SME raise flag over withholding tax – The Standard

Source: SME raise flag over withholding tax – The Standard

BY TATIRA ZWINOIRA

SMALL to medium enterprises (SMEs) warned on Friday that their operations have been overstretched by a hike in the withholding tax rate, which came into force this January.

In the 2022 national budget, Finance minister Mthuli Ncube hiked the rate to 30%, saying this was crucial for enhancing compliance.

The rate was previously pegged at 10%.

Withholding tax, is income tax that is paid to government by the payer of the income, rather than the recipient of the income.

It is thus withheld or deducted from the income due to the recipient.

Under the new rules, unless a payee produces a tax clearance certificate to the payer, the latter can withhold 30% of the amount payable.

“Increasing the withholding tax is obviously detrimental to SMEs and I think our view or our response to the authorities was that why should they not take the 10% more as a presumptive tax than as a withholding tax?

They were not clear with that,” Small and Medium Enterprises Association of Zimbabwe (SMEAZ) CEO Farai Mutambanengwe told Standardbusiness in an interview.

“We have always been lobbying that the authorities implement a simplified tax regime instead of having complex compliance procedures.

“We actually submitted a proposal to that effect, but unfortunately again it was shot down.”

The new rule gives the timeframe in which the 30% of the amount payable can be held.

“Subject to this section, unless a payee furnishes the paying officer with a tax clearance certificate, the paying officer shall withhold 30% of each amount payable to the payee under the contract concerned, and shall remit each amount so withheld to the commissioner on or before the tenth day of the month following that in which the payment was made,” it says.

SMEs have said the policy has affected operations.

Between 60% and 75% of the economy is informalised, meaning that most small businesses are not registered and thus do not have robust accounting systems.

“Given that you are dealing with SMEs that are mainly affected, these are people who employ one or two people and they do not have the finance to employ a bookkeeper or an accountant to look after their books.

“So, invariably then, their tax affairs would be behind because that is the least of their problems in so far as the business is concerned,” a small business owner said.

“So, the issue of the 30% means that their cash flows are then seriously encumbered because it means in addition to VAT which is 14,5%, which obviously belongs to the government, they are taking 15,6% effectively from the person without a tax clearance.

“The second issue is that for most SMEs when they are dealing with corporates, they do not receive payment immediately.

“The payment comes after 30 days or a period of weeks, which therefore means SMEs are really at a disadvantage.”

He said raising the withholding tax to 30% was killing small businesses.

Mutambanengwe said another challenge concerning withholding tax was that the Zimbabwe Revenue Authority (Zimra) itself was inefficient.

“Their system is not working and they know that,”  he said.

“They have said they are going to upgrade the system but as it is, even submitting returns or getting a clear record out of them has major difficulty.

“Also, people have been facing difficulties for registration for VATs and the multicurrency devices so again there are a lot of inefficiencies at Zimra that are resulting in bona fide businesses not having tax clearances.”

In explaining why the withholding tax was increased, Ncube said in the 2022 budget Treasury had observed that the 10% withholding tax was too low.

He said Treasury envisioned that the 30% withholding tax will induce better compliance.