Informal sector tax: 2025 Budget dilemma
A major challenge in the 2025 Budget will be to get the informal sector to pay their fair share of taxes, or at least a decent share of the tax burden even if the complications mean they are not paying what they should.
The pre-budget seminars arranged by Parliament have discovered that this year the informal sector is paying 3 percent of what was set as the target, not 3 percent of the total tax bill but just 3 percent of what the Ministry of Finance, Economic Development and Investment Promotion hoped they would pay.
This places the burden of running the country and of funding the national capital budget on the formal sector, and on the salaries and incomes of those in formal employment, including those who are self-employed but who are registered with Zimra and pay their quarterly taxes. This is a small minority of the population and it is unfair that they carry almost the entire burden.
We would agree that the formal sector is likely to pay more taxes, even if more people are earning their living within the informal sector, simply because the larger businesses and most of those who earn reasonable incomes are within the formal sector, but they should not be alone.
Part of the problem of taxing small businesses and many of those who operate in the informal sector is the cost of compliance. Zimra can devote an accounting team to check out a large company where it suspects that there is tax avoidance, and pay a couple of weeks of salary to a group of professionals against what is collected, since the amount collected will be far higher than that cost.
But to devote even US$500 or its equivalent to check out a small mini business to collect say $200 does not make economic sense, so other methods have to be used to enforce compliance.
The obvious set of solutions is indirect taxation and fixed presumptive taxes. Several Government agencies manage to collect their fees this way.
For example the Environmental Management Agency has made major advances in ensuring that those who need an EMA licence do pay.
If you try and mine sand without an EMA permit a roaming team finds you and calls the cops, closes you down because you are in a cell, and then works out the penalties and the fees to resume business.
The word gets around and others decide that the risks are too high to continue illegal operations and they go out and get the permits and wave these in front of the inspectors when they call, and that is precisely what is wanted.
On a more mundane level, Zinara and the Ministry of Transport and Infrastructure Development manage to ensure that almost all vehicles on the streets are licensed and that kombis have permits.
Again they use inspectors and the cops. You cannot go through a toll gate now without a licence on your windscreen.
Zera has done rather well in making sure that all sellers of liquefied petroleum gas are now licensed and adhere to minimum safety standards.
They inspect, and they are willing to take tip-offs from the legal sellers unwilling to compete with an illegal. Fees are collected promptly and we have far fewer fires.
At the very bottom level, and here there are enforcement guides for others, Harare City Parking makes sure almost everyone parking on the streets of central Harare pays parking charges and parks correctly in demarcated bays.
That is done first by having adequate staff collecting the fees and secondly by making it clear that if you do not pay or park incorrectly your right front wheel is padlocked and you have to pay a penalty to get it released.
Enforcement is cheap and the combination of easy payment, via cash, swipe or mobile money to a readily available parking attendant, and certain and cheap enforcement means people make an effort to pay.
For a start, Zimra could use the City Parking enforcement method to collect fair, simple and modest presumptive taxes. A team with some lengths of chain and padlocks could go around and ask for tax receipts, and where these were unavailable, simply lock the doors of the business.
The first few days would be somewhat exciting but once everyone get the message that if you have even a small booth you pay something or are locked out then people would pay.
The system would need to be backed by a simple payment and receipt system, without queues, but modern technology allows this. We would imagine mobile money payments and a WhatsApp receipt would be a good start, and it is possible to organise prints of the receipts for anyone who wants one.
Even better would be to adopt the City Parking system in its entirety with someone stationed at a desk in one of those mini-shops every few blocks with a laptop, mobile phone and printer, the block tax attendant in fact.
That person, like the City Parking block attendant, would patrol and make sure everyone on the block or group of blocks paid. A hotline for corruption alerts, plus the audit team drifting by at least once a month, would ensure basic honesty.
Even better would be to add shop licences, and these could be monthly as well, and any other fees that might be required. Again, those with fixed premises would have a list of what they had to pay and could make a single payment to the block attendant, with the system allowing the totals collected to be divided between all who legally require some sort of fee or tax.
With cheap collection and enforcement, but certain collection and enforcement, the actual taxes and fees for small businesses need not be large but with so many small businesses and micro-businesses the totals would add up and make a significant contribution to tax revenue, not the majority of business taxes but at least a fair share.
The block attendant system would also mean the start of regularising a lot of businesses, getting them licensed with the local authority as well as becoming known to Zimra.
As those businesses grew the presumptive taxes and minimum fees like would need to morph into the more formal arrangements that larger businesses and those with reasonable incomes are used to, but again the attendant could pass the word that someone had moved up the ladder.
That would still leave those who are more mobile in their businesses, and there are a lot of people like plumbers, handypeople, electricians and the like, plus those tuckshops in the back of a small hatchback.
And then there are the vendors operating from a clothes rack on the street or a simple shelter in a suburban shopping centre.
Someone would have to track down plumbers and find where they are based, in the yard of a house usually, but again an attendant with a larger area would work, and perhaps be given a scooter to get around.
For suburban shopping centres or those collections of shack shops you see on road sides again an attendant once a week coming round, with someone carrying the chains and the padlocks, would work and that team would have several shopping centres to patrol. Small scooters are cheap.
Finance Minister Mthuli Ncube has been eager for indirect taxes, his biggest jump perhaps being the transfer tax on electronic payments where this is collected automatically, and so very cheaply but with certainty, by around 20 banks and mobile money concerns, each making a monthly payment of their totals into the Zimra coffers.
The informal sector has now learned to avoid much of that, by insisting on cash payments, hence the need to presumptive taxes.
But the joy of a system we have outlined of the block or suburban attendant means you can start with a tiny tax for the smallest operator, and even a dollar a day would be a start and make a profit once the attendant was paid assuming enough businesses were grouped under each attendant. A dollar a day would be a tiny vendor, on a couple of square metres.
The decision to build a proper market in Mbare Musika makes life easier, as someone can be collecting the daily, weekly or monthly fees very easily, and those not paying can be barred.
Again the fees and taxes can be small, but with 10 000 stalls planned for that market it is easy to see how a reasonable flow of cash in rent for the developer, licences for the city and taxes for Zimra could be collected but still keep the daily combined payment for a tiny trader rational.-ebsinessweekl
