Treasury shot its own foot with VAT reintroduction on gold deliveries

Economy Uncensored with Tapiwanashe Mangwiro

The re-introduction of a 15 percent value-added tax (VAT) on gold sales in January 2024 has had a profound impact on Zimbabwe’s gold mining sector, particularly affecting the delivery statistics for the first quarter of the year.

This policy shift, although reversed through Statutory Instrument 105 of 2024 has resulted in significant behavioural changes among small-scale miners, leading to increased side marketing activities and consequently affecting overall gold deliveries, government revenues and strategic economic goals.

As a result, the imposition of VAT has placed additional financial strain on artisanal and small-scale miners (ASM), who traditionally operate on thin margins. To avoid the tax burden, many ASM operators had turned to side marketing, where gold is sold through informal channels rather than to the state-owned Fidelity Gold Refinery (FGR).

This shift undermines the formal gold delivery system, making it challenging for the government to track and tax gold production accurately.

The first quarter of 2024 saw total gold deliveries drop to 6,044 kilogrammes, down from 6,194 kilogrammes in the same period in 2023 and significantly lower than the 7,694 kilogrammes recorded in the first quarter of 2022, a record-breaking year.

This decline can be attributed largely to the increased prevalence of side marketing as a response to the new VAT policy.

While large-scale miners delivered 51,99 percent (3 143,0683 kilogrammes) of the total gold in Q1 2024, ASM contributed 48 percent (2 901,8006 kilogrammes). Historically, ASM has been the dominant force in Zimbabwe’s gold production, accounting for over 61 percent of total deliveries.

The first quarter figures indicate a notable shift, with large-scale miners slightly surpassing ASM in contributions, highlighting the impact of VAT on the latter group.

Interestingly, April 2024 witnessed a reversal of this trend after players were told that the law has been reversed although not gazetted, with ASM deliveries soaring by approximately 58 percent to 1 218,2045 kilogrammes, compared to 770,9838 kilogrammes in March.

This surge brought ASM deliveries to 51 percent of the total, surpassing those of large-scale miners for the first time in two months. Large-scale miners also saw an increase, delivering 1 168,7022 kilogrammes, up from 1 045,5575 kilogrammes in March.

This sudden increase in April may be attributed to several factors, including a temporary lull in side marketing activities, improved gold prices, or enhanced efforts by the government to curb illicit trade.

The rise in side marketing directly impacts the government’s revenue from gold mining, particularly in terms of potential royalties. The Reserve Bank of Zimbabwe (RBZ) relies heavily on these royalties to build reserves for the planned introduction of a new Zimbabwe Gold currency.

As a result, leakage of gold through informal channels reduces the volume of gold officially recorded and taxed, thereby diminishing the funds available for strategic economic initiatives.

Zimbabwe has set an ambitious target of achieving 35 tonnes of gold deliveries in 2024. The performance in the first quarter, coupled with the challenges posed by the 15 percent VAT, raises concerns about meeting this target.

The first quarter’s delivery of 6,044 kilogrammes represents approximately 17.3 percent of the annual target, indicating a significant shortfall if current trends persist.

The introduction of the 15 percent VAT, while aimed at boosting government revenues, appeared to have had unintended negative consequences on the formal gold delivery system. To address these challenges, the government may need to consider a multi-faceted approach.

By revisiting the VAT policy to find a balanced approach that does not overly burden small-scale miners has helped reduce side marketing.

Other ways that need to be employed are enhancing surveillance and enforcement mechanisms to combat illicit gold trade can help ensure that more gold is sold through official channels. This could involve collaboration with local communities and international partners to trace and regulate gold flows.

Providing support to small-scale miners in the form of access to financing, equipment, and training will also help improve productivity and profitability, making formal sales more attractive despite the VAT.

Offering additional incentives for gold deliveries to FGR, such as better prices or additional subsidies, can help encourage miners to comply with formal processes.

The re-introduction of the 15 percent VAT in January 2024 has significantly influenced Zimbabwe’s gold delivery statistics, driving small-scale miners towards side marketing and reducing overall formal gold deliveries.

This shift poses risks to the government’s revenue from gold royalties and its ambitious gold delivery targets for the year.

Addressing these challenges requires a balanced policy approach that supports both government revenue goals and the operational viability of artisanal and small-scale miners. By doing so, Zimbabwe can work towards stabilising its gold sector and achieving its economic objectives, including the establishment of a robust Zimbabwe Gold currency.

Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn