Home » Business » Will Zimra’s Proposals Improve Revenue Without Choking Growth?

The public domain has been awash with news concerning Zimbabwe Revenue Authority (Zimra) since the beginning of this month. Reports over the revenue authority warning of tough times ahead, raiding companies and institutions that are breaching tax laws, issuance of garnishee orders and several proposed revenue enhancement measures have been circulated.

Recently Zimra was reported as having surpassing its quarterly target despite the contraction in the broader economy. In light of all these news, one would not be surprised if the Zimra by the end of the year is found within the “newsmakers” of the year. In the midst of these reports, few questions may need to be addressed, Is Zimra’s positive variance believable and worth celebrating? Will the revenue target for the year be met in these circumstances and the implications to the economy? Can the proposed revenue enhancement measures be practical or counter-productive to economic agents’ ability to generate revenues?

In addressing these issues it is key to note that Zimra recorded net revenue collections of $834,6 million for the first quarter to March 31, 2014 representing a positive variance of 2 percent against the target of $817,9 million. Value added tax (VAT) was the major contributor to revenue weighing in with 25 percent of the total revenue.

Individual taxes and excise duty were the other revenue heads among the major contributors weighing in 23 percent and 13 percent respectively. In total five revenue heads viz individual tax, companies, VAT imports, carbon taxes and mining royalties recorded positive variances. The latter (mining royalties) recorded the highest positive variance of 154 percent at $79,1 million. On the other hand, VAT on local sales, customs duty, excise duty and carbon tax had negative variances ranging 7 percent to 39 percent. VAT on local sales was the worst revenue head performer down 39 percent at $103, 8million.

According to Zimra, the positive variance was mainly due to improved compliance enforcement by Zimra through follow-ups and audits and also an improvement in mining royalties. Improved compliance specifically on remuneration was the major reason for the uplift in individual tax which recorded a positive variance of 15 percent at $193,3million. This was the same scenario in company tax up 19 percent to $104,7 million due to intensified efforts by the revenue authority. In addition, a positive variance of 153 percent on mining royalties was the other reason why Zimra surpassed its target. In light of the weakness in aggregate demand in the economy, Zimra’s numbers are likely to be believable as the positive variance emanated from increased enforcement. Whilst the move to intensify efforts on compliance is reactive, Zimra may need to step up on this area as a way of beefing up Government coffers. The move has been considered reactive as they are pursuing this as a follow-up to the surge in corruption cases across the economy. Nonetheless, the fact that they are pursuing it now is positive as it possibly signals a reformation by the revenue authority in aiming to reduce leakages being experienced in the economy due to economic hardships being faced by economic agents.

Whilst acknowledging the positive quarterly result, the outlook is not encouraging with Zimra authorities even confirming it as a bumpy ride. This outlook from Zimra’s perspective aligns with the trends currently being faced in the broader economy. It is against this background that the $4,12 billion revenue target may be a tall order for the revenue authority. Thus Zimra may fall short of its revenue target as was the case last year due to the persistent shrinkage in the national tax base. Total collections in 2013 came in at US$3,43 billion against a target of US$3,64 billion. Zimra despite the challenges being faced in the economy is proposing various revenue enhancement measures. Introduction of tax on nostro accounts, taxation of the informal sector, increased enforcement on diamonds firms, collection of minerals as a share of dividends from mining sector are some of the proposed measures. In as much as the revenue authority is seeking to grow its revenues, a two-pronged approach must be taken to avoid increasing the burden on firms and households. For instance, introduction of tax on nostro accounts may not attain the intended objectives.

This is because it increases the burden on banks since such funds are held for the sole purposes of meeting international commitments. Worth noting also is the fact most of the funds are kept to meet the burgeoning import bill thus the revenue authority may need to consider the impact of such a move as it may end up increasing the operating costs not only for banks but also companies. Formalising the informal sector is another topical area.

Such a move is a noble idea but caution must be taken. There is need for an in-depth analysis of this sector as the estimated US$4 billion to US$5billion circulating in this sector has not been verified with certainty. Furthermore, most small-to-medium enterprises (SMEs) within this sector are also singing the blues due to the slowdown in the economy. Thus whilst the need is there for these businesses to be tax compliant, the revenue authority may need to take a gradual and soft approach as it may choke the low activity being faced in the informal sector. Overall by formalising this sector, the revenue authority also needs to consider the fact that these SMEs will also need tax exemptions and tax breaks so that it becomes a mutual agreement.

In respect of diamond revenues, Zimra may need to step up its efforts as a way of fostering transparency and accountability within the diamond players. According to Zimra, the 150 percent positive variance in mining royalties emanated from the removal of sanctions on Zimbabwe’s diamond mining companies enabling the sale of diamonds at Antwerp. Thus Zimra may need to increase compliance so that these firms improve on honouring their tax obligations as this revenue head has been underperforming since dollarisation. Payment of dividends through minerals may not yield the positive results as offshore investors may view it as a way in which the revenue authority will be impeding business. Enforcing compliance may be the only solution rather than adopting such methods.

Source : The Herald