THE 15 percent Value Added Tax (VAT) Zimbabwe charges on foreign tourist hotel accommodation is tantamount to taxing an export and is detrimental to foreign exchange generation, job creation and growth of the tourism industry by making Zimbabwe an expensive destination.
While the charging of tax on accommodation for foreign visitors is not something unique to Zimbabwe, the policy measure has generally placed Zimbabwe in the same line with other competitive countries in the region, which is costing it potential visitors.
Zimbabwe’s tourism sector, like any other sector of the domestic economy, is already burdened by a myriad of other taxes such as the corporate and money transfer taxes, local authorities’ charges and a litany of levies and fees by other regulators.
Botswana has a lower rate of 12 percent, just as South Africa at 14 percent as well as well Kenya on 14 percent while Namibia has similar rate as Zimbabwe at 15 percent.
Uganda suspended the tax of 18 percent in 2014 after its introduction in 2013 reduced the destination’s competitiveness.
Studies have also been done to assess the impact of such policy measures at the international level. According to studies carried out by a local research institution, the VAT can have negative impact in terms of development of the tourism industry as well as on job creation in the sector.
In Germany, reducing the VAT rate on
accommodation services from 19 to 7 percent from January 2010 saw an annual increase of 2,4 and 2,9 percent in the number of jobs in hotels in 2010 and 2011. In Luxembourg, the low level of VAT saw the hospitality industry creating 1 650 new jobs in 2011 and over 1 800 in 2012.
The sector is of strategic importance to Zimbabwe, as it contributes about 8 percent of the country’s total Gross Domestic Product (GDP) while earning the Southern African country in excess of US$1 billion annually. Government targets growing tourism’s GDP contribution to 15 percent.
Foreign tourist arrivals into the country have grown from 1,8 million in 2013 to a staggering 2,5 million in 2018 amid unlimited potential. Tourism players however suggest the growth could be much higher if the tax is to be removed or reduced.
Economic analysts and industry players said the VAT, which they have lobbied against since 2014, was not good for competitiveness of the tourism industry as it inflated the cost of tourism services compared to regional competitors.
At some point, as a strategy to promote the tourism sector based on its contribution to the economy in Zimbabwe, Government decided to exempt accommodation services for tourists from Value Added Tax (VAT).
But as the tax base continued to shrink owing to economic challenges, Government became constrained, forcing it to continue to explore other mechanisms of enhancing fiscal space, which saw it reintroducing the VAT.
A study commissioned by the Tourism Business Council of Zimbabwe (TBCZ), undertaken by Zimbabwe Economic and Policy Research Unit (ZEPARU) found that high foreign tourist accommodation prices drives away visitors while absorbing the cost reduces the revenue and profits of operators.
The worst is a situation where tourists either avoid Zimbabwe, resulting in loss of significant foreign currency earnings the country desperately needs or day trips that only see tourists visit Zimbabwe for adventures during the day and fly back to cheaper regional neighbours for accommodation, which would again mean lost export revenue.
Hospitality Association of Zimbabwe (HAZ) immediate past-president Tamuka Macheka told this publication in an interview that while they have made submissions to Government to have the issue addressed, nothing had materialised thus far.
“We have tabled the issue through the ministry (Environment, Climate and Tourism) and they are still looking into it. We were also asked to resubmit some of the papers.
“There is serious implication; what it means is that the total cost will go to the customer, if we charge the tax. After charging our rates, we add the 15 percent VAT that is now where the disparity is in terms of (destination) being expensive,” Machecha said.
In Croatia, increasing VAT for accommodation services from 0 to 10 percent in 2006 saw the average number of nights a tourist stayed in hotel declining by 22 percent compared to 2005 when the number of foreign tourists coming from Croatia through travel agencies being 2,1 percent lower than in 2006.
In Latvia, increasing the VAT rate on accommodation in January 2009 from 5 to 21 percent reduced employment in the sector by 12 000 resulting in losses for the government in social and income taxes of around 14 million EURO.
Economist and trade expert, Dr Gift Mugano said the tax was detrimental to the optimal performance and targeted growth of the domestic tourism industry in Zimbabwe, as it added to the already high cost of doing business in the country.
“Why are we charging VAT on tourists? Does it make sense to levy an export,” he said, adding the argument that all other countries have it was not a good justification for its introduction.
“We must not do it simply because others do.
“If you go to South Africa, they have a complete mono-currency which is domestic as well. We still have the US dollar because prices are indexed. Secondly, we do not have similar business conditions as in South Africa.
“When you look at the cumulative effect of the general business environment, we are already highly expensive so you can’t say Namibia is 16 percent, Zambia 15 percent, Botswana 14 percent . . . so it’s the same; it’s not.
“In those countries, operators get long terms loans for 10 years to 20 years at very low interest rates so what instrument can we use to ourselves; we do not have. So we could use the VAT to gain competitiveness.
“In any case, we are losing the same clients to the region; so why can’t we test just for one year what will happen if we remove the VAT,” Dr Mugano said.