Tax cut to boost stock market activity

LIVINGSTONE MARUFU
Government has taken a significant step to invigorate trading activity on the Zimbabwe Stock Exchange (ZSE) by reducing the Capital Gains Withholding Tax (CGWT) rate from 4% to a flat 1%, Business Times can report.
This measure, introduced under the Finance Act [Chapter 23:04], Act No.7 of 2024, became effective on December 28, 2024.
Market analysts believe this move could restore investor confidence and drive much-needed liquidity into Zimbabwe’s ailing capital markets.
The CGWT is a government levy on the profits realized from the sale of assets such as securities and immovable property.
In Zimbabwe, this tax is typically charged as a percentage of the difference between the asset’s sale price and its acquisition cost, adjusted for inflation.
For listed securities traded on the ZSE, CGWT is applied at the point of sale. The withholding tax is collected by brokers or agents facilitating the transaction and remitted to the Zimbabwe Revenue Authority (ZIMRA).
Historically, the tax has been tiered, with higher rates for short-term holdings ( such as investments held for less than 180 days) to discourage speculative trading. However, these rates have been criticized for suppressing trading activity, especially in a volatile and liquidity-constrained environment like Zimbabwe’s.
The recent decision to slash CGWT to a uniform 1% addresses longstanding concerns raised by investors and market participants.
At 4%, the tax was seen as punitive, especially in an economy where inflationary pressures and exchange rate volatility have already eroded asset values.
The high tax burden discouraged frequent trading, effectively freezing liquidity on the ZSE.
The reduction to 1% lowers the cost of transacting on the ZSE, making it more attractive for investors to buy and sell shares.
It also reduces the frictional costs associated with reallocating capital, which is critical for enhancing market efficiency.
One of the immediate benefits of the CGWT reduction is the potential increase in liquidity on the ZSE.
Liquidity is the lifeblood of any stock exchange, enabling investors to enter and exit positions efficiently.
By reducing transaction costs, the government has removed a significant barrier to trading activity.
Analysts at Morgan & Co highlighted the importance of this development, stating.
“The move is a positive development towards improving share trading on the ZSE. The tax reduction will come as a reprieve for investors and stakeholders alike.”
Lower taxes on capital gains are likely to attract both institutional and retail investors. For foreign investors, in particular, the high CGWT rate was a deterrent, as it compounded the challenges of operating in a market already perceived as risky due to exchange rate volatility and regulatory unpredictability.
The 1% rate aligns Zimbabwe’s tax regime more closely with regional peers, potentially making the ZSE more competitive as an investment destination.
A vibrant stock exchange often encourages companies to list, providing them with an avenue to raise capital.
With reduced transaction costs, businesses may find it more appealing to go public, thereby expanding the range of investment opportunities available on the ZSE.
Despite the positive implications of the tax cut, some challenges remain.
As noted by Morgan & Co, the impact of tight Zimbabwean dollar liquidity continues to weigh heavily on the market. The ZSE All-Share Index recorded a 2% decline in early January 2025 trades, reflecting broader economic headwinds.
Revenue vs. market development
Governments often balance the need for revenue collection with the imperative to foster economic growth.
In Zimbabwe’s case, the CGWT reduction signals a strategic pivot toward prioritizing market development over short-term revenue gains. While the lower tax rate will likely result in reduced immediate revenue from capital gains, the long-term benefits of a more active and liquid stock market could outweigh this loss.
Zimbabwe’s previous CGWT rate was among the highest in the region, placing the country at a competitive disadvantage.
For instance, in neighboring South Africa, capital gains tax is applied at lower effective rates, depending on the taxpayer’s income bracket. By reducing CGWT to 1%, Zimbabwe aligns itself more closely with regional norms, making it more attractive to cross-border investors.
A more active ZSE could have ripple effects across the broader economy:
- Capital mobilization for businesses
A thriving stock exchange enables companies to raise capital for expansion, innovation, and job creation. With reduced transaction costs, businesses might find it easier to access funding through equity markets.
- Wealth creation for individuals
As trading volumes increase and stock prices stabilize, investors are likely to realize higher returns on their investments, contributing to wealth creation.
- Improved investor sentiment
The government’s proactive approach to addressing market concerns could boost confidence among investors, signaling a commitment to creating an enabling environment for private sector growth.
- Support for pension funds and long-term savings
Pension funds, which are major players on the ZSE, stand to benefit from increased liquidity and reduced transaction costs. This could enhance their ability to generate returns for retirees.
Policy Implementation and Industry Reaction
The CGWT reduction took effect on December 28, 2024, with adjustments to ZSE trades executed from December 30, 2024.
Edwin Mtami, Head of ZSE Markets, confirmed that the 1% tax will be treated as the final tax, simplifying compliance for investors.
Market participants have broadly welcomed the move, though some have called for complementary measures to address liquidity constraints and broader economic challenges.
The reduction of CGWT to 1% represents a significant step toward revitalizing the ZSE.
While the measure alone may not resolve all challenges facing the market, it is a critical enabler of increased trading activity, investor participation, and economic growth.
By aligning with regional best practices and reducing transaction costs, the government has created a more conducive environment for both local and foreign investors.
However, to sustain this momentum, policymakers must address broader economic issues such as currency stability, inflation control, and market liquidity.
With a coordinated approach, the ZSE could once again become a vibrant platform for wealth creation and capital mobilization in Zimbabwe.