Outcry over presumptive tax rates

Economists and informal business owners are raising concerns over potential negative consequences for Zimbabwe’s economic recovery following the government’s decision to amend the Finance Act of 2019, gazetted on the 29th of December 2023 that will see presumptive tax balloon in US terms.

Presumptive taxes are commonly used to collect revenue from the informal sector, where businesses may not keep detailed records or operate outside the formal tax system.

However, critics argue the high levels of the presumptive tax could lead to a decline in tax revenue as businesses struggle to comply and may resort to operating outside the formal system.

Furthermore, business owners and industry experts warn the policy could lead to widespread tax evasion and hinder efforts to formalise the informal sector.

For example, operators of driving schools providing driving tuition for Class 4 vehicles only are now required to pay US$300 per month while those with Classes 1 and 2 vehicles (whether or not in addition to providing driving tuition for the other classes of vehicles), are now required to pay US$600 per month.

Operators of hair dressing salons, restaurants or bottle stores, are now required to pay US$300 per chair per month while operators of restaurants or bottle stores will fork out a similar amount.

Informal cross-border traders are now required to pay 20 percent of the value for duty purposes of the commercial goods being imported.

Subsequent to the latest tax system, this publication took time during the week to speak to some of the players in the informal and SMEs sectors within the Central Business District (CBD) in Harare.

A hair dresser operating along Jason Moyo Avenue, said the latest policy will create viability challenges for her.

“We are really shocked that the Government now wants us to pay presumptive tax exclusively in United States dollars. Remember we also have other obligations to settle at the end of the month – we need to pay water and electricity bills as well as rentals. I am renting a chair for US$100 a month and that presumptive tax is exclusively in US dollars. Where do I get that money?

“What it means because of presumptive tax exclusively in US dollars and in such a huge amount, my business is now under threat. All my hopes of growing the enterprise are shattered,” said Cynthia Madzikanda.

She said apart from meeting monthly obligations, it is also from her hairdressing enterprise that she generates income to support her family.

Another hairdresser who preferred not to be named and operating her business along Speke Avenue, said pegging presumptive tax at US$300 and exclusively in foreign currency would face resistance.

“Remember, there has been resistance by the informal sector players to pay presumptive tax and this also explains why the Government through Zimra (Zimbabwe Revenue Authority) has been grappling to encourage people to formalise their operations.

“What it means is the Government is worsening reluctance by players in the informal sector and by the end of the day tax collections from that revenue head will shrink further,” he said.

In October last year, President Mnangagwa announced that the United States dollar will remain an integral part of Zimbabwe’s payment system until 2030.

The development boosted investor confidence and brought certainty to planning for business, given some financial institutions had started scaling down lending in foreign currency.

A proprietor of one of the driving schools in the CBD who also preferred not to be named said the gazetting of presumptive tax solely in hard currency sends wrong signals to the market to shun local dollars.

“We are in a multi-currency system environment where the local currency is accepted as a legal tender alongside other currencies and if the Government stipulates that presumptive tax must be strictly in foreign currency, it insinuates that authorities themselves don’t have confidence in the local unit.”

The Zimbabwe Chamber of Informal Economy Association secretary general, Wisborn Malaya, said those operating in the informal economy had weaker businesses and majority would not afford the amounted needed.

“So, taking into account issues of tax is not a priority to them as of now. We feel the decision was not inclusive as we were not consulted.

“Secondly, it’s also going to cause a lot of criminalisation of informal activities, which is exactly something we are fighting to overcome as a country to say let’s formalise the informal activities,” he said.

Through the latest stance, the Government feels it will realise high tax revenues.

Malaya said there are better initiatives the Government should consider to collect tax from the informal sector.

“We once presented a document called ‘The Formalisation Strategy of the Informal Economy’…to say for the formalisation of the informal sector we need to have a basic tax bracket that attracts everyone to participate in it and with incentives.

“For example, we know as a country that currently our health sector is bad and if the Government puts a tax bracket which then calls every informal trader to say if you are contributing to a tax of say US$5 or US$10 per month, you are also covered for primary health care, more people will pay.

“Another incentive can be financial support for the work informal sector players are doing to enable them to become better entrepreneurs. Within those incentives you then reduce or simplify the collateral requirement system and this can be an attractive package that can cause many people to participate in taxation within the informal sector.”

If one million informal traders are taxed US$5 per month, Malaya said, it means the Government would be able to collect US$5 million.

“Suppose we raise it to a basic US$10 per month, it comes up to US$10 million per month which I believe and bet the Government is not collecting from informal traders to this day,” he said.

Malaya said gradually the traders in the informal economy can then start to be categorised depending on their areas of work such as those in vending sector and those in the engineering field like welding and the tax system starts to generally change.

“As a result, this makes the informal sector become bankable, tax compliant as well as boosting confidence with the Government in terms of how it administers the work it does.

“Currently, the tax system is a system which is totally non-attractive to the informal traders, its anti-poor. This is not a pro-poor policy this type of presumptive tax system works in the First World countries where the economy functions properly.

“You can’t put a presumptive tax system where you tell a hairdresser to pay US$300 per month- where will that person get that money from and in the first place where is the assessment that this hairdresser is generating US$300,” said Malaya.

Bulawayo Chamber of SMEs coordinator, Nketa Mangoye Dhlamini, said given that the presumptive tax is now strictly in United States dollars this could result in a lot of people evading tax.

“It was not supposed to be exclusively in United States dollars, an option was supposed to be given to also pay in local currency. Just like what is happening in the mainstream economy where people have an option to pay in RTGS. I don’t think it’s correct to take RTGS out of the equation,” he said.

SMEs Association of Zimbabwe chief executive officer, Farai Mutambanengwe, said those tax thresholds were set a while back with the association highlighting these will create viability challenges.

“Since then, even if you go to Zimra they are not really collecting much on those presumptive taxes because of the level at which they are set. But also presumptive tax is meant to be an alternative to normal tax, so a person can go and register and then use the normal tax rates that apply whether to individuals or companies,” he said.-ebusinessweekly