VAT deferment withdrawal sparks company closure fears

Zimbabwean businesses, particularly those in the manufacturing sector, are worried about potential company closures following the Treasury’s decision to withdraw the Value Added Tax (VAT) deferment provision.

This policy allowed companies importing capital equipment exceeding US$500 000 to defer VAT payments for up to six months. However, due to a high number of beneficiaries failing to settle outstanding tax bills after the deferment period, the Treasury abruptly ended the programme.

Under the VAT Act, specified sectors that include agriculture, manufacturing, mining, health, and aviation industries are considered for VAT deferment for a period not exceeding six months on imported capital equipment.

The Treasury Chief Professor Mthuli Ncube who is also Finance, Economic Development and Investment Promotion Minister in the statement said: “Treasury notes with concern, the number of beneficiaries that are not honouring their VAT obligations upon the expiry of the deferment periods.

“In view of the above, . . . with immediate effect VAT deferments granted to operators with outstanding VAT payments on tax deferred are hereby withdrawn forthwith. This means that tax is payable immediately, failure of which enforcement measures are provided in the tax legislation will be applied.”

Businesses including those in the productive sector have of late been importing capital equipment to facilitate retooling to improve their production efficiencies and boosting output.

This is against a backdrop of most companies and businesses operating with antiquated plant and equipment that often result in constant breakdowns whose net effect adversely affects productivity.

In an interview, a tax expert Trust Chikohora who is also the Zimbabwe National Chamber of Commerce (ZNCC) past president said if Treasury does not climb down on its decision, more company closures are looming.

“They have to work out payment plans with Zimra (Zimbabwe Revenue Authority) because if you just do it haphazardly you can actually cause the closure of those companies.

“The Government through the Treasury should get the outstanding money from the affected businesses, but in business you have to do things that work. If you just go to someone and say I want this money and that person doesn’t have the money, it doesn’t work — and if you go and garnish their bank accounts, it means they are not going to be able to pay their employees, rates and bills and all sorts of things including paying their suppliers,” he said.

“In as much as you want the money, you have to do something that works; looking at it on a case by case basis and working out a payment plan with the relevant company. Depending on each case, he said, the VAT that is due can have payment plans spread over a period of up to nine months to allow the affected firms to operate while the Treasury also receives what is due.

“Because if they close you get nothing anyway and that does not help anyone; an amicable solution which involves payment plans which are specific to each organisation has to be worked out,” said Chikohora.

He said the failure by the affected companies to settle their outstanding tax obligations was due to cashflow challenges entities are facing as business is scarce at the moment. Among other operational issues that have affected business, the Government has been failing to pay on time suppliers for goods and services rendered.

This is against the background of the Treasury’s shrinking revenue base.

Another tax expert who preferred not to be named for professional reasons said the facility (VAT payment deferral) was meant to give relief to companies bringing investment of a minimum of US$500 000 through capital equipment into the country.

“That facility was meant to give relief to companies . . . looking at investment above US$500 000, so it then means you have to put an additional 15 percent on that where that VAT has to be paid like now.

“So, this is going to put a cashflow strain on those operations and if you don’t pay those obligations, you will be penalised with additional interest, which in turn could lead to company closures.

“Unless the investor is cash-rich, then it could progress straight forward, but in most cases because of the many things that we are dealing with, we definitely need that reprieve.

“I don’t think it’s a compliance issue where people would not just want to pay because when you start a business, it’s a very difficult process for you to be able to generate the necessary cashflows,” said the tax expert.

Another tax expert Trust Chiroora said while the move by Treasury to withdraw VAT deferment from importers defaulting on their payments for deferred tax may be aimed at safeguarding revenue and constant inflows to Treasury, there is need to examine the reasons behind the beneficiaries’ failure to meet their obligation.

“Before the relevant regulations are gazetted, there is a need to examine why beneficiaries are failing to comply, and also consult with industry to ensure an informed policy position.

“The stance taken by Treasury may not be so well received by importers whose failure to comply may be due to genuine cash flow or working capital constraints.

“Some industries may be capital intensive and the imported equipment may have lengthy gestation periods before fully installed and commissioned that the window period for VAT deferment may lapse before it starts generating revenue.

“This can push such importers off the cliff.

“Ideal regulations may need to take care of cases, setting capital or machinery value thresholds for lengthened VAT deferment periods, may be beyond the current 180 days,” he said.

Speaking from Seoul, South Korea early this week where he is attending the 2024 Korea-Africa Business Summit, ZNCC president Mike Kamungeremu said: “I will only be in a position to properly comment on the reasons for defaulting after engaging the affected companies.

“My only appeal to the Treasury is for them to consider each case on its own merits and not just penalise everybody the same.

“Perhaps some have genuine circumstances that caused them to fail and we want those heard and the companies supported so that they survive and then pay off their debts.

“For those that defaulted for no good cause and have shown no sign of cooperating, surely the Treasury is justified.”

He also appealed to local businesspeople to always honour their obligations to avoid messing everything up for others.

“We don’t want facilities like these that have been assisting us to retool to then be suspended totally because of us defaulting.

“Where we face challenges let’s proactively engage the ministry so that they know what we are going through upfront. I don’t think if all affected companies had done this, the Treasury would have made this decision,” said Kamungeremu.

In a separate interview, the Confederation of Zimbabwe Industries (CZI) president Kurai Matsheza said his organisation was yet to be apprised of the reasons why the affected firms have failed to honour their commitment, but indicated that the pronouncement by Treasury over the matter have negative repercussions on industry survival.

“We are still checking with our members who have been affected. We don’t have any answer yet as to why they have not been able to meet their obligations in their regard and when we talk to our members and we have understood the reasons we will let you know.

“But if the Treasury proceeds with the stance it has announced, this will have adverse implications on the affected companies going concern status,” he said.-ebusinessweekly