New policy outlines plans to widen tax base

Michael Tome

A new policy has outlined plans to adopt simplified tax models for Small to Medium Enterprises (SMEs) to expedite their formalisation and widen the tax base.

The Zimbabwe Industrial Reconstruction and Growth Plan (ZIRGP) noted that compliance procedures for small retailers should be simplified to encourage them to formalise.

ZIRGP is a short-term transitional manufacturing policy document by the Government largely focusing on import substitution.

The plan, which runs from October 2024 to December 2025, serves as a transition between Zimbabwe National Industrial Development Policy (ZNIDP) (2019-2023) and its successor ZNIDP (2025-2030) that will be aligned with the National Development Plan 2.

According to the Zimbabwe National Chamber of Commerce (ZNCC) state of industry and commerce survey of 2023, approximately 71 percent of local businesses operate informally.

This situation places an undue tax burden on the few formalised businesses.

“This is an undesirable trend and measures are needed to prescribe simplified registration and minimum mandatory licensing requirements that promote formalisation, through the Shop Licensing Act,” said the ZIRGP.

To promote formalisation, the plan proposes measures such as simplified registration processes, minimum mandatory licensing requirements through the Shop Licensing Act and the promotion of electronic transactions.

The Government will encourage businesses to register and maintain functional bank accounts, while also promoting the use of plastic money and Point-of-Sale (POS) machines.

The recent introduction of Starlink in Zimbabwe is expected to significantly improve internet access in rural areas, further facilitating electronic transactions.

SME Association of Zimbabwe chief executive officer Mr Farai Mutambanengwe said there had been problems around the formalisation of MSMEs (micro, small and medium enterprises) and simplification of some cumbersome tax processes would encourage some players to comply.

“One of the big challenges has been the complexity of the tax regime. So, a simplified tax regime would ensure SMEs can comply easily and speedily, rather than the current situation where a lot of people are not able to complete the compliance procedures,” he said.

A study by the University of Zimbabwe researcher Mr Curren Pindiriri estimates that informalisation cost the Treasury about US$1,15 billion between 2020 and 2023.

The findings underscore the importance of addressing the informal sector to bolster government revenue.

Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube has repeatedly warned that revenue collection risks are exacerbated by reduced tax compliance stemming from high levels of informalisation.

Despite its widespread non-compliance with tax regulations, the informal sector remains a significant source of employment in Zimbabwe.  The sector plays a crucial role in providing livelihoods for a large portion of the population, particularly in rural areas and urban fringes.

Meanwhile, the ZIRGP outlines measures to address the challenges faced by the manufacturing sector, including high regulatory and utility costs.

To enhance competitiveness, the Ministry of Industry and Commerce, through the National Competitiveness Commission, proposes conducting a Regulatory Impact Assessment to review regulations that hinder business operations.

ZIRGP also seeks to encourage the ease of doing business by announcing plans to streamline business licences.

As such, a committee chaired by the Office of the President and Cabinet has commenced its work with the goal of reducing the number of business licences and time required to obtain them by the end of the year.

Additionally, the committee is reviewing licensing costs to ensure they are competitive and not burdensome. The initiatives aim to create a more conducive business environment and support the growth of the manufacturing sector in Zimbabwe.

Normally, the simplified tax models are chained out in form of simple lump sum or fixed amount taxes (also known as patents), usually targeted at microenterprises.

Some are chained out as presumptive profit taxes or single taxes which are based on turnover, either with the tax liability calculated as a percentage of turnover or with net profit calculated by applying a standardised cost deduction from turnover to account for business expenses.

According to the World Bank, very simple fixed tax regimes which do not require much bookwork or records tend to be overly popular, but prone to abuse.

Findings show that despite the operation of a special simplified tax model, in some cases small firms may be deterred from formalising due to perceived excessive tax burdens, compliance costs and risks (including risks of punishment for real or alleged non-compliance).