HomeLocalGovt’s tax Targets Unrealistic, Unachievable, say Analysts

Govt’s tax Targets Unrealistic, Unachievable, say Analysts

GOVERNMENT’S proposed plans to finance the US$1,9 billion national Budget through taxes are too ambitious and unachievable, analysts have said.


Already reeling from a high unemployment rate and a depressed manufacturing sector, government last week proposed a raft of taxes aimed at boosting its coffers.

The government has few options except to rely on taxes and levies from domestic sources to generate revenue.

But economic experts argued this week that this could be a mission impossible for the government, which recently liberalised the economy.

Under the proposed measures, taxes would be paid in both foreign and local currency after the relaxation of foreign exchange controls.  

The analysts said the suspension of quasi-fiscal activities by the central bank could also lead to a decline in business for the informal sector that was previously contracted by the central bank to manufacture farm equipment under the farm mechanisation programme.

This threatens the survival of some small enterprises which, according to independent estimates, account for 80% of the economy.

In a bid to end tax evasion by small enterprises, acting Finance minister Patrick Chinamasa proposed plans to levy the informal sector in foreign currency.

He also proposed a monthly minimum tax-free threshold of US$125 and a maximum tax of 37,5% a month for workers earning over US$3 000. But with the unemployment rate estimated at 94%, it remains to be seen how government would generate revenue.

Budget projections indicate that government seeks to raise a staggering US$1 billion from taxes on income and profits, over US$594 million from taxes on goods and services, among other revenues. International aid grants, according to government figures, would account for US$200 million of revenue.

Former Zimbabwe National Chamber of Commerce president and businessman, Luxon Zembe, contends that the proposed new tax regime would do little to ignite the economy in the short-term.

“Zimbabwe is one of the most highly taxed nations,” Zembe said. “With 94% unemployment everybody is struggling to pull through. One would expect that government would take heed of the plight of people.

Tax reduction is crucial at this stage. The new tax regime is viable in the long to medium term. At the moment, tax reduction for workers and small enterprises would be ideal.”

This view is held by Keynesian economists who argue that the balance of taxation and expenditure should reflect the overall state of the economy; in recession, governments should raise expenditure and reduce taxation; reduce expenditure and raise taxation in a boom.

Lower direct taxation would reduce the burden of corporation tax for a firm, thereby raising its profitability after tax.

Resultantly, this profit can be re-invested in technology and machinery leading to greater operational efficiency and lower unit costs.

A slash in direct taxes would also mean a reduction of employment costs for a firm, such as employee insurance and social security contributions and this might encourage firms to hire more labour or use labour intensive methods of production.

The economy, Zembe argued, has been informalised by poor policies such as price controls, quasi-fiscal activities, excessive money supply growth, government expenditure and rampant corruption.

“Nobody wanted to informalise given numerous advantages of formalising your business. Right now everyone is playing hide and seek with authorities due to these bad policies,” he said.

This budget, Zembe added, had no measures to “trim down” government expenditure. He argued that the proposed inclusive government made up of 31 cabinet ministers would be too large for the economy.

“We need structural reforms that can reduce budget expenditure to about US$1,5 billion in order to accommodate the new inclusive government costs,” he said.

Zembe also expressed worry over government’s plan to put in place a 40% levy on free-funds.

On the taxable food vouchers that Chinamasa said would be used to augment salaries of civil servants, analysts predicted that the bulk of government workers – who account for the majority of the job market – could fall outside the tax net.

This forecast comes after central bank governor Gideon Gono this week announced the introduction of US$100 vouchers for government workers, which he said was enough for a food basket for a family of six.

 
According to the Consumer Council of Zimbabwe, the poverty datum line was US$310 last December.

Regional economic analyst Daniel Ndlela said the proposed plan to generate revenue from the informal sector could hit a brick wall.

“There is no country which has succeeded in generating significant revenue from high taxation from the informal sector,” Ndlela said. “This is a cumbersome exercise and in the end government would spend more money in trying to police the informal sector rather than introduce incentives that would strengthen the sector.”

The introduction of presumptive tax paid in foreign currency, Ndlela argued, was a desperate decision by the government. Instead, he said, government should “bite the bullet” and re-engage international support.

“This was not a well thought out budget. They should rethink this Budget which in my view was a window-dressing exercise,” he said.

 MDC-T secretary for economic affairs Elton Mangoma criticised government for fast-tracking the Budget and monetary policy presentations before the formation of an inclusive government. Chinamasa, in his introductory remarks, alluded to “wide consultation” on the Budget before being booed by opposition legislators.

 
“The logical position would have been for both the national Budget and the monetary statement to be deferred to allow for the consummation of the inclusive government,” said Mangoma, who is tipped to become Finance minister in the new political dispensation. “It will be a casino economy where even vendors and road-side dealers are all required to procure licences of US$10 from the RBZ to engage in mundane economic activities that are of no benefit to the national economy.”

Mangoma said civil servants must be paid in hard currency as opposed to the proposed voucher system.
Confederation of Zimbabwe Industries president Kumbirai Katsande also doubted government’s capacity to generate the projected revenue.

“Government needs to revisit the numbers,” Katsande said. “We are currently trying to engage government over this matter on these questionable figures which could prove to be unachievable.”

Secretary for the treasury Willard Manungo defended the new tax regime saying these were aimed at protecting formal local industry from thriving informal activity.

“Government proposed the presumptive tax for people doing viable economic business,” Manungo told the Zimbabwe Independent. “Business people have to choose whether they want presumptive tax to be deducted from their business or formally register their companies with Zimra for the purpose of corporate tax remittances.”

Manungo said formalising the informal sector would in turn make the tax burden lighter for the small enterprises.

“A lot of measures in the budget support domestic industry. This is aimed at levelling the playing field. What we don’t want to do is to offer protection to uncompetitive entities,” he said.

BY BERNARD MPOFU

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