Taxes, regulatory fees cut a bold move

FINANCE, Economic Development and Investment Promotion Minister Professor Mthuli Ncube’s announcement that the authorities will reduce some of the business taxes and regulatory fees by half within six months is a step in the right direction.

But it is also a tacit admission of what established businesses and entrepreneurs have been saying for some time: that excessive red tape is strangling the economy.

Businesses, especially small and medium enterprises (SMEs) that have a significant contribution to the economy, have been operating under a regulatory burden so heavy that it discouraged formal entrepreneurship and has, for long, tilted the playing field in favour of the informal sector.

Take a typical supermarket in Harare.

According to the Confederation of Zimbabwe Retailers, such a business needs more than 30 different permits just to operate.

That includes a bakery licence at around US$700, a butchery licence at around US$650 and a food takeaway permit at $650 — each issued separately.

In addition to that, there are the fees for environmental compliance, fire safety, copyrights and a host of other obligations.

The heavy fees mean the supermarket could easily be spending thousands of dollars annually before even paying rent, salaries and suppliers.

Compare this to South Africa, where a retail business requires just eight permits.

In Rwanda, a restaurant needs only four.

These are some regional benchmarks we should be aiming for, and it is crucial that the Government is taking the right direction on this matter.

A red-tape heavy system typically pushes businesses underground, which could explain the high levels of informal businesses in the country.

The informal businesses rarely comply. The authorities have been battling for years to ensure some resemblance of compliance within this sector, with little success.

Scrapping or reducing some of the taxes and regulatory fees could actually be a trigger for the informal business to come on board and start contributing to the fiscus.

As for the informal businesses, when they face insurmountable compliance hurdles, they either shut down or go informal. And this is exactly what has been happening in some cases.

Zimbabwe’s informal economy is estimated to account for more than 60 percent of total employment.

It is not that businesses prefer to operate without proper paperwork — it is because the formal system was punishing compliance.

The bureaucratic maze forces many business owners to choose between profitability and legality. And it is not surprising that they chose the former.

The rising informality is what has contributed to the thriving smuggling trade, as basic household goods enter Zimbabwe illegally from countries such as South Africa, Mozambique, Botswana and Zambia, bypassing import duties and taxes.

Meanwhile, law-abiding formal retailers, burdened with licensing costs and tax obligations, find themselves unable to compete.

And the Government, instead of collecting revenue from a robust formal sector, loses billions to smuggling and tax evasion.

The cycle becomes vicious.

While the plan to reduce regulatory fees is a step in the right direction, it will not be enough on its own.

Broader consolidation is key.

Streamlining regulatory requirements by combining permits and eliminating redundant fees would not only reduce costs, but also improve compliance rates.

The move to reduce business taxes and regulatory fees may appear simple on the surface, but the Finance minister could be going up against regulatory bodies that see themselves as revenue-generating entities rather than the facilitators of business growth that they should be.

Lowering tax rates and reducing compliance costs may seem like revenue loss in the short term, but it will expand the tax base in the long run as more businesses enter the formal economy.

The Government has set a six-month timeline for these reforms.

There should be no room for delay.

The country’s informal sector is growing, smuggling is rampant and foreign capital is not patient.

Zimbabwe wants to be a competitive investment destination and the slashing of fees is a good start to extensive economic transformation.

The broader goal is enhancing the ease of doing business, paving the way for more investments, both domestic and foreign.

President Mnangagwa recently directed ministers to enhance the ease of doing business in their spheres of operations to ensure competitiveness and sustainable economic growth.

It is commendable that Prof Ncube has set the ball rolling.