A taxing task: Mthuli’s quest to fill in fiscal void

Ahead of the 2025 fiscal year, Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube faced a daunting task on Thursday: revitalising Zimbabwe’s economy and filling the coffers of a Government encountering challenges to meet its obligations.

In 2024, Government coffers came short, forcing Treasury to order ministries, departments and Government agencies (MDA) to prioritise spending. In a letter to the MDAs, Treasury said during the last quarter of the year, priority will be given to support social protection programmes, “which are still lagging behind in terms of their budget utilisation”.

This is after revenue projections fell short of expenditures. During the first nine months of the year, total revenue collections amounted to ZiG62,4 billion, against expenditures amounting to ZiG66,5 billion. Consequently, a budget deficit of ZiG4,1 billion was recorded.

Total revenue collections to year end are projected at ZiG110,7 billion, while expenditures are expected at ZiG119,97 billion (18,4 percent of GDP), resulting in a projected deficit of ZiG9,3 billion. With a constrained fiscal space, Treasury relied heavily on borrowing and even faced accusations of excessive money printing.

The fiscal deficit as at September 2024 stood at ZiG4,1 billion and was financed through issuance of securities amounting to ZiG2,3 billion and drawdown of bank balance carried forward from the previous financial year.

The year 2025 is not expected to be any better. In line with the projected GDP growth of 6 percent, during 2025, revenue collections are estimated at ZiG 270,3 billion (19,6 percent of GDP) while the 2025 fiscal framework provides for overall expenditures of ZiG276,4 billion or 20,1 percent of GDP.

In US dollar terms, the Fiscal Framework translates to a GDP of approximately US$38,2 billion, revenues of US$7,5 billion and expenditures of US$7,7 billion. Mthuli said the budget deficit will be financed from the domestic markets and external sources.

However, even after accounting for borrowing, the spending envelope still fell short of vote allocations. During the 2025 National Budget formulation stage, MDAs submitted total bids of over ZiG$700 billion, against the available budget envelope of ZiG 276,4 billion. This is more than double the ceiling of revenue collection capacity of 19,6 percent of GDP.

To address this, Mthuli embarked on an ambitious plan to broaden the tax base by tightening existing tax administration and introducing new taxes and regulations.

One such measure was the imposition of a “Fast Foods Tax” on popular items like pizza, burgers, and shawarma that will attract a tax rate of 0,5 percent on the sales value, with effect from 1 January 2025.

The betting industry was not spared. A 10 percent withholding tax was imposed on the gross winnings of sports betting punters, aiming to tap into this growing sector.

Furthermore, a wide range of businesses, from fabric and clothing merchandisers to car dealers and lodges, are now mandated to register for corporate and personal income tax. Failure to comply would result in hefty penalties.

Mthuli proposed that any operator that fails to register and account for taxes be compelled to pay tax between US$9 000 and US$15 000.

“I, further, propose to empower ZIMRA to temporarily close businesses which fail to adhere to the above requirements, including failure to register for tax purposes, until such registration and payment of applicable taxes are completed,” said Mthuli.

To monitor transactions and enhance tax compliance, even small businesses were required to adopt the Virtual Fiscalisation System.

“I, propose to extend the Virtual Fiscalisation System for the recording of VAT taxable transactions to Micro and Small Enterprises whose turnover falls below the VAT registration threshold for purposes of monitoring sales, during the first quarter of 2025.

“This will assist in promoting transparency and ultimately enhance tax compliance by Micro and Small Enterprises,” said Mthuli.

The mining sector also came under scrutiny. Mineral royalties were included in the definition of taxes, and mining companies were required to register for income tax before applying for mining rights.

“I, therefore, wish to emphasise that, in the general interest of the public, royalties shall be payable on any mineral or mineral bearing ore or products during any period of assessment.

“In addition, I propose that the Minister responsible for Finance be empowered to designate any mineral as being subject to royalties, notwithstanding the provisions of any other legislation. The Government also introduced a Special Capital Gains Tax on the transfer of mining rights.

“I propose that no mining company should be allowed to make any application for mining rights without registration for Personal and Corporate Income Tax.

“While these measures aimed to increase revenue, Mthuli also acknowledged the need for tax relief. The personal income tax-free threshold was adjusted to provide relief to taxpayers.

“I propose to review the local currency Tax-Free Threshold to ZiG2 800 per month and accordingly adjust the tax bands,” said Mthuli.

Additionally, the Capital Gains Withholding Tax on marketable securities was reduced.

“I, therefore, propose that marketable securities be subject to Capital Gains Withholding Tax at a rate of 1 percent on the gross value of the price at which the security is sold, with effect from January 1, 2025.

To promote environmental sustainability, the Government introduced a 20 percent Plastic Carrier Bag Tax and provided incentives for the use of electric vehicles and solar power.

Trigrams Investment analyst, Walter Mandeya, said the success of these measures will depend on effective implementation and enforcement.

“As Zimbabwe navigates its economic challenges, the Government’s ability to strike a delicate balance between taxation and economic growth will be crucial,” he said.

Meanwhile, Zimbabwe’s economy is poised for significant growth in 2025, with projections indicating a 6 percent expansion.

While slightly lower than the initial forecast of 6,5 percent, this figure represents a significant rebound from previous years including 2024, which is expected to grow by just 2 percent.

Key sectors driving this growth include agriculture, which is expected to surge by 12,8 percent, powered by favourable weather conditions and increased investment. The energy sector, specifically electricity generation, is projected to grow by 10.6 percent, alleviating power shortages and boosting industrial activity.

The information technology sector, a burgeoning industry, is anticipated to expand by 9,9 percent, fueled by increasing digital adoption and innovation.

The mining sector, a traditional economic mainstay, is expected to grow by 5,6 percent, driven by rising commodity prices and increased investment in mining operations.

On the demand side, private consumption is projected to be the primary driver of growth in 2025, with an estimated 6,6 percent increase.

This is attributed to a strong recovery in household spending as economic conditions improve.

Government consumption is also expected to contribute to growth, albeit at a more modest pace of 5,3 percent. Gross fixed capital investment is projected to rebound significantly from 0.5 percent in 2024 to 4,6 percent in 2025.

This surge in investment is expected to be driven by the private sector, which is increasingly confident in the country’s economic outlook.

The economy is expected to experience stable inflation in 2025, with a projected average month-on-month inflation rate of less than 3 percent.

This stability is attributed to the implementation of tight fiscal and monetary policies. While US dollar year-on-year inflation increased from -2,9 percent in January 2024 to 3,3 percent in November 2024, the outlook for the exchange rate remains positive.

Mandeya, however, called for caution. “While these projections are promising, it is crucial to note that several challenges remain. These include high levels of debt, infrastructure deficits and political uncertainty.

‘However, with prudent economic policies, sustained reforms, and a conducive business environment, Zimbabwe has the potential to unlock its economic potential and achieve sustainable growth,’ said Mandeya.-bnessweekl