Zimbabwe is facing a daunting challenge: how to raise enough revenue to finance its development and sustainance, while facing a drying up of international support and a hostile economic environment. The government announced a series of tax changes in its 2024 National Budget, which it continues to chop and alter one month into the year, all aimed at increasing the tax base, enhancing the tax administration and enforcement, and protecting the national interest and sovereignty.
But will these changes be enough to achieve the desired outcomes, or will they backfire and hurt the economy and the people?
The tax changes for 2024 cover various aspects of the tax system, such as income tax, capital gains tax, value added tax, mines and minerals tax, and tax administration. Some of the key tax changes include standardising Value Added Tax at 14.5%, while the VAT registration threshold was increased for both local and foreign currency earners. Betting and gaming companies have been brought under VAT on the gross takings of the operators.
The custodial services too provided by financial institutions and security companies were made subject to VAT at the standard rate. Thankfully, VAT exemptions and zero-ratings (which had earlier been rescinded and later reinstated) were expanded to include basic and essential goods and services.
The rate of income tax from trade or investment was increased from 24% to 25% for individuals, companies, and trusts, while the rate of income tax on dividends, interest, royalties, fees, and remittances was increased for both residents and non-residents.
Unsurprisingly, tax-free threshold and the tax bands were adjusted accordingly but what is surprising is that "all monetary amounts and taxes stated in local currency in the taxes acts are now denominated in foreign currency, albeit, payable in local currency at the prevailing (official) exchange rate."
Curiously, especially in light of the Treasury Department's directive dated May 29, 2023, compelling "all government departments (to) collect fees in local currency," the Zimbabwe Revenue Authority (ZIMRA) on the 24th of January 2024, put out its own statement notifying that, "all monetary amounts and taxes stated in local currency in the Taxes Acts are now denominated in foreign currency, albeit, payable in the local currency at the prevailing (official) exchange rate."
Indexing taxes against foreign currency means these taxes are now denominated in local currency in name only, since the exchange rate fluctuates daily. This is in direct contrast to what was obtaining previously where tax amounts were somewhat fixed. Only being adjusted from time to time in response to economic conditions (read inflation).
Although it is understandable why the authorities made this particular adjustment, it now makes planning more cumbersome for taxpayers who conduct business, or earn, in ZWL. They will likely suffer loses as there is a time lag between the transaction day and that of payment, by which time the exchange rate may have moved against them.
ZIMRA will do well to introduce a mechanism to freeze the tax due value at an exchange rate of the transaction date. Otherwise without this, or another commensurate system, taxpayers will necessarily migrate to exclusively foreign currency denominated transactions only, to avoid exchange rate losses. Full dollarisation.
There is now also the much maligned "wealth tax" which has been introduced at a rate of 1% of the value of a dwelling other than a principal private dwelling of a taxpayer, if such value exceeds US$250,000. Another is the domestic minimum top up tax introduced at a rate of 5% of the difference between the actual tax paid and the minimum tax payable, if the actual tax paid is less than the minimum tax payable. Then the special capital gains tax of 10% on the disposal of shares or any interest in a company or trust that owns or holds a mining title or any interest therein.
Separately, withholding tax of 10% was announced too on the gross proceeds of the sale of such shares or interest, payable by the buyer or the transferee. It is imperative to note that the withholding tax is creditable against the final tax liability of the seller or the transferor.
The rate of capital gains tax was increased from 20% to 25%, while the rate of stamp duty was increased from 4% to 5%. The tax on gross proceeds of granite and lithium was introduced at a rate of 5% on the gross proceeds of the sale of granite and lithium, payable by the seller or the producer.
Still in mining, the notification of the intention to transfer or lease mining rights or any interest therein to the Minister of Mines and Mining Development and the Commissioner General of the Zimbabwe Revenue Authority was made mandatory. While collection of mining royalties in kind was introduced, whereby the Commissioner General may collect mining royalties "in kind" (a tax payable in the form of the mineral mined) from any person who produces it in Zimbabwe.
Penalties for failure to comply with the fiscalisation and the Fiscalisation Data Management System (FDMS) requirements was increased. The Commissioner General was given power to search and seize any storage device that contains or is suspected to contain any information or data relating to any tax matter as well as power to appoint "any person" as an agent for the collection of any tax due from any taxpayer. Vested upon that office also is power to approach the High Court for court orders to counter the abuse of corporate vehicles to avoid tax.
The litany of new taxes continues on and on, from sugar tax for your favourite beverage, to increased toll fees on the roads. Old taxes were reaffirmed, and tax administration in general was revamped. It is plain to see that the rationale behind these changes is to raise more revenue to finance the development and sustainance of the country, which is facing a drying up of international support and a hostile economic environment.
For 2024, the government has set, a tax revenue target of collecting 16.4% of the GDP (a number with no universal consensus at the moment), a budget deficit target of 1.5% of the GDP, down from 3.5% in 2023, a debt-to-GDP ratio target of 70% for 2024, down from 78.4% in 2023, a current account surplus target of 3.1% of the GDP, up from 2.9% in 2023, and a foreign currency reserves target of USD$1.5 billion for 2024, up from USD$1.2 billion in 2023.
It is with these aspirations in mind, coming as they are, mired amid a seemingly unyielding international community and their closed purses for Zimbabwe, that is informing the decision to promulgate these taxes. Government business has to be financed and the economy has to grow regardless of those external repudiations doesn't it? The government thus aimed at increasing the tax base, enhancing the tax administration and enforcement, and protecting the national interest and sovereignty.
A critique of these tax changes quickly brings us to the possibility that they may not be enough to achieve the desired outcomes for a number of reasons, if certain conditions are not met. Certainly, these taxes will not replace external fundings in their various forms or, alternatively, they may actually hurt the economy and the people, more than they benefit. Tax and registration measures around containing SMEs come to mind.
But what other economic choices do the authorities have? Let the economy stagnate, or even whither? Over-leverage the country's abundant resources, but by that very action diminish the lucrativeness of those sectors and ipso facto push investors to other countries? Drop the local currency completely? Privatise national assets? Reform the structure and institutions of the economy?
All these and more have their advocates and critiques in equal measure. What it amplifies is that Zim-Treasury has the unenviable task of solving this conundrum, and for now we can note they have chosen the path to "look inwards" for funding needs.
The government has further stated that these tax changes are in line with the National Development Strategy 1 (NDS1), which is the medium-term economic blueprint for Zimbabwe for the period 2021-2025. The NDS1 has four pillars: governance, macroeconomic stability and re-engagement, inclusive growth, and social protection. The strategy has six enablers: human capital development, infrastructure and utilities, digital economy, devolution and decentralisation, environmental protection and resilience, and image building and international relations. These taxes are to finance that vision by raising revenue , hopefully without killing growth.
There is a real jeopardy of these taxes failing to widen the tax net, and with it the tax base, as they may be detrimental to natural firm growth, reducing the number and/or sizes of the very entities liable for tax in the first place, and discourage the informal sector. The critique also points out that the tax changes may not protect national interest and sovereignty, as they may undermine the competitiveness and attractiveness of the economy in the continent dually. Firstly, by reducing attractiveness of the country's investment climate compared to her peers, and secondly by reducing the competitiveness of local producers, what with the advent of the African Continental Free Trade Area (AfCFTA) led tariffless trading in the horizon.
On the flip flight side of that is the potential for Zimbabwe to organically grow from these (currently punitive) taxes and simultaneously take advantage of the AfCFTA to enhance its trade opportunities with other African countries. By harmonising its tax policies and regulations with the AfCFTA framework, the country could benefit from lower trade costs, increased consumer variety, improved productivity, and expanded regional value chains.
The AfCFTA could also stimulate economic growth, income, and employment, which could in turn increase the tax base and revenue for the government. Moreover, the AfCFTA could strengthen Zimbabwe’s voice and influence in the multilateral financing system and promote its national interest and sovereignty in the continent, attacking the very source of funding challenges the country currently faces, among others.
The recommendations for these tax changes include the need to strictly balance government revenue against expenditure needs, so as to provide some relief to the economy and the people. This suggests that the tax changes should be reviewed and revised periodically, as they did with the basic commodity taxes, based on latest economic data and projections, as well as feedback and consultation of the taxpayers and the stakeholders.
As such, the tax changes are expected to increase the government’s revenue and reduce the budget deficit, at least in the short term. The underlying challenges of the Zimbabwean economy include as prohibitive inflation, low productivity, weak governance, and corruption and so the taxes must constantly be monitored so that their existance is constantly aligned to market feedback.
The government thus needs to implement a comprehensive and coherent reform agenda that covers both the fiscal and monetary domains, as well as the structural and institutional aspects of the economy.
Some of the key reforms that may need to be looked at include:
- Maintaining a tight monetary policy stance to anchor inflation and exchange rate expectations, and enhancing the transparency and credibility of the foreign exchange auction system.
- Implementing fiscal consolidation and debt management strategies to reduce the public debt burden and restore fiscal sustainability.
- Reforming or privatising state-owned enterprises still outside of the Mutapa Fund to improve their efficiency, accountability, and service delivery, and to reduce their fiscal drain.
- Strengthening the rule of law, the anti-corruption framework, and the public financial management system to enhance governance and accountability and reinstating their use of the Consolidated Revenue Fund.
- Promoting private sector development, investment, and competitiveness by improving the business environment, reducing regulatory barriers, and facilitating access to finance and markets.
- Fostering inclusive and sustainable economic growth by investing in human capital, social protection, and infrastructure, and by harnessing the opportunities of the African Continental Free Trade Area.
These reforms, if implemented effectively and consistently, could help Zimbabwe achieve its Vision 2030 of becoming an upper-middle-income country with improved living standards for its citizens. However, they also require strong political will, leadership, and commitment, as well as broad-based stakeholder/taxpayer participation and support.
Zimbabwe has chosen to deal with the financing dilemma by looking to raise revenue internally, but at what it deems sustainable levels that will not kill growth. The government has announced a series of tax changes for 2024, aimed at increasing the tax base, enhancing the tax administration and enforcement, and protecting the national interest and sovereignty. Will they be enough to achieve the desired outcomes,? Or will they backfire and hurt the economy and the people?
The tax changes are here now. Barring any repeals, as long as they are here they need to be reviewed and revised periodically, based on the latest economic data and projections, as well as the feedback and consultation of the taxpayers and the stakeholders. The tax changes should also be complemented and supported by other fiscal and monetary measures, as well as by structural and institutional reforms, as their impact will be adverse if they are not accompanied by these, like the monetary example alluded to earlier about aligning USD denominated tax to transaction date and not payment date. Beyond the administrative fixes should also be economy wide adjustments, as suggested above.
If adapted accordingly, these announcements may promote growth and development of the economy and the people, as well as the equity and efficiency of the tax system. Zimbabwe's tax dilemma is not insurmountable, but it requires a holistic and innovative approach that balances the revenue and expenditure needs of the government, as well as the relief and stimulus needs of the economy and the people. Zimbabwe's tax dilemma is a challenge, but also an opportunity, to transform the economy, win it off the tentacles of external forces, and for the betterment of its populace.