Dr Keen Mhlanga
Taxation is an essential tool for domestic resource mobilisation as well as policy-making, shaping the distribution of resources among wealthy and less-wealthy citizens and enabling the government to address national development objectives.
The government of Zimbabwe relies to a substantial extent on tax revenues (12.62 percent of the gross domestic product in 2018), especially in light of heavy external and domestic debt.
Competing socio-economic and infrastructure demands have led the government to introduce additional taxes, including the unpopular intermediated money transfer tax. This 2-cent tax on every dollar transferred using mobile-money platforms is widely seen as having a double-taxation effect, especially for those in the formal sector.
However, in Zimbabwe the government acknowledged that a lot individuals avoid the taxation net. High taxation rates coupled with poor enforcement and corruption have encouraged tax avoidance and evasion, which is very high in Zimbabwe. The biggest source of revenue in Zimbabwe historically has been Pay As You Earn (PAYE) contributing nearly 40 percent of the tax revenue.
Sales tax and VAT was in the second position contributing an average 24 percent to the total tax revenue between 1996 and 2004. Financial analysts define tax as a compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions whilst taxation is a term for when a taxing authority, usually a government, levies or imposes a financial obligation on its citizens or residents.
Paying taxes to governments or officials has been a mainstay of civilization since ancient times. The term “taxation” applies to all types of involuntary levies, from income to capital gains to estate taxes. Though taxation can be a noun or verb, it is usually referred to as an act; the resulting revenue is usually called “taxes.”
In Zimbabwe the Zimbabwe Revenue Authority (ZIMRA) is the statutory body that was established in 2001 to improve efficiency in revenue administration and thereby enhance revenue collection and trade facilitation. ZIMRA is responsible for assessing, collecting and accounting for revenue on behalf of the State (through the Ministry of Finance) in terms of the Revenue Authority Act [Chapter 23:11].
ZIMRA has an advisory role in the development of sound fiscal policies and therefore also in the formulation of the budget. The Authority is also responsible for facilitating trade and travel through the country’s points of entry and is entrusted to come up with measures to curb smuggling and any form of international trade crime.
ZIMRA responsibilities extend to enforcing import, export and trade controls. As the duty of the board, from 2021 new tax statutory laws were introduced as the businesses paying of corporate income tax in foreign currency, based on gross foreign currency receipts remaining after deducting the prescribed retention or liquidation thresholds.
Income tax registration is mandatory for all companies doing business in Zimbabwe. Businesses are required to register for tax online and comply with all the obligations imposed by the Income Tax Act [Chapter 23:06] (“Income Tax Act”).
A business cannot file tax returns without registering for tax. Section 81(1) of the Income Tax Act makes it an offence for a person to fail to file or submit a tax return in violation of the provisions of the Income Tax Act. Furthermore, without registering for tax or filing tax returns, a company will not be able to obtain a Tax Clearance Certificate.
A Tax Clearance Certificate is mandatory in order for businesses to do business with other organizations like the State and large organizations. The absence of a Tax Clearance Certificate will prove to be an administrative nightmare for companies intending to do serious business in Zimbabwe.
It is mandatory for companies who wish to do business in Zimbabwe to register for tax. Registration for tax is a simple process and can be done online if a company has a bank account, company documents and particulars of its officers.
The failure to register for tax can attract criminal liability and is generally ill-advised for a company intending to do serious business in Zimbabwe.
Tax registration is performed by Zimbabwe Revenue Authority [ZIMRA], Registration is done electronically (online) by first applying for an e-services account and then register for a BP number choosing appropriate contract accounts e.g. Income Tax, PAYE, Withholding Tax, Capital Gains Tax, Presumptive. VAT is only registered manually because of the pre-checks that must be conducted by ZIMRA before registration and manual registration can also be done where taxpayers have no access to the internet.
The tax compliance and payment laws are set up by ZIMRA in Zimbabwe.
The tax year-end is 31 December each year. Applications may be made for a different year-end if good reasons are given (e.g. to comply with the international group year-end).
In the first year of trade, a longer or shorter period than 12 months may be accepted to tie in with a future year-end. The corporate income tax return is due by 30 April in the following tax year.
A Transfer Pricing return (called an ITF12C2) is now required to be filed as an addendum to the Income Tax return. Zimbabwe regulates the payment of CIT on four dates during the course of the current tax year; these are referred to as Quarterly Payment Dates (QPDs).
The first payment of 10 percent is due by 25 March of the respective tax year. The second payment of 25 percent is due by 25 June of the respective tax year. The third payment of 30% is due by 25 September of the respective tax year. The fourth payment of 35 percent is due by 20 December of the respective tax year.
All taxes are expected to have been paid by the 2th day of December. If there is an adjustment after the year-end accounts have been finalized, a top-up payment must be made. There is no set date for this.
However, in practice, this payment should not be more than 10 percent of the annual tax liability. ZIMRA often imposes a 25 percent per annum interest charge on any underpayments of QPDs.
The type of taxes that are relevant and recognized in Zimbabwe as well as payable to ZIMRA are income tax, PAYE, Value added tax, withholding taxes, capital gains tax and presumptive tax.
Zimbabwe generally levies income tax on companies and individuals under the Income Tax Act [Chapter 23:06] in respect of income earned from sources within or deemed to be within Zimbabwe. A capital gains tax is also levied on gains made on sales or disposals of specified assets from a source within Zimbabwe.
The Income Tax Act also imposes withholding taxes on resident shareholders’ dividends, non-resident shareholders’ dividends, non-residents’ fees, non-residents’ remittances, non-residents’ royalties, non-residents’ interest, automated financial transactions, intermediated money transfers, and non-executive directors’ fees.
Presumptive taxes are also levied under the Income Tax Act in respect of income earned by small to medium enterprises. All taxes levied under the Income Tax Act are, however, subject to the provisions of Double Taxation Agreements, where applicable. Income tax is tax levied on business income for individuals or companies or any other entities and it varies with their respective income or profits (taxable income).
PAYE (Employee tax) is a withholding tax charged on salaries (income) payable to employees whilst Value Added Tax is an indirect tax on consumption, charged on the supply of taxable goods and services. It is levied on transactions rather than directly on income or profit, and is also levied on the importation of goods and services.
Presumptive tax (informal trader’s tax) is a fixed rate of tax chargeable to selected sectors within the economy such as hair salons, bottle store owners and Capital Gains Tax- is paid when a person/ company sells an immovable property or marketable securities.
Withholding taxes are paid by the payer and may or may not be a final tax.
Taxation is at the heart of administration of government and provides the foundation for the provision of public goods and the implementation of effective regulation and acts as a vehicle for transporting public demands for responsiveness and accountability from their elected leaders.
Collecting taxes and fees is a fundamental way for Zimbabwe to generate public revenues that make it possible to finance investments in human capital, infrastructure, and the provision of services for citizens and businesses.
Taxes have a key role to play in making growth sustainable and equitable, especially in the context of the COVID-19 crisis, and through such efforts as “greening” tax systems and fighting tax evasion and avoidance.
Environmental or green taxes include taxes on energy, transport, pollution and resources. Energy taxes are taxes on energy products and electricity used for transport, such as petrol and diesel, and for other purposes, such as fuel oils, natural gas, coal and electricity used in heating.
The Zimbabwean government impose charges on their citizens and businesses as a means of raising revenue, which is then used to meet their budgetary demands.
This includes financing government and public projects as well as making the business environment in the country conducive for economic growth. Mandatory spending consists primarily of Social Security, Medicare, and Medicaid. Several welfare programs are smaller items, including food stamps, child tax credits, child nutrition programs, housing assistance, the earned income tax credit, and temporary assistance for needy families.
Taxation is more than a revenue but tool for development. All governments need revenue, but the challenge lies in carefully choosing not only the level of tax rates but also the tax base. In addition, it is important that governments design a tax compliance system that does not discourage taxpayers from participating.
Tax rates that are too high can hold back the development of the private sector and the formalization of businesses. Lower tax rates are particularly important to smaller-sized businesses.
Even though businesses of this size do not add significantly to government tax revenue, they have a vital contribution to economic growth and employment. Lastly, effective tax administration can change the relationship between citizens and the government.
Taxation not only pays for public goods and services; it is a major ingredient in the social contract between citizens and government. “How taxes are raised and spent can determine a government’s very legitimacy.
When citizens see the tax system as being fair and find value in the public services they receive, they are more likely to comply with tax laws. Trust in government is essential to create tax morale: the extent to which people accept a moral obligation to pay taxes as their contribution to society. It is therefore important for governments to continue to build public trust by improving the design and the administration of their tax systems.
Apart from the government benefiting from taxation, the nation as individuals also stands a chance of gaining merits from taxation.
Some taxpayers, who do not file the correct amount of tax, encounters problem when they need to generate an Income Tax Return for purposes of VISA and Loan applications.
As such, they resort to preparing inaccurate income tax returns in order to produce the said requirements. The risk on producing an inaccurate tax return is high because if the agency verifies it to the ZIMRA, it will cause big trouble.
However, if you are diligently filing and paying the right amount of tax, it’s easy to produce accurate income tax return without any risk. Paying the right amount of tax provides good credit rating to financial institutions and agencies.
The higher the income and tax you declare, the higher the credit rating. You can use your good credit rating when getting a loan for additional funds for the expansion of your business or other purposes.
In order to grow your business, at some point, you will need people or institutions with money that are willing to invest in your company. These investors will look into your financial and tax records to support their investment decisions. Maintaining a truthful and accurate accounting and tax records will boost confidence of investors.
On the other hand, fraudulent and inaccurate will create an impression that the company is not trustworthy to invest with. Paying the right amount of tax is a social responsibility to the country.
The taxes we pay will go to the government funds that will be used in developing and improving the government facilities and life of Zimbabweans, inside and outside our country.
If all income earners will pay the right amount of tax, the government can collect more money to support its objectives such as building roads, schools, better government salaries and improve government services.
These factors can help attracting more investors and jobs in Zimbabwe. More people having jobs, means more people having money to spend which will directly or indirectly improve your business as well.
On the opposite, if all income earners will illegally reduce the amount of tax obligations, the government will have no funds on hand and will resort to availing private or foreign loans in order to govern the country.
There will be lesser funds to build roads, schools, infrastructure, lower wages that decreases morale which leads to poor government services. In this scenario, the cycle of poverty will continue because investor may cease from investing in Zimbabwe which will reduce jobs and increase poverty.
With less jobs in the country, people will have less money to spend and less potential customers to your business. Crime will increase which may also directly or indirectly affect your family and your business.
We all have to pay our fair share, allowing the government to generate enough resources to fund the priorities of society. In turn, the government’s duty is to improve the lives and well-being of its citizens.
This involves strengthening tax administration so that all citizens and businesses meet their tax obligations. And, establishing tax systems that are better structured and more effective in creating sustainable improvement for society as a whole.
Dr Keen Mhlanga is the executive chairman of Finking Financial Advisory. He can be contacted on [email protected] Com or +263719516766