The budget statement presented by the Minister of Finance yesterday contains some interesting measures that have a major impact on informal businesses that might see increased formalisation of the economy.
The Minister proposed to increase the withholding tax rate from 10 percent to 30 percent, with effect from January 1, 2021 (maybe he meant 2022) whereby registered operators are compelled to withhold this tax from the value of any supply from informal and non-compliant operators for remission to ZIMRA.
This proposed increase alone could be the magic wand that transforms Zimbabwe’s economy from being highly informal to being more formalised and tax compliant than any other measure announced in the Budget. The National Budget sort to balance several competing needs with the prime of these being for the Government to increase the tax base in a sustainable manner.
For a long time, the informalisation of the economy has meant that the Government was foregoing a sizable amount of potential revenue from this sector.
The introduction of sector specific presumptive taxes was meant to widen the tax net, while acknowledging the economic difficulties that ordinary citizens where facing, but this allowed some larger operators to dodge the tax net with only a 10 percent tax withheld on their sales. This window or loophole now seems to have been closed as the risk of remaining informal or non-compliant has been increased three fold. For operators that had grown, but remained unregistered with zimra, they now need to assess the cost/benefit of continuing to operate as informal businesses.
This policy measure seems to have been designed to encourage voluntary registration with the various arms of Government, especially zimra. This approach needs to be buttressed with complimentary measures, especially educational campaigns on the benefits of being registered. That said, those who continue to be impacted by the economic environment and are unable to grow their operations need to be accommodated somehow through reduced burdens of compliance.
The 2022 Budget and the Employee Tax challenge
The budget statement contains the same old measures with respect to employees with the usual adjustments to tax bands and the tax free bonus threshold.
The 2022 Budget adjusted the tax-free threshold from $10 000 to $25 000 and also adjust the tax bands to end at $500 000 above which a marginal tax rate of 40 percent will apply, with effect from January 1, 2022, with a review the foreign currency tax-free threshold on income accruing increasing from US$70 to US$100, with effect from January 1, 2022.
Other foreign currency tax bands remain unchanged.
The Minister also reviewed the local currency tax-free bonus threshold from $25 000 to $100 000 and the foreign currency tax-free bonus threshold from US$ 320 to US$ 700, with effect from November 1, 2021.
These measures are very welcome and represent a significant and meaningful cushion to the challenges being faced by those who are formally employed who are subjected to PAYE as the first tax, then the 2 percent Intermediated Transfer Tax and VAT when they are forced to purchase through formal shops because of the shortage of cash.
However, with the November month on month inflation rate coming in at 5,76 percent a slight drop from October’s 6,40 percent ordinary employees who have borne the brunt of the Covid-19 expected more from the Minister. This more so from employees who have their salaries paid entirely in the local currency.
Zimbabwe’s employment tax system has served the country well with personal income tax whose main component is PAYE, contributing 16,6 percent in the 2021 fiscal year. This tax head has been a consistent performer for Treasury over the years, but the system now requires an assess to see if it remain fit for purpose as the country targets to become a Middle Income economy by 2030.
Our thinking is that the Government have made significant progress in introducing and making accepted the 2 percent Intermediated Transfer Tax (IMTT) together with Value Added Tax (VAT), another consistent performer for Treasury.
Both these taxes are based on reliable technological infrastructure backbones in the form of the national payment platforms and fiscal device network. For this reason, these 2 taxes should now transition to replace the current cumbersome PAYE system with a flat rate tax.
Conventional wisdom tells that it is difficult for the Government to give up guaranteed revenue streams, but such are the demands that are required to be met head on if we are to improve the incomes of citizens, stimulate economic activity and transform the country from a net skills exporter into a country that can attract the best minds, to live, work and spend in the country.
In acknowledgement of the difficult post Covid-19 pandemic phase we are facing in which some businesses are retrenching in order to right size operations and better deal with the challenges from the pandemic’s negative effects the Minister announced measures to preserve the value of retrenchment packages.
The non-taxable portion of the local currency tax-free threshold was increased to the greater of $400 000 or 1/3 of the retrenchment package, whichever is greater, up to a maximum of $2 million, for income earned in local currency. This measure takes effect from January 1, 2021.
While retrenchments come with seriously complex social impacts, this policy measure has tried to provide hope for those faced with the prospect of retrenchment.
The measure, however, needs to be buttressed with complimentary measures, especially educational campaigns on the opportunities that will be available through government and private sector programmes. These retrenchment packages represent a significant injection of capital into the economy and there is need for better education and training of recipients such that this capital is applied towards very productive endeavours.
The 2022 Budget and the Securities Market
The budget also contains some interesting measures that affect the Stock Markets which are likely to see the market go through a realignment period. The number of listed companies on the ZSE stands at 55, with one Exchange Traded Fund (ETF). The first ETF in the country was listed on January 4, 2021.
A new listing on the Victoria Falls Stock Exchange, Caledonia Mining Corporation is also on the cards.
In terms of trading, “all-share index” gained 302,19 percent as at the date of the Budget, November 25, 2021, spurred by gains in the heavyweight counters as reflected in the growth of the ZSE Top 10 counters which were up 292,46 percent during the same period.
Cumulative trades to September 30, 2021 were $32,13 billion, compared to $9,50 billion during the same period in 2020. The ZSE total market capitalisation recorded a new high of $1,39 trillion on October 26, 2021 compared to $317,88 billion as at December 31, 2020.
The measures (in table above) targeted at the Securities market were announced and their likely impact on the market is also noted.
These measures are likely to see the market trading mixed through to the end of the year as implementation measures are operationalised and a start date for the increase is announced. While the Securities Market might experience some disruption to the trading patterns, the measure is going to be very good for the fiscus as this tax line will most likely double as investors assess the cost benefit of claiming back the 0,5 percent for trades done within the 6 months of purchase.