GOVERNMENT’S policy of promoting the informal sector at the expense of properly structured SMEs and big business has come back to haunt the nation.
Finance minister Tenda Biti in warning teachers not to go on strike this week revealed that government had in July managed to collect a miserly US$90 million in taxes and levies. This is against a projected annualised revenue inflow of US$1,7 billion to be raised from taxes and levies. That is an average of US$141 million a month.
Government is off target and as a result the state cannot raise revenue to pay restive civil servants a living wages or finance social services. The low revenue flows, averaging below US$25 million a week are not likely to improve significantly until there is a deliberate policy thrust to correct damaging state interventions during the bad years of economic decline.
Firstly government’s intervention promoted arbitrage which gave rise to the growth of an informal economy where business was conducted on the street with no real set rules. Big business became a cheap target for politicians to score points as capital was accused of sabotaging the economy and promoting a regime-change agenda.
Price controls were recklessly implemented to keep a lid on rising prices in the face of rampant inflation. On the other hand the informal economy took root and many became suddenly very rich through corruptly acquiring scarce commodities and selling them at exorbitant prices. They were never caught by the price control net.
Then there were cheap funds, fuel, seed and maize given to “farmers” who never put a seed into the ground. They sold these and became instantly rich. Those farmers honest enough to plant a field and produce a crop were never asked to pay back loans neither were they taxed on their farming businesses. They got free capital and pocketed fat profits.
The sum total of this has been a debilitating erosion of the tax base and current efforts to raise revenue will fail as long as the new regime at the Ministry of Finance believes that the best way forward is setting Zimra upon small-scale traders to collect revenue. This is not sustainable.
The era of blitzes and search and grabs is over. Tendai Biti and his team have to be smarter in their quest to raise revenue.
The challenge is to widen the tax base by formalising the informal sector.
Many among our rulers harbour the unfortunate misconception that the formalising of the informal sector means making them pay tax and levies. The Zimra blitzes have nothing to do with building capacity but more to do with squeezing as much revenue as possible out of struggling traders.
When business people see tax as punitive they try as much as possible to avoid paying it. There are small companies that have closed shops in town to operate from garages at home to avoid paying tax. Others are using more subtle means to evade tax.
The challenge before Biti therefore is to come up with a plan that increases capacity in the informal sector and grow registered SMEs which in the long term would expand the tax base. Many Asian countries which have experienced economic booms took this route.
Closer to home, the South African government – having realised that access to equity finance by small and medium-sized businesses was one of the main challenges to the growth of this important sector of South Africa’s economy – last month started using its taxation legislation to stimulate SME development.
To enable SME business ventures to obtain capital required to fund establishment or growth, the South African Income Tax Act now provides for tax incentives to those who invest in venture capital companies that engage in the provision of funding to small business enterprises.
That tax incentive comprises tax deductibility of the entirety of amounts invested in venture capital companies that provide SME funding. By so doing the South African government hopes to raise capacity in the small-scale sector. The growing sector can then contribute meaningfully to the fiscus through corporate tax and individual income tax. It’s a smarter way of doing things indicative of the innovative thinking that could vigorously stimulate SME development here.
Zimbabwe needs to come up with smart ways of encouraging formal and informal sector development and not stifling trade through punitive tax raids. We want to see a deliberate policy that ensures there is a progressive shift by business people in the informal sector to join the ranks of the formal sector.
The same should happen on the land. There should be a proper plan for resettled farmers to also start paying tax on their land and on their agro-business ventures. It does not make sense that a small trader selling buns and coke in West End is raided by Zimra whilst a large-scale commercial farmer is exempt. All this is taxing, isn’t it?