Mthuli got his tax!

Finance, Economic Development and Investment Promotion Minister Mthuli Ncube might have had his way to tax the informal sector, but the elephant in the room — exchange rate disparities — remains, resulting in significant revenue losses not only to business, but to the Government as well.

Following an outcry over his 2024 revenue measures, Mthuli “fine-tuned” some of the measures, but still emerged with an agreement that manufacturers will collect a 5 percent withholding tax from customers who are not registered for VAT, are not in possession of a valid VAT certificate and also not registered for Income Tax purposes.

But while Mthuli gets his tax, businesses, including exporters, are still stuck with an official exchange rate that is at a significant discount to the widely used alternative market exchange rate.

As a result, business lobby groups have urged the Government to reconsider the policy requiring formal retailers to use official exchange rate when pricing goods in local currency amid revelations of significant financial losses due to exchange rate disparities.

The exchange rate disparity has caused significant revenue losses throughout the supply chain, with many wholesalers facing severe viability challenges. Some are exploring informal channel and scaling down operations, as confirmed by both the Confederation of Zimbabwe Retailers (CZR) and the Confederation of Zimbabwe Industries (CZI).

Data compiled by Business Weekly from major retailers, with analysis assisted by two veteran economists, showed that the formal retail sector could have experienced financial losses of more than US$700 million between 2021 and 2022.

“Using data from leading formal retailers, a detailed analysis suggests the formal retail sector may have incurred financial losses of between US$720 million and US$750 million between 2021 and 2022,” one of the economists, who declined to be named said.

This comes at a time the gap between the official exchange rate and the black-market rate has significantly widened over the past few weeks with exchange premium shooting to 86 percent at some point, thus creating an uneven playing field undercutting formal retailers who are unable to compete with informal retailers and traders.

The CZI says a more flexible exchange rate policy would help to reduce exchange rate disparities and create a more level playing field for formal and informal retailers.

In a recent submission to the Government, the CZI proposed the use of an exchange rate of not more than 20 percent below the official rate to minimise exchange losses. Currently, businesses apply an exchange rate of the official rate plus 10 percent when trading.

This has seen a massive loss of US dollar sales in the formal sector every time there is a wide parallel market premium as was the case last week Friday when the official exchange rate was $6 443 while the parallel market rate was close to $12 000 per US dollar.

As of yesterday, the average parallel-market rate was $12 500 per United States dollar against the official bank rate of $8 240. This implies that the Zimbabwe dollar prices by the formal businesses are heavily discounted.

“This is a major driver of informalisation,” said CZI in its recent policy recommendation proposal to the Government.

“Business proposes that formal businesses be allowed to use an exchange rate that is not more than 20 percent below the market rates to continue trading in US dollars and to ensure that US dollar revenue does not shift to the informal sector.

Last year, the Reserve Bank of Zimbabwe’s Monetary Policy Committee recommended the scrapping of the 10 percent limit of the exchange rate used by formal retailers in a bid to curb exchange rate losses.

But the policy proposal can only be effective upon the promulgation of necessary legal instruments to formalise it.

Once the scrapping of the limit is legally effected, formal retailers will be able to set more competitive prices, according to Morgan & Co., a local financial services group.

“Formal retailers are currently required to use the official rate for US dollar customers which offers less value per dollar compared to informal retailers,” said Morgan & Co.

“Although authorities tweaked this and allowed formal players to add a 10 percent premium to the official rate, formal retailers’ prices remained uncompetitive.

“We note that authorities have since scrapped the requirement, but it remains ineffective until a legal directive is issued and we identify this as a key value trigger for the business.”

The CRZ described the situation in the wholesale and retail sector as dire while urging authorities to “urgently look into the matter.”

Its president Denford Mutashu, said some wholesalers were contemplating pushing their goods through informal channels, scaling and closing down some branches.

He said regulations which compels retailers and wholesalers have been viewed as a price control mechanism. “It has become a nightmare to be in formal wholesale or retail business,” Mutashu told Business Weekly in an interview.

“Some of these businesses are now contemplating to move into the informal sector,” he said.

Mutashu said US dollar sales, which make up between 10 and 40 percent of formal business, are creating financial strain in a supply chain heavily reliant on the US dollar.

According to official estimates, about 85 percent of local transaction are now US dollars.

“Imagine what will happen when the wholesalers cut their branch network and closes down.

“Jobs will be lost and supplier, particularly smaller ones will be thrown out of business.

“These challenges are real and Government must take the challenges seriously,” added Mutashu.

“The law is no longer serving the purpose.”

Mutashu argued that the law disproportionately penalises formal businesses compliant with regulations.

Mutashu said formal retailers and wholesalers were being flooded with local currency they can’t spend since manufacturers are prioritising US dollar payments from informal businesses.

“Formal wholesalers and retailers are now dumping grounds for local currency and are ending up holding a huge stock of Zimbabwe dollar in their bank accounts because manufacturers are favouring near-cash informal retailers.”

“I am quite aware of a number of wholesalers who shelved plans to expand. I know of the wholesaler who is contemplating closing six branches. It is sad that they are suffering despite being compliant with tax regulations,” Mutashu added.-ebusinessweek