malvernmugadzikwa
Business Reporter
THE local industry strongly supports Government’s agenda for formalisation, viewing it as a path to boost State revenues, but emphasises the need for a multi-pronged approach to ensure it does not impede competitiveness.
In a bid to level the playing field for formal businesses, the Government last week implemented trading guidelines aimed at addressing concerns about unfair competition from the informal sector and promoting a more equitable market environment.
Through the Finance (No. 2) Act 13 of 2023, Treasury introduced significant measures, including new trading rules meant to counter unfair competition, while, at the same time, enhancing Government revenue collection.
The new regulations limit purchases from manufacturers to tax-compliant wholesalers in a bid to combat tax evasion and ensure fair market competition.
What this rule essentially means is that even manufacturing companies can only buy from wholesalers. In other words, a manufacturing company that uses sugar as a raw material cannot go direct to a manufacturer of the sweetener, but will have to go through a wholesaler.
While formal retailers face no buying limits from the wholesalers, non-VAT registered retailers, informal traders and individuals have a US$1 000 purchase limit every 30 days.
Any person who purchases for the first time from that wholesaler in any calendar year, or if the individual concerned cannot produce a receipt as proof of a previous purchase from the same wholesaler, can only buy goods not exceeding US$20.
Manufacturers, however, believe the new rules will distort long-established trading channels and will result in limited trading since, among other things, wholesalers do not have the capacity, infrastructure and brand network to handle business that will now be channelled their way.
Instead, manufacturers are proposing that existing trading channels be maintained, while putting forward a proposal to collect presumptive VAT tax on behalf of Government.
In an interview on Friday, Confederation of Zimbabwe Industries (CZI) chief executive Ms Sekai Kuvarika expressed the need for a multi-stakeholder, time-sensitive approach to formalising the informal retail sector.
She stressed that acknowledging its gradual development is crucial for smooth transitioning.
“The informal sector is not an overnight thing,” said Ms Kuvarika.
“It developed over the years and can’t be resolved with a stroke of a pen. We need a multi-sectoral approach involving all key stakeholders and we are happy the Government is warming up.”
In a paper to the Government, the CZI said the new rules may result in the informal sector finding alternative goods at the expense of local manufacturers.
These include smuggled imports, which will flood the informal retail sector, replacing locally manufactured goods.
The CZI boss said closing trade between manufacturers and the informal sector when the smuggling challenge is still rampant will only shift the source of goods.
“The market share for smuggled goods has been recorded at around 30 percent in some manufacturing sub-sectors and giving away that market is giving away our revenue and jobs,” said the industry lobby group.
In addition, local manufacturers will lose market share to smuggled goods and duty-free goods from the Southern African Development Community region and with this a corresponding loss in capacity utilisation, profitability, corporate tax contribution, pay as you earn (PAYE) and even jobs.
The CZI said manufacturers should be allowed to choose the route to market that suits their products distribution channels, as well as their preferred trading volumes.
“Insisting that all manufacturers sell to wholesalers means, for example, bread will have to be sold to a wholesaler before it gets to the supermarket or local convenience store or tuck shop; the same with other perishable products.
“The retail sector is as much integrated as it is differentiated, where wholesalers also break bulk and retail, and where manufacturers have several business channels which include retailers and wholesalers.
“Small traders and the informal sector are another channel.
“The integrity of these channels needs to be maintained if trade and manufacturing are to continue performing.”
The CZI has recommended that trading among registered businesses, manufacturers, retailers, wholesalers and small traders should continue without restrictions.
It also proposed businesses should charge a 3 percent presumptive VAT on all goods sold to registered traders who are not VAT-compliant or those who do not have tax clearance, and that it be remitted to the Government.
This would ensure an immediate collection of the VAT that is equivalent to 3 percent of the current volume of trade among manufacturers, small traders or informal traders.
The informal sector’s proliferation has sparked a shift in manufacturers’ strategies. New supply channels have emerged, with producers also focusing on the sector.
This has caused outrage among formal retailers, who feel the sector creates an unfair playing field.
Prices in the informal markets undercut formal businesses by significant margins, a consequence of operating outside the tax net.
Formal businesses, burdened by regulations and hefty tax bills, are struggling to compete.
Countering widespread claims of deliberate favouritism towards informal traders, the CZI boss attributed manufacturers’ new supply channels to market forces.
She said the emergence of informal channels was not a targeted move against formal retailers, but rather a natural outcome of market dynamics.
She called for collaborative efforts to address the underlying challenges impacting both sectors.
“We are not (deliberately) diverting (distribution) routes but naturally I have to follow the consumer,” said Ms Kuvarika.
“In the first place, it’s the consumer who moved to downtown and I will be foolish not to move the product there.
“We don’t agree that the route should be legislated but the market should detect where I should take the product and this is how we developed this (informal) channel.”
Some analysts have expressed concern about distribution efficiency due to the country’s limitations in wholesale networks, warehouse capacity and high distribution costs.
“The wholesale business in the country had collapsed,” said an executive with a leading retail chain.
“What are the rural retailers going to do? I think there is a need to relook at the policy if we are to achieve the desired results.”
Harare-based economist Mr Carlos Tadya argued that forcing large manufacturers to buy raw materials through wholesalers would be counterproductive as the latter do not have capacity to handle some of the bulky raw materials from manufacturers to other manufacturers.
Online Reporter