Southern Times Correspondent
Zimbabwe has exhausted its tax options and needs to find a balance between a tax regime that is business and investment friendly and one which gives the much-needed revenue for development.
According to economists interviewed by The Southern Times, policy makers over stretched the tax regime in the country in comparison to its counterparts in the region, and this has encouraged tax evasion and discouraged formalisation of the informal sectors as well as disheartening foreign direct investment.
“Zimbabwe has reached a point that it has maxed up its tax regime to an extent where it can no longer squeeze any income out of the small number of formal players in the country, hence the economy is at a very fragile position and any wrong move may cripple the economy," said economist Tatenda Mugata, who is an independent tax consultant.
"If the country wants to achieve its 'Zimbabwe is open for business mantra' and become a middle income economy by 2030, it has to seriously adhere to tax regime changes that improve the doing business environment in order to foster both foreign direct investment and domestic investment.
"There have been some initiatives by Government to introduce tax friendly policies and laws but most of these have not been implemented. However, the most ideal solution for the country is an optimal balance between a tax regime that is business and investment friendly, and one which can leverage enough revenue for public service delivery to enhance the attractiveness of the economy. ”
Looking at the Doing Business Report 2018, Zimbabwe continues to lag behind in the ease of paying taxes ranking in comparison to its neighbouring countries in the region. According to the report, Zimbabwe is one of the bottom five countries with the lowest percentages towards the ease of doing business frontier.
The distance to frontier score helps assess the absolute level of regulatory performance over time. It measures the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies.
According to the report, the top five best ease of paying taxes economic environments in the SADC region are Mauritius, Zambia, Seychelles, South Africa and Botswana. And the bottom five countries which are still further from the frontier are the Democratic Republic of Congo, Tanzania, Zimbabwe, Malawi and Madagascar as depicted by the table shown.
The doing business ease of paying taxes ranking is made up of all taxes and contributions that are government mandated applicable to the standardised business that impact its financial statements after accounting for allowable deductions and exemptions.
According to ZEPARU, Zimbabwe’s tax regime is more costly and disadvantaging local businesses in relation to its regional neighbours. The Zimbabwe-based medium-size business can expect to pay up to 35.3% of its commercial profit, which is about 5 % higher than what a similar company would pay in South Africa (30.1%), twice as much as what would be expected for a similar company in Zambia (15.1%), and about 10 % higher than in Botswana (25.4%).
It is important to note that taxation is not limited to the doing business indicators. It extends to regulatory fees, levies, and all other business related charges by government. According to a report released by ZEPARU, the standard business case for doing business indicators does not participate in foreign trade (no import or export) and does not handle products subject to special tax regimes, including excise, environmental, licensing, and many other forms of taxation that are better benchmarked at the industry sub-sector level and thus fall beyond the scope of this study. Nevertheless, other studies have looked at these issues and some of their findings are worth considering as an example of the extent to which these fees and regulations are squeezing the life out of local businesses.
A Zimbabwe's Agricultural Competitiveness Programme ZIM ACP Project assessed the cost of compliance with regulations in the livestock and poultry sectors. In the case of beef, their results show that various levies (including an 11.625% levy to be assessed on the value of all cattle sold) recently enacted by rural district councils (RDCs), registration of abattoirs with multiple agencies (Veterinary Public Health, Agricultural Marketing Authority, and Environmental Management Agency (EMA), meat inspection charges, and effluent disposal under EMA regulations, amount to a projected US$112 per animal sold, which is calculated to lead to loses (when fixed costs are included) of between US$7 - US$17 per head.
In this case, the total projected cost of all Government mandated payments amounts to 16% of total costs, and therefore are high on an absolute level as well as on a comparative regional basis. According to the benchmarks presented in the report, livestock buyer fees in Zimbabwe are between 20-50 times those applicable in Botswana, the regulatory costs in Zambia amount to only $4.72 per head, and in South Africa marketing levies are less than US$1. The regulatory costs of the other subsectors are also high in relation to neighbouring countries and have a significant impact in their competitiveness, stated the report.
In a Skype interview on what Zimbabwe should do with its tax regime to reach the optimal balance for development, economist Smart Manda of the Central Bank of Zambia stated that, “taxation is critical to the current economic development agenda. It provides a stable flow of revenue to finance development priorities, such as strengthening physical infrastructure.
"However, it is interwoven with numerous other policy areas, from good governance and formalising the economy, to spurring growth. Fundamentally, tax policy shapes the environment in which international trade and investment take place hence its importance.”
He added: “Zimbabwe should therefore reform their tax systems to mitigate the distortions caused by taxation. An effective way to increase revenue and promote growth would be to work towards the emergence of a neutral tax system with respect to the behaviour of economic agents within the country.”