adminClive Mphambela
Finance and Economic Development Minister, Professor Mthuli Ncube recently announced a 2 cents in the dollar tax on electronic transactions as the country moves to broaden the tax base by harnessing all forms of economic transactions.
As largely expected from any tax announcement, the move has been met with a big backlash from the transacting public and many from the formal corporate sector who feel that the tax will have negative significant consequences on the financial lives of the majority of Zimbabweans.
Many taxpayers and non-tax payers alike, have also expressed feelings that the tax is an unfair attempt by the government to impose an additional burden on an already overtaxed economy?
However, there is also a general agreement by all, that the tax is indeed a quick win in terms of revenue generation for the fiscus, which will contribute to plugging a major budgetary gap for the government.
What the Zimbabwean public is, however, not acknowledging is that the tax is actually better devil, than many of the alternatives on the table.
There are many reasons why Zimbabweans must, as a collective, share the pain of economic adjustment. I will share few thoughts as to why I honestly and sincerely believe that we should all come to the table to assist the Government’s efforts to turn around the economic fortunes of the country, not just with ideas, but with money to fund social programmes. Indeed, the new tax, will gain widespread support, if a substantial part of it is ring-fenced and revenues channelled to social programs and this is done in a transparent and deliberate fashion.
The black economy should contribute its fair share to the economy
For decades now, the grey or black economy in Zimbabwe has not contributed positively to the economy, or at least not as much as it should, given its growing influence and size. Many black economy participants, such as smugglers, informal traders, money changers and second had vehicle dealers are making fortunes but contribute nothing to the fiscus.
However, every one enjoys benefits of subsidised education and healthcare and transport. Every Citizen of Zimbabwe also enjoys substantially subsidised electricity and fuel. Many informal and small businesses do not pay PAYE or remit VAT to the Revenue authority. However, due to circumstances, many of these economic players have been forced to move into the electronic transactions net and the IMMT is in the short term, a very good way to tax these economic actors.
Minister Mthuli is perhaps right in his move, although admittedly, the structure needs further refinements. The idea is very sound.
The increase in the informalisation of the economy and huge spikes in electronic and mobile phone-based financial transactions and real-time gross settlement transactions (RTGS), make the need to expand the tax collection base and ensure that the tax collection points are aligned with electronic mobile payment transactions and the RTGS system a no brainer at all.
So far during 2018, over 1,7 billion transactions have been conducted electronically, the latest Reserve Bank of Zimbabwe figures for the half year to June showing that the value of electronic transactions amounts to $65 billion. The 2 percent tax therefore would imply a revenue stream of some $1,3 billion for six months, which can stretch to over $3,5 billion per year.
Making a similar projections for the remainder of the year means that government can easily cover a substantial portion of its budget from the new tax, and this is a good thing. Higher taxes are definitely better than an inflation Tax.
The second major reason why Zimbabweans should accede in my view to a new taxation framework is that the alternative is worse.
The economy right now is on the verge of hyperinflation phase two. If government continues to print money to cover its budgetary shortfalls, the economy risks succumbing to hyperinflation, again. Such a scenario would mean everyone loses everything. Frankly an additional 2 percent off my purchasing power is palatable. An inflation tax would be disastrous.
Perhaps we actually need to support the tax moves in my view with additional taxes on Fuel, which is now relatively cheap, and government must also consider imposing foreign currency duties on non essential luxury goods, trinkets and motor vehicles.
Successful countries have generally higher tax rates.
Many countries, especially in Europe have very high tax rates. For example Denmark collects about 9,6 percent of GDP through the VAT, Norway collects about 7,8 percent, and Sweden collections about 9 percent of GDP. All three countries also have VAT rates of some 25 percent.
It may be worthwhile to study the taxation policies that many of the Scandinavian countries (Denmark, Norway, Sweden) are commonly known to have. These revenue policies support programmers such as government sponsored college education, paid parental leave, and universal healthcare for instance. For us, taxes can get us out of the woods. It could be instructive to look at how the Scandinavian countries structure their tax systems in order to raise revenue for a variety of government programmes.
Scandinavian countries are known for having very high taxes on income. According to the OECD, Denmark (26,4 percent), Norway (19,7 percent), and Sweden (22.1 percent) all raise a high amount of tax revenue as a percent of GDP from individual income taxes and payroll taxes. This is compared to the 15 percent of GDP raised by the United States through its individual income taxes and payroll taxes.
In order to raise a lot of income tax revenue, income tax rates in Scandinavian countries are rather high except for in Norway. Denmark’s top marginal effective income tax rate is 60,4 percent. Sweden’s is 56,4 percent. Norway’s top marginal tax rate is 39 percent.
The Two Cents Tax must mostly go to social services
Some of the public’s resistance of the Intermediation Tax lie in the fact that there was no adequate consultations and communication before it was rolled out. The IMTT was also introduced without any communication as to what it was earmarked for. There was no specific pre announcement of how the additional resources would be used. So the natural reaction from a public who think the government is raising more revenue for consumptive borrowing and other forms of non production oriented expenditure was to reject the tax. There is, however, room to correct this mistake by clearly earmarking and ring fencing the tax for specific services and projects that would give an immediate flow of benefit to the citizens.
There is need for the Minister of Finance to consider the allocating the tax directly towards expenditures that contribute to the growth of the economy, promote the reinvestment of the proceeds of the tax to increase capacity of the affected tax payers to earn more income, and fund social safety nets that alleviate poverty, meet social obligations and assist the marginalised. Possible areas for which the new tax can be ring-fenced are:
Enhancing SMEs growth by developing formal working spaces for SMEs. Government, through municipalities are falling short in identifying and developing suitable operating places to the current illegal ones. SMEs and informal sector players are accused of not paying any meaningful direct taxes so this is an opportunity to put everyone in the tax net. The new tax can be an opportunity to provide stimulus for the growth of the SMEs sector and to mainstream it into the general tax base for other tax heads.
Economies of agglomeration through cluster initiatives offering one stop shop for business linkages with bigger firms can be exploited. This can be done through construction of market stalls and incubation centres. The proceeds from the IMTT can be used to finance such ventures, with government recovering the costs in the long term through the monthly rentals to be paid by the owners. For example in June 2008, the Harare City Council approved a proposal by CBZ Bank to construct a ‘state of the art mall’ in Graniteside. The mall would include 300 wholesale fruit & vegetable stalls, 320 farmers’ market stalls, 465 flea market stalls, 100 overnight cloakrooms, 165 electrical and hardware stalls and 37- parking bays, 280 clothing bale stalls, 165 electrical and hardware shops. This mall was all going to be constructed at a total cost of just $11 million.
The 2 percent Tax can also be targeted at Financing the development Agricultural value chain linkages. The IMTT can be used to reduce foreign currency pressure while expanding the production capacity of farmers and industries involved in import substitution initiatives. For example, it is currently difficult for oil expressers or the feed industry to finance contract farming for soya beans.
The IMTT proceeds can be used to finance soya beans production to levels adequate to meet national stockfeed and cooking oil requirements.
Meeting Social Services
Social services like BEAM which is in arrears should be paid off Together with outstanding social grants for the elderly can now be quickly and effortlessly paid off.
Another area where a portion of the IMTT can be earmarked for is in financing civil service restructuring. The Government has been keeping civil servants in service because it could not fund retirement packages, particularly the lump sum portion.
Retirement and pension packages were an issue due to the cash flow impact on the fiscus. So over the next 24 to 36 months Government can afford to reduce the Civil service salary bill and benefits drastically by offering an attractive lump sum pension payments in the form of voluntary retirement schemes.
The Balance of the civil service pensions can be restructured and paid through NSSA, which will also get annual lump sum premium in respect of each pensioner and pensioners can then draw the remainder of their pensions out of NSSA rather than from Government budget.
This will release pressure on the Government budget as it will no longer have to pay for pensions on a pay as you go basis and this cost will now be actuarially amortised via a new seeded pension fund.
The 2 percent tax can also be targeted for SME incubation facilities aimed at formalisation of small business ventures and the creation of incubation funds and financing venture capital firms. Projects such as the ongoing reform and modernisation of the company registry and ease of doing business projects that have been suffering lack of funds can be speeded up from proceeds of this tax. The tax can also be applied to finance the land audit and re pegging of farms in order to allow the faster roll-out of 99 year leases to farmers.
The Balance can then be earmarked for fiscal stabilisation, retiring domestic debt such as the RBZ overdraft and outstanding Treasury Bills in a programmed manner so that people know in advance that Government is committed to reducing indebtedness. The big public outcry about the 25 Tax is not because people cannot afford the 2 percent , but they are not sure what it is for. There is an opportunity therefore to clear the air and get people happily paying the tax by outlining a clear programme on how the tax will benefit the ordinary Zimbabwean.
Over to the Minister of Finance
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the he is associated or connected with.
Bongani Ndlovu