via Tourism in tailspin | The Financial Gazette – Zimbabwe News 12 Mar 2015
A NEW Value Added Tax (VAT) on foreign tourists introduced by government two months ago has cut revenue and diminished profits in the recovering tourism sector after making Zimbabwe one of the most expensive destinations in Africa, the Financial Gazette has learnt.
This week, industry players revealed that the VAT has triggered cancellations by foreign tourists, some of whom had made bookings two years ago.
Worse still, hotels have been forced to shoulder the tax to keep relationships with clients.
The new tax has the effect of pushing costs to cover the 15 percent VAT, introduced at short notice in January.
But this has been at a significant cost to a sector that spent just under US$80 million in 2013 in preparation for the United Nations World Tourism Organisation (UNWTO) general assembly.
Most of this was borrowed, and repayments are now due.
The industry concludes deals with global tour operators two years in advance.
With prices for 2015 already agreed in March last year, turmoil has emerged in the sector as hotels try to adjust prices to factor in the new VAT.
Reports of cancellations came after the industry lost US$6 million in potential revenues in the last quarter of 2014, after the Ebola virus resulted in poor tourist arrivals.
In a 34-page presentation to Hospitality and Tourism Minister, Walter Mzembi last month but seen by this newspaper this week, the Zimbabwe Council for Tourism (ZCT) described the tax as “destructive” and a “significant momentum stopper.”
“It is not too late to reconsider our position,” the ZCT said, asking government to reverse the tax.
“The tourism industry, which government is projecting to (contribute) US$5 billion to Gross Domestic Product, may not (achieve this) given current indications from source markets. Bookings (are) already in the system based on contractual obligations with tour operators, airlines and agents. (They) will not accept that clients booked have to pay an additional 15 percent for their trip and industry will be requested to absorb that cost; refusing to do so will result in cancellation(s). The investments for UNWTO have only just been made with no time at all being allowed for the industry to repay the loans. This would put many businesses in jeopardy as it threatens loan repayment capabilities. Close analysis should take place of the multiple other areas of potential tax and duty benefits from tourism expenditure and consumption that would be lost because of a certain downturn of trade, which this will definitely cause,” the document said.
Talk of the tax started in July last year.
Finance and Economic Development Minister, Patrick Chinamasa indicated then that as part of efforts to improve revenues into the fiscus, he would introduce the 15 percent VAT.
However, when he presented the 2015 National Budget in December, he did not announce the VAT.
But in January, the Zimbabwe Revenue Authority directed the industry to start charging tourists the 15 percent tax. Many industry players were stunned by the move.
In southern Africa, Botswana charges a standard rate of 12 percent VAT on all tourism packages, while Tanzania started zero rating from December 19, 2014.
“It is destructive to introduce a 15 percent tax all at once,” said the ZCT.
“There is severe damage pending if this continues.
“Our colleagues in Uganda and Tanzania have experienced the impact of added cost through VAT and have since retracted,” said the ZCT.
“While tourism room nights in Victoria Falls increased to just below 10 percent in 2013 versus 2012, Victoria Falls hotels only averaged 46 percent occupancy for the year, which means that 54 percent of our rooms were empty in 2013.
“There is a long way to go to get to a point where there is pressure on room stock, which then allows for prices to move up. The industry needs a minimum of five years (until 2019) to recover, grow volumes, grow rates, and allow the many potential dividends delivered from the UNWTO to pay off, in particular, direct arrivals at the new Victoria Falls Airport.
“The number of foreign airlines flying directly into Harare, Bulawayo and Victoria Falls is critical to viability of a destination and competitive prices will be necessary to ensure these airlines get the required capacity to route into Zimbabwe.”
Apparently, government has been desperate to increase revenue inflows against the background of a shrinking economy.
Consequently, it has resorted to increased tax or new tax on products or services.
Currently, tax arrears since dollarisation of the economy in 2009 have reached US$1 billion, according to tax authorities.
The bulk of companies with outstanding tax obligations have closed or are in liquidation or struggling.
Multiple fee hikes and taxes forced on mines have also seen at least two multinationals threatening to pull out or scale down operations.
Rio Tinto’s Murowa Diamonds and Mimosa Mining Company have said the sustained fees and tax hikes on mining businesses would affect operations.
But if government presses ahead with the new tax, the threat of fresh job losses in an industry the State has increasingly seen as key to recovery is high.