Understanding presumptive tax in Zimbabwe: A legal guide for informal businesses

MARTIN MASITERA AND FUNGAI CHIMWAMUROMBE

Presumptive Tax is a simplified taxation method targeting informal businesses in Zimbabwe that typically fall outside traditional income tax frameworks.

The Zimbabwe Revenue Authority (ZIMRA) introduced this tax to ensure that informal sector players contribute to national revenues while reducing the administrative burden of complex filings. The provisions of Section 36 of the Income Tax Act [Chapter 23:06] and the Finance Act [Chapter 23:04] stipulate the circumstances under which such tax may be collected.

Informal businesses form a significant portion of the economy in Zimbabwe and thus presumptive tax on such businesses aims to broaden the tax base and increase revenue collection.

Who is Liable to Pay Presumptive Tax?

Informal business are required at law to contribute to the tax income base. All tax compliant operators are exempt from this tax provided they hold a valid tax clearance certificate. The following informal business categories are typically subject to presumptive tax in Zimbabwe:

– Commuter omnibus and e-hailing operators

– Hairdressers and beauticians

– Cross-border traders

– Small-scale miners

– Cottage industries

Key Aspects of Presumptive Tax

Informal traders are required at law to register and need to apply for a Business Partner Number (BP Number) under the correct Presumptive Tax category.

Rating of the presumptive tax payable within each category varies depending on the type of business. For example, taxi operators with vehicles that have a seating capacity of up to seven passengers are liable to pay US$ 35 per month whereas .

For ease of business, presumptive tax is payable in local currency at the prevailing rate of exchange on the day of payment regardless of currency of trade as promulgated by the Finance Act. Failure to pay or late payment results in penalties and interest.

Implications of Presumptive Tax Positives

Presumptive tax offers a stepping stone to becoming a fully registered and compliant tax payer as businesses grow given that informal business do not always remain as such. To their advantage, informal businesses having already registered and complying with tax obligations puts them one step closer to formalizing their businesses.

Similarly, presumptive tax helps businesses grow by allowing for better access to credit facilities, which is an integral part of business growth. Formalization incentives are very important in business as banks and other creditors are much more open and willing to lend to businesses that have some form of compliance with regulatory boards.

Presumptive tax brings about administrative simplicity and efficiency as it uses simple indicators such as vehicle capacity and number of employees to determine a business’ tax liability. This in turn reduces the administrative burden for tax authorities and the taxpayer.

Lastly, because of its simplified and less cumbersome rules, informal businesses are encouraged by the initial registration and compliance and become part and parcel of the system from there onwards. This as compared to the standard taxation system that is too complex and expensive is a great benefit for both the taxpayer and the authorities.

Negatives

However this policy to broaden revenue base faces enforcement difficulties. This is mainly due to lack of awareness and resistance from informal sector operators thereby hindering the system’s effectiveness.

Presumptive tax may also act as a fertile ground for inequity. Such a tax regime can be regressive, with some businesses paying higher effective rates than others. This will result in taxpayers with different actual incomes but the same rate of presumptive taxes. It can also be inequitable for all players in the informal sector if the rates are set arbitrarily high with disregard to actual and fair analysis of profitability.

Authorities are also on the continued look out for informal businesses that may alter their business practices to reflect factors that minimize presumed tax liability rather than actually focusing on business efficiency and growing from small scaled business to larger and tax compliant businesses.

Recent Reforms

The Finance Act introduced changes to presumptive tax rates and payment methods, aiming to enhance compliance and revenue collection. With the government planning to digitize the presumptive tax payment processes, it becomes even more efficient and attractive for informal businesses to register. This together with an offering of incentives for voluntary registration and compliance will definitely broaden revenue collection.

In summation, presumptive tax, as a measure instituted to broaden revenue flow from the informal sector than forms a considerable chunk of the economy, plays a crucial role in Zimbabwe by promoting tax and regulatory compliance. Albeit the persistence of challenges, as the law evolves, effective implementation and enforcement of presumptive tax laws will ensure its effectiveness.

Martin Masitera is a legal Associate at Zenas Legal Practice (Nyanga) (Pvt) Limited and can be contacted on martin@zenaslegalpractice.

Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Zenas Legal Practice and can be contacted at fungai@ zenaslegalpractice.com