LIVINGSTONE MARUFU/RYAN CHIGOCHE/ SAMUEL NJINGA
Finance and Economic Development minister Mthuli Ncube has buckled under pressure from business and will today cut the intermediated money transfer tax (IMTT) among a raft of measures to grow the economy.
The business has been clamouring for the tax head to be removed.
Ncube will also increase the tax-free threshold as he seeks to increase disposal incomes amid low aggregate demand.
Captains of the industry and economists have expressed fears that failure by Ncube to address the tax burden and restore purchasing power in the 2023 budget will weaken hopes of attaining Vision 2030.
The national budget comes at a time when many are feeling the heat of a deepening economic crisis while companies are struggling to stay afloat.
Many companies have been forced to shut down, adding to the expanding corporate graveyard while job losses and company closures have been felt by the country’s tax collection agency, the Zimbabwe Revenue Authority (ZIMRA), which is struggling to generate adequate revenue.
However, Ncube could spring a surprise this time around and cut the contentious tax rate by 50%, according to multiple well-placed Treasury sources.
“After serious discussions, he convinced the stakeholders that he was going to cut the 4% IMTT on foreign currency transactions to 2% as it was becoming a disincentive to the banking sector, resulting in starving the supply of foreign currency liquidity to the formal banking channels,” an industry source said.
“Also, Ncube agreed to cut the 2% on all local transactions as it was becoming a double tax to ordinary Zimbabweans who pay Value Added Tax on goods sold.”
The Zimbabwe National Chamber of Commerce chief economist Jephias Makiwa told Business Times that the IMTT has more destructive effects on the economy as it makes goods more expensive and drives more people into poverty.
“When 2% IMTT was introduced, the spirit of the tax was to bring into taxation the informal sector which was not being taxed. What it has done, however, is to overly tax the formal taxpayers.
“Businesses are incurring the IMTT even when paying tax dues to ZIMRA, thus it is a tax on tax and to cushion the supply chain players against the increased cost of production, the cost is passed on to the consumer in the form of price increases across all goods,” Makiwa said.
“It cannot be emphasised how the intermediate transaction tax has a compounded effect on the supply chain due to the incremental tax charged from the producer to the consumer,” Makiwa said.
He said IMTT is not tax deductible and its application has to be different between businesses and consumers.
He said the burden of the IMTT tax is huge on business.
“Although various expenditure rationalisation measures must be adopted, the government is urged to continue and also increase budgetary allocation for social sector programmes given the increased vulnerabilities induced by the effects of the pandemic and the Russia-Ukraine conflict,” Makiwa said.
Economist Gift Mugano said the IMTT tax must be scrapped.
“We have seen that a lot of loans are now given in US$ terms so what does it mean in terms of cost of doing business it means the policy is now punishing people because if you are given a loan and transact into an account you lose 4% immediately so you see now in real terms the obtaining interest rate and if you add the 4% charge the interest rates could be around 20%.
“I’m of the view that there is a business case to scrap that 4%,” Mugano said.
He added: “If I am holding my US$, I will not be encouraged under the current 4% instrument to go and deposit,” Mugano said.
Economists expect Ncube to revamp the tax regime and also provide tax relief to employees’.
“The minister should also come up with economic relief measures for business and social relief of individuals in distress. He should also come up with measures that ensure that there is an incessant demand for local currency,” Regret Tsunge, an economics lecturer at Great Zimbabwe University said.
He said the health sector requires “serious consideration in investing in new health centres and not just refurbishing the existing ones”.
In its budget submissions, the Confederation of Zimbabwe Industries (CZI) said local firms were overtaxed as the government has placed too much emphasis on taxing the shrinking formal sector.
In the process, the CZI said, the move will be increasing their tax burden and creating unfair competition with the informal sector.
“For example, the IMTT is not an income tax but a transaction tax. Since it is now applied to all transactions, even on formal businesses that also pay corporate tax, it is high time the IMTT tax is deductible just like other transaction taxes. The government also not only extended the IMTT to US$ transactions but made the rate higher at 4% compared to the 2% for local currency transactions,” CZI said.
CZI chief executive officer, Sekai Kuvarika, said there was a need to boost aggregate demand for locally produced goods through increasing consumer spending.
“Industry needs a spending population to thrive; hence the 2023 National Budget should prioritise increasing the spending power of the population.
“Key recommendation is that the Treasury should increase the tax-free threshold to an equivalent of about US$100 per month based on the prevailing exchange rate,” Kuvarika said.
She said some of the measures that have been put in place by Ncube this year, such as the opening of borders for selected products, hinder the manufacturing sector from achieving the growth targets.
Business leaders also said efforts to clear external arrears, as well as re-engagement with international creditors and financiers, should be harnessed to open up international lines of credit.
“The business community is in dire need of patient but cheap capital for capitalisation across all sectors of the economy,” Kuvarika said.
The industry said key enablers remain constrained, at a time when the performance of manufacturing companies is highly dependent on them.
Industry has also been battling the high inflation rate at 268.8% in October, severe liquidity crisis, crippling power cuts, high interest rates, and acute shortages of foreign currency.
Also, the purchasing power of many workers has been eroded as wage and salary increases have lagged far behind prices of goods and services, which have been skyrocketing in recent months.
Exacerbating the crisis, the companies have been battling the contentious IMTT. Industry has been experiencing a lot of distress, resulting in business leaders clamouring for a tax cut.
But, these have been difficult conversations with Ncube, who for the past few years did not buckle under pressure as the government heavily relies on taxes to fund its operations.