eBusiness Weekly
The business world is not going to stand up and cheer the proposals in the 2024 National Budget presented by Minister of Finance, Economic Development and Investment Promotion Mthuli Ncube last week, but the additional taxation, the new enforcement responsibilities and a general lack of tax concessions that are not just to cope with inflation are not enough to cause most businesses to cry too loudly.
The addition of 1 percent on corporate taxation to bring it back to 25 percent was not dramatically severe and was, to be blunt, an easy way for the Minister to raise some extra. This has been a long standing rate and while we had a bit off during the first term of the Second Republic most businesses can cope.
The tax, after all, is on profits rather than gross and still leaves a healthy chunk of profit. The main effect will probably be to reduce dividends slightly, unless businesses are tempted to reduce capital spending. But most have discovered that reductions in capital spending are in the medium term, let alone the long term, a bad move, so along with financial managers gazing at the cost charts the shareholders are likely to carry what is a very small can.
The general rise in fuel prices, 5USc on a litre of petrol and 3USc on a litre of diesel is also universal, but this is the sort of small alteration that is well within the range that businesses have had to cope with arising from fluctuations in oil prices and at the moment the global oil price is not going up fast any time soon.
Some extra deferment on VAT on capital goods imports will be welcome, and could encourage more investment.
Owners who run their businesses and senior managers will benefit, along with their other employees, from the fairly dramatic movement in the tax bands, so their personal income will not be affected.
However this group are more likely than most to be hit by that 1 percent wealth tax on residential housing worth more than US$100 000. Details of how it likely to be collected, and time given, have yet to be given but it is likely that this particular section will be more intensely debated than most of the taxation proposals in Parliament. Already there are suggestions of different limits or of a stepped tax since US$100 000 does not buy you much in cities and especially in Harare where land is very expensive. Housing in some middle income suburbs will fall into the net.
The extra tax surcharge on very fancy luxury cars is more carefully done and in any case US$120 000 will buy a decent executive style car or double cab and the main effect appears to be to persuade the super rich to invest more rather than indulge in the out levels of conspicuous consumption. It seems odd that the wealth tax on luxury cars, which is what this amounts to, is less dramatic than the housing tax.
When we come to specific industries then there are some major changes. At one end there is what amounts to a tax on excess profits in the motor insurance industry. The levy proposed on statutory motor insurance premiums is not general, it applies only on those insurers whose claims paid fall below 75 percent of the premiums generated, and then it is 20 percent. That business is a cash cow, hence the competition in collection, but it is an assured source of cash and income. The previous suggestions that it would be a universal if smaller levy were dropped.
The sugar tax on beverages containing sugar will affect that industry strongly, considering just how much sugar is in a bottle of fizzy drink or a bottle of orange squash. It could easily double prices when passed on to consumers. However most beverage manufacturers have been offering the option of reduced sugar drinks, or even zero sugar drinks, but have been facing consumer resistance. The price differentials may reduce that resistance. Price wars in the carbonated beverages have already shown that this market is far more price sensitive than many had once supposed.
But it will be essential for manufacturers as the tax cuts in to explain, in detail, why their prices are rising and in many cases rising so much. While they have been compelled to list the sugar in the list of ingredients on the label, most do this “per portion” or per 100ml or per 250ml. Now they need to explain how much sugar is in a bottle, and for some beverages this is a lot. Posters for retailers seem essential along with the more general advertising, but treating customers like adults, and offering the sugar-free and low-sugar options, again well-advertised, seems essential. And the price rises should be for the sugar, not the Government being used as an excuse to play around with profit margins.
The extra taxation in the mining industry appears to be designed to curtail speculation or encourage full processing. While major mining companies, plus a decent swathe of the smaller miners, do not mess around with speculation on exclusive prospecting orders, there has arisen a group of people who do not even own a spade who want to earn huge gains on having unused orders. Respectable businesses who follow the spirit of the law, as well as its letter, will not be affected.
The lithium tax was expected. Plants are being built and lithium exports need to be the pure salts, lithium carbonate has been laid down although we cannot imagine that if the lithium hydroxide market builds up that this salt will not be added. Everyone else in mining has had targets for local processing and lithium has now joined the group.
One pair of changes that will affect a lot of small businesses, and to a degree a number of major manufacturers and wholesalers, is the change on just who is allowed to buy directly from a manufacturer or even from a wholesaler.
Businesses, and this includes vendors and those with their stock displayed in a car boot, as well as going up the scale into small shops who want to buy from a wholesaler have to be licensed by their local authority and be registered with Zimra with a tax clearance certificate. Those buying from manufacturers directly have that, plus the need to register for VAT and pass that money on, and that means those with sales above US$25 000.
There has been a huge growth in these sort of deals, with these US dollar only small retailers buying for US dollars from the wholesalers and factories. They can still get away with this, but now have to join the taxpayers. So most businesses will support the moves and the handful being the main suppliers in these schemes will have to conform.
Well actually a bit more than conform. Minister Ncube has empanelled them as the practical enforcers. It is almost impossible for Zimra, or even local authorities, to check that every little business is licensed and registered, at least without spending more than the tax received will pay for. But it is easy to check if a couple of dozen major suppliers are following the rules and those who have been doing this should realise that it is easy and cheap for the authorities to check. A couple of tax assessors in those dark suits can do it in a few hours, so decent records will be useful so they do not have to linger.
The change should not make any major difference to a manufacturer. After all the market is for a certain quantity of goods and how they are distributed is not really pertinent. Admittedly some have been winning market share, and boosting foreign currency direct payments, by dealing with tuckshops and the like and keeping their eyes closed. Now they have to open them.
Some wholesalers might be affected if a higher percentage of goods go direct to the major chains, who obviously do and can buy direct from manufacturers, but on the other end there is now an incentive for these wholesalers to have a “help desk” where they can carefully explain to small business customers how to buy a licence and register for taxes. Some of their customers have no idea whatsoever where the local tax office is, or where to log-in to the Zimra site, and if the price of keeping a customer is to give a few minutes of help and computer time then that cost is cheap.
The problem if formalising the informal sector, and getting its members to pay taxes, is serious and the Minister appears to have found a solution to gather a large block into the formal sector using as enforcers those who are already good customers of Zimra.
He has probably already been making plans to enforce the enforcers to do what he wants. That is the only way to enforce the rules, but the net result will be a lot more businesses contributing to his tax flows, and that can only benefit the rest of us.
