In a move likely to draw various interpretations about how government is co-ordinated among its ministries, Finance and Economic Development Minister Mthuli Ncube moved to remove tax incentives that had been offered to companies such as Varun Beverages, which produce for the domestic market.
In February this year, the Zimbabwe Special Economic Zones Authority declared Varun Beverages a SEZ as a way of incentivising the firm that is planning to expand and diversify its operations.
The status granted the company corporate tax relief with Industry Minister Mangaliso Ndlovu saying the move would boost industry in the country. Varun Beverages dominated the market especially during the first quarter when Delta Beverages was not producing its soft drinks due to foreign currency shortages.
The SEZ status had given Varun an unfair advantage in the soft drinks market where they were now pricing below their competitors. Analysts and observes believe that Varun had implemented the same model they had pursued in Zambia before they were ordered to pay the taxes which do not appear on the equivalent of the SEZ Act there.
In 2010, tax incentives were irregularly granted to Varun Beverages. Under the deal, Varun Beverages was granted a deferment of value added tax and excise duty for five years.
Varun management was asked to pay back the K15 billion the firm had accumulated between 2010 and 2011 in deferred taxes including Value Added Tax which does not appear on the Zambia Development Agency Act as a tax that could be deferred.
But now, the Finance minister in his mid-term budget delivered last week noted that some non-exporting companies have been designated as Special Economic Zones in order to benefit from the existing preferential tax regime.
Unimpeachable sources told Business Times that the Industry Minister had not been consulted to this move prior to the budget announcements. This brought to light questions on how well Government was coordinated among ministries.
“Notwithstanding operating in a Special Economic Zone, companies are, however, not automatically entitled to benefit from the existing tax incentives, unless they meet the conditions prescribed in the Finance or Income Tax Act.”
Ncube said these conditions include wholly exporting goods and services produced from within the Special Economic Zone from industrial activities that include manufacturing, processing or assembling of goods.
“From the foregoing, mining houses and other companies that produce for the domestic market cannot benefit from tax incentives under Special Economic Zones. Furthermore, in order to ensure that there is conformity to the constitutionally enshrined principles of fair taxation and for purposes of transparency and accountability, tax incentives shall be solely promulgated through the relevant tax legislation,” said Ncube in the half year budget.