Last Word
With the Finance Act passed and gazetted at the end of last year, the budget proposals of Minister of Finance, Economic Development and Investment Promotion Prof Mthuli Ncube to push informal businesses into the ranks of the taxpayers are now the law.
It has been the law since the 1890s that those with an income above the taxable thresholds must pay tax, but many in the informal sector have avoided tax and have tried to claim when challenged that they earn too little to pay tax. Prof Ncube noted that come do not even bother to have even basic accounts to prove that contention.
The major problem in the past is that a full Zimra investigation into just one of these small businesses will costs a lot in time and money to produce a tax payment that does not even cover the collection costs. Even very modest presumptive taxes have proved to be difficult to collect, those supposed to pay them quite often disappearing when the collectors come round.
So the Minister this time decided on a new approach, huge presumptive taxes plus enforcement of the laws that allow tax authorities to close down unregistered businesses until they have gone through the paperwork.
Businesses pay taxes quarterly and so he set his huge quarterly taxes: US$9 000 for tuckshops, kitchen stores, spare parts dealers and lodges; US$12 000 for fabric and clothing merchandisers and boutiques, and US$15 000 for car dealers and hardware stores.
Even at the bottom level, the US$9 000 tax for a tuck shop, assumes that the tuckshop is making profits of close to US$12 000 a month if this was to be the tax at corporate tax levels, and a business making a profit of US$12 000 a month would definitely be a corporate rather than a sole trader since that would be more tax efficient.
By the time we are on taxes of US$15 000 a quarter, our monthly profits have soared to almost US$20 000 a month. We stress we are talking about profits in these cases, not sales or turnover, so this is what a fairly respectable family business could be looking at, one that would almost certainly be big enough to have already been tracked down and be paying taxes.
There has been some fairly daft criticism that the Minister is trying to end the informal sector and has imposed huge taxes so that the little businesses can be bankrupted and closed down. This is obviously not the intention.
The intention must be to force the small businesses, or the small business people since so many operate as sole traders rather than register their business as a company, to register with Zimra and then keep the minimum level of accounts that Zimra demand. This minimum level is not particularly grand and does not require detailed double entry booking although any business would find that useful.
Rather the dealer must be able to have clear records of what they have taken in from sales and what they spent on stock or other expenses such as salaries and wages or rent. The difference is the profit and that is what they must pay tax on.
For a very small business with the owners operating as a sole trader that means working your way up the personal income tax brackets, from the zero percent to the 40 percent.
Even when a business is starting to produce the sort of profits that require the sold trader to start paying taxes in the 30 percent, 35 percent and 40 percent brackets, so they switch to company tax at 25 percent, the company owner will probably pay themselves a modest salary so they still get the bottom tax brackets.
There are two sets of actions now required. Almost all these small businesses to be hit with the presumptive taxes if they do register with Zimra are in fact fixed businesses.
There are some tuckshops in the back of a hatchback but most are in a shack, a small shop or a room or some sort of structure that cannot be easily
moved.
So it would be useful for Zimra to start sending our officers who can pace the pavements and go into the shopping centres and the clusters of shacks that suddenly appear and hand out the warning letters as well as recording the addresses. These are the people who must pay their huge tax bills at the end of March.
This action by Zimra will make it clear that the authority is serious and, more importantly, is collecting the names and addresses so it can come round again after the end of March. It does not need a huge staff, a single officer being able to visit a few dozen businesses in a single day, since at this stage all that is being done is collect data and issue a friendly warning.
It is important to make it crystal clear that the new taxes will be collected from businesses not registered with Zimra and paying ordinary taxes and that this will probably involve, for many of these businesses, bankruptcy and closure since they simply do not make the sort of money that comes even close to meeting the tax bill.
Once the businesses are convinced they will be paying huge sums, they should be more eager to sign on with Zimra, keep the basic accounts, and then stroll in and pay their far small tax bills as these fall due. But they will probably need help.
So the other set of action will need to come from those who must help the small businesses. Zimra has a reasonable online registration system, although not everyone will understand how to use it and many might well want to talk to a human being while they go through the process. Perhaps Zimra could set up client help centres, just an officer in a booth with a desk and a laptop, who can answer queries and then help the new client register.
Others can also move in more aggressively. The Ministry of Women, Community and Small and Medium Enterprises has a responsibility to help small businesses, and has contacts among non-government organisations who are also willing to help.
The Ministry and the NGOs can, with Zimra providing the technical backup, run meetings were the registration moves are explained carefully and then also have these help centres, someone at a desk with a laptop, so that small businesses find it easy to register.
Technically you can even register on a smart phone, but again people need to understand what they are doing when they access the Zimra sites.
Some of the small businesspeople are fairly tech savvy, if not fully literate in tax law and dealings with Zimra, so the online help button needs to be upgraded so it can walk a new taxpayer through the process correctly.
It would be most unfortunate if these small businesses were closed down, although in the end some will probably have to go to make sure the rest understand that they need to obey the law.
Perhaps the example could be made with businesses charged the new tax, suddenly panicking and wanting to do things properly, and then being allowed to register, calculate the real tax and then pay that plus a significant penalty to discourage others to hide away until caught.
But once the first businesses are being caught then we should see sudden compliance across a lot more. But it does need Zimra to find and tax them.
Some of those owning property will also suddenly need to join the taxpayers with that new 20 percent tax on residential property rented out for business purposes. Again they will probably have to sign onto Zimra and will need to be tracked down.
Prof Ncube intends to get the tenants to provide a lot of the details so the hidden businesses will suddenly emerge into the light of day.
Again he is looking at taxes that are simple, cheap to collect and easy to hunt down the taxpayers. This is the only real way to tax the informal sector.
The sector is large, but it is large in numbers with the actual businesses being small. So the only way of collecting the taxes is to make sure that enforcement is universal and that the new taxpayers do most of the work.
