LIVINGSTONE MARUFU
The expanding use of the United States dollars in the economy poses a growing risk of shrinking the tax base and a growing risk of potential tax loss,Finance Minister, Mthuli Ncube and multiple captains of industry have warned.
It comes at a time the country’s tax collector, Zimbabwe Revenue Authority (ZIMRA) is battling unprecedented high rates of non-compliance, fraud, lack of cooperation and failure to submit returns, among other problems. These issues create problems for the government which depends on taxes to finance operations.
Given that the government has no external budgetary support, the rising dollarization has put the administration in a precarious position.
By June 30, 2023, foreign currency deposits made up 81.51% of the total money supply, while local currency deposits made up 18.43%. This represents an acceleration of the dollarization process.
With domestic sales in US dollars now exceeding 80%, the re-dollarization trends have intensified. According to reports, most transactions are being made in cash, which is thought to favor tax evasion.
The percentage of forex deposits was around 60% in February of this year.
Ncube, the minister of finance and economic development, issued a dire warning, warning that the tax base might be reduced by 25%.
“This (revenue collection) risk is further compounded by rising dollarisation, which is shrinking the tax base and promoting informalisation.
“Full dollarisation has the potential to reduce the taxable base by almost 25%,” Ncube said.
He said revenue collection risks may emanate from reduced tax compliance and transfer pricing, particularly in mining.
The Confederation of Zimbabwe Industries president Kurai Matsheza concurred.
“Full dollarisation is bad for the industry and the economy as it affects gross domestic product growth and industrialisation as local goods will become uncompetitive on the export market.
“The increased dollarisation is worrisome as the economy will shrink due to reduced aggregate demand and informalisation which pushes formalised firms [which pay taxes] out of business due to reduced sales volumes,” Matsheza told Business Times.
The Confederation of Zimbabwe Retailers president Denford Mutashu weighed in saying: “Once a supplier or manufacturer sells his goods to informal traders, the taxation cycle reaches a dead end as that shop owner will not remit taxes to the government thereby affecting the country’s tax base.”
He added: “ However, there is a need to find ways to ensure that the tax base widens without affecting the registered entities but to lure new ones to register.”
In order to lessen the effects, the government is putting policies into place that will increase the use of the Zimbabwean Dollar in domestic transactions.
In 2024, ZWL$30.7 trillion in projected revenue will be used to fund ZWL$33.1 trillion in projected expenses, leaving a ZWL$2.3 trillion (1.5% of GDP) budget deficit.
The government has implemented new strategies for revenue collection in response to the projected deficit.
“In 2024, total revenue collections are projected at 19.2% of GDP broken down as tax receipts accounting for 95% of total revenue and non-tax revenue contributing the balance of 5%.
“Expansion of the base through embracing emerging industries, including those in the informal sector, as well as capturing the digital market place where sellers and buyers of goods and services converge through e-platforms will ensure that eligible taxpayers contribute towards national development,” Ncube said.
The government is prioritising review of concessions and contracts that undermine revenue collections as well as adjusting fees, levies and charges in line with the cost recovery principle.
