USD IMMT tax upward adjustment bitter pill for business

The Zimbabwean business community is in a state of shock following the Ministry of Finance, Economic Development and Investment Promotion’s announcement of a significant hike in transactional taxes.

This new policy, detailed in Statutory Instrument (S.I) 80 of 2024, effectively doubles the Intermediated Money Transfer Tax (IMTT) on US dollar transactions, jumping from 1 percent to 2 percent.

While motivated by the need to strengthen government revenue streams, this decision has ignited fierce debate. Critics argue that the increased tax burden unfairly targets businesses, especially those operating within Zimbabwe’s extensive informal sector.

The legal framework of the hike

Statutory Instrument 80 of 2024 provides the legal foundation for the tax increase. Citing Section 3 of the Finance Act, the instrument empowers the Minister of Finance to implement these regulations.

Notably, Section 36G(2b) of the Taxes Act now mandates a flat rate of 0.02 (two cents) levied on every US dollar or portion thereof for transactions subject to the tax. Additionally, a flat fee of US$10,150 applies to transactions exceeding US$500,000.

Potential consequences for businesses

Businesses, particularly those handling high volumes of transactions, now face a significant financial hurdle.

From retailers to manufacturers, companies across the board are likely to experience shrinking profit margins and rising operational costs. Formal small and medium-sized enterprises (SMEs), already grappling with a challenging economic landscape, are especially vulnerable.

The tax hike could force many SMEs to raise prices, potentially passing the additional cost onto consumers.

Furthermore, businesses may be forced to divert resources away from growth initiatives to offset the higher transaction costs, potentially stifling investment and innovation.

Informal economy concerns

The increased tax burden also raises concerns about a potential decrease in bank deposits. Businesses seeking to minimise their tax exposure may be tempted to utilize informal banking channels. This could have a domino effect, eroding trust in formal institutions and potentially leading to a rise in black market activity.

A delicate balancing act for policymakers

The Government’s goal of boosting revenue through this tax increase needs to be carefully weighed against the potential negative consequences. Policymakers must consider the importance of fostering a business-friendly environment that incentivizes compliance with tax obligations.

The challenge of balancing revenue and growth

The decision to double transaction taxes underscores the inherent complexities of fiscal policy in an economy with a large informal sector.

While the move aims to bolster government finances, it risks harming business profitability, encouraging informality, and stifling economic growth. The true test lies in striking a delicate balance between generating revenue and fostering an environment conducive to business development in a globalised world.-herald