- Mthuli’s 2024 budget is dominated by an array of anti-human, business tax mechanisms
- The taxes did not spare anyone, from general populace to business community
- Due to lack of external funding, government has pinned hopes on overtaxing the already burdened suffering populace
Harare- The budget proposed by Professor Mthuli Ncube, the Minister of Finance and Economic Development, for the year 2024 amounts to ZWL58.2 trillion. However, what has caught the attention of the business community and the nation at large are the tax hikes and introduction of new tax instruments. Contrary to expectations of tax relief, especially from the mining sector, the budget imposes a staggering 100% increase in the existing tax burden, affecting residents, civil servants, motorists, miners, and traders. This includes the introduction of new taxes such as the fizzy tax and house tax, significant increases in existing taxes like passport fees, fuel levies, tollgates, electricity and new car registration charges.
This raises concerns about government’s ability to effectively address core economic issues such as currency stability, the growing debt crisis, exchange rate volatility, and employment dynamics which can’t be addressed by overtaxing the already strained populace. Rather than focusing on pressing concerns, the budget appears to prioritise exerting greater fiscal pressure on individuals and corporate entities, following the austerity measures implemented in 2018. While taxes are crucial for fiscal sustainability and supporting economic activities, there are concerns about overtaxing and whether these tax measures are the best way to achieve economic goals. This article seeks to unpack these taxes according to the 2024 budget.
Tax on Civil Servants
Since the outbreak of the COVID-19 pandemic, civil servants have been granted a COVID-19 allowance to mitigate the economic impact. Initially set at US$75, the allowance was subsequently increased to US$300 over time. However, as it was not classified as a formal allowance, it was not subject to taxation. Nevertheless, starting from January 2024, a tax rate of 2% will be imposed.
Additionally, Ncube has revised the Tax-Free Threshold to ZWL750,000 per month and adjusted the tax brackets to ZWL270 million per annum. Any income exceeding this threshold will be subject to a tax rate of 40%, effective from 1 January 2024.
The imposition of a 2% tax would result in a deduction of US$6 from the US$300 allowance, further exacerbating the financial challenges faced by civil servants. These individuals are already burdened with various taxes, including funeral policy taxes, insurance taxes, medical taxes, and IMTT (Intermediated Money Transfer Tax) taxes. The introduction of additional taxes only compounds their financial difficulties.
To put the civil servants' situation into perspective, their salary as of October 2023 stood at ZWL195,000. However, this amount is subject to electronic taxes, despite the rapid devaluation of the currency. When converted using the official exchange rate, the salary equates to approximately US$33, while using the parallel market rate, it amounts to around US$19. However, due to the 2% tax and bank charges, the full ZWL195,000 cannot be withdrawn, resulting in a net amount of approximately US$25 (using the bank rate) or US$15 (using the parallel market rate). Taking into account the rising cost of living, civil servants will be earning less than US$310, while rental prices in high-density suburbs such as Dzivaresekwa range from US$100 to $120 per room. This calculation does not include expenses for electricity, water bills, food, and transportation, which average around $50 per month.
Regarding the proposed review of the tax-free threshold to ZWL750,000, equivalent to approximately US$75, this amount is significantly low considering the pace of inflation. By November 2024, when the new budget is released, this threshold is likely to be less than US$1. Consequently, civil servants earning ZWL195,000 will quickly surpass the tax-free threshold and become liable for taxation.
Taxes on traders
This tax was put to alleviate the large-scale retailers from competition with informal traders but the result will be very unfortunate because the government is itching where it is not scratching. The challenging situation faced by large-scale retailers, including their difficulties in meeting payment obligations to manufacturers in US dollars, coupled with intense competition from informal traders, has led manufacturers to prefer selling their products to informal traders.
To address this issue and restore a functional supply chain from manufacturers to wholesalers and retailers, Ncube has proposed a new regulation where traders will only be allowed to purchase goods directly from manufacturers or wholesalers if they possess the necessary licenses and demonstrate tax compliance. This means that only traders who are registered for VAT and possess valid Tax Clearance Certificates will be permitted to engage in transactions with manufacturers.
To further regulate this system, the threshold for VAT registration will be reduced from US$40,000 to US$25,000 starting from January. This adjustment aims to ensure that a larger number of traders are registered for VAT and comply with tax obligations, thereby reinstating a more transparent and accountable supply chain within the retail sector.
Despite positive expectations, this measure will have a disruptive impact on manufacturers akin to the mandatory implementation of bank rate-based pricing, which has disrupted the operations of retailers. It can be seen as robbing Peter to pay Paul, where the burden that was previously placed on retailers has now been shifted onto manufacturers. The prevalence of informal trading and the porosity of our national borders make it unlikely that informal traders will be willing to acquire licenses valued at US$25,000, thus reducing sales volumes from local producers. Instead of safeguarding the interests of both retailers and manufacturers, the government is subjecting them to a challenging situation. There is a high likelihood that informal traders will resort to importing products, as opposed to adhering to the VAT registration threshold of US$25,000. As a result, we anticipate a surge in imports, which will further exacerbate the difficulties faced by both manufacturers and retailers.
Tax on Miners
In light of the increased electricity tariffs imposed by ZESA on miners last month, coupled with the persistent decline in commodity prices for metals, there was an expectation that miners would receive some form of relief to ensure their survival without reaching a critical stage. However, contrary to these expectations, the latest budget did not include a 5% tax reduction, for example, on Lithium. Instead, an export tax will be imposed on lithium concentrates from March. Lithium is currently being exported as concentrates. To circumvent this tax, the budget proposes lithium miners to process lithium into carbonates, which represents a more advanced stage in the processing chain, involving two additional stages of processing. Miners involved in lithium extraction have until March to submit their processing plans, and new lithium licenses will not be issued without these plans in place.
Additionally, Ncube, is introducing a 1% levy on revenues derived from lithium mining activities, as well as on granite miners and producers of quarry stones.
Miners are currently facing numerous challenges, including a decline in global metal prices, high corporate taxes, carbon taxes, and exorbitant electricity charges. These inequities have led major mining companies such as Zimplats and Karo Mine to suspend projects. Among all minerals, lithium has been particularly hard hit. The price of lithium carbonate has plummeted to CNY 120,000 per tonne, reaching its lowest level since August 2021, as low demand exacerbates the current supply glut. Losses for lithium prices have accumulated to 9% week-to-date, 28% month-to-date, and 79% year-to-date.
Lithium miners primarily generate income from selling lithium, and when prices are low, they must increase production to maintain profitability. However, the imposition of a 1% tax, a 5% levy introduced previously, and the upcoming tax on concentrates effective from March pose significant challenges. These challenges are compounded by the headwinds of high electricity bills, which now account for 22% of miners' expenses. Consequently, these measures are impractical and will likely result in reduced productivity and earnings. The lithium industry has already fallen short of the targeted revenue of US$500 million by year-end. It begs the question of the rationale behind increasing taxes when the demand for the product is already low.
Taxes on Fuel
The budget has resulted in an increase in fuel costs. The country already has the highest-priced fuel in Africa. As part of the budget measures, the Strategic Reserve Levy has been raised by US$0.03 per litre for diesel and US$0.05 per litre for petrol, starting from January.
An essential analysis indicates that high fuel prices have significant implications. Fuel plays a crucial role in connecting wholesale and trade activities. When fuel prices rise, retailers and wholesalers often respond by increasing the prices of basic goods to offset any losses incurred. This trend was observed during the fuel crisis in 2018, 2019, 2020, and 2021, where the cost of a 2-litre bottle of cooking oil reached a minimum of US$5.
However, the irony is that large-scale retailers are the most severely impacted by these price adjustments, as any increase in prices creates incentives for informal traders to engage in smuggling activities to take advantage of the situation. In response, the government often implements pragmatic policies such as opening borders for free imports. While this may help alleviate the situation, it ultimately reduces earnings for the retail industry and local producers, resulting in a lower contribution to the country's GDP.
Spiking of Tollgate Taxes
Ncube has implemented a significant increase in tollgate taxes, raising them by 150% on premium roads. This increase applies to major routes such as the Harare-Beitbridge highway and the Plumtree-Mutare Road. The toll fees for minibuses have risen to US$8 from US$3, for buses to US$10 from US$4, for heavy vehicles to US$15 from US$5, and for haulage trucks to US$25 from US$10.
The increased tollgate taxes now require individuals to budget US$50 or the equivalent in Zimbabwean dollars for round trips between Harare and Bulawayo, and US$60 for round trips between Harare and Beitbridge. The government, facing challenges in securing external funding, is relying on the budget to finance the Beitbridge highway, as it has struggled to meet its payment obligations to contractors. The Plumtree-Mutare Road, on the other hand, was constructed with a loan from the Development Bank of Southern Africa (DBSA). Originally, the loan was scheduled to be repaid by 2022, but the government defaulted on its payments. As part of a restructured deal, the outstanding amount of US$165 million will now be repaid over an additional 15 years, with a reduced interest rate of 5% compared to the previous rate of 6.18%.
These developments place an additional burden on the already struggling population, making it difficult for them to attain a sustainable livelihood.
New Mansion Tax
The budget has introduced a proposal for a 1% wealth tax on houses valued above US$100,000. The revenue generated from this tax is intended to be allocated towards urban infrastructure development, specifically focusing on roads, water supply, sewer systems, and community health centres. Individuals aged over 70 are exempted from paying this tax for their private homes.
Taxpayers will have the option to choose whether to pay it on a monthly, quarterly, or annual basis. However, specific details about the valuation process for determining the property value and the assessment of the tax have not been provided in the budget announcement.
If the funds are designated for road infrastructure, then what is the allocation of funds from ZINARA and ZIMRA? Specifically, what happens to the revenue collected from tollgates? The imposition of house tax, similar to historical hut taxes, has raised concerns and drawn parallels to the causes of the First Chimurenga, a historic resistance movement in Zimbabwe.
Under the proposed tax, a person owning a house worth US$400,000 would be required to pay a tax of US$4,000 to the state. This could result in increased rental costs, as property owners pass on the tax burden to tenants. Essentially, this means individuals would be paying rent for their own homes after covering the costs of materials, land, construction, and council bills.
The valuation process for houses based on supply, demand, and postcodes may be seen as problematic, making the entire taxation system appear arbitrary. This could discourage citizens from saving for or investing in medium or low-density housing, further exacerbating the rich-poor divide and limiting certain areas to only the wealthy and politically connected.
There is concern over the potential for corruption in determining the tax assessment. The recent story published by The Mirror, where ZANU PF elites were reportedly refusing to pay a tollgate fee of US$2, raises doubts about whether they would comply with the proposed minimum tax of US$40,000 per year. The effectiveness of enforcing the tax is questionable, given the state of the judiciary and the potential for preferential treatment of government officials.
Taxing wealth or savings contradicts conventional tax practices, which typically focus on taxing earnings rather than accumulated wealth.
Tax on Fizzy Drinks
The government has introduced a new tax on the sugar content in fizzy drinks as a measure to discourage the consumption of beverages with high sugar content. Under this tax, each drink will be subject to a charge of US$0.02 per gram of sugar. The revenue generated from this tax will be allocated towards therapy programs and the procurement of cancer equipment for diagnosis.
The introduction of a new tax on sugar content in carbonated beverages has a notable effect on beverage companies, with Delta Corporation serving as a prominent example due to its production of a substantial volume of soft drinks in Zimbabwe. The tax is calculated based on the amount of sugar per gram in these beverages, and for brands such as Coca-Cola, Pepsi which contain a significant quantity of sugar, the tax burden can be quite substantial.
To illustrate further, let's consider the sugar content in specific Coca-Cola and Pepsi products. A 100ml bottle of Coca-Cola contains 10.6g of sugar, while a larger 500ml bottle contains 53g of sugar, which constitutes approximately 59% of the total product volume. In comparison, a 500ml bottle of Pepsi contains 28g of sugar. These figures indicate that there are few alternatives available to consumers who wish to opt for beverages with lower sugar content, apart from choosing water as a substitute.
In 2019, Delta Corporation produced approximately 36 million bottles of soft drinks per month. Considering the subsequent increase in production capacity, the current figures are likely higher. Based on a tax rate of US$0.02 per gram of sugar and using the production data from 2019, Delta would be obligated to pay approximately US$19 million per month solely in sugar taxes.
When considering additional expenses such as corporate tax charges, electricity bills, currency devaluation, and lower consumer demand, the sugar tax can present significant challenges for Delta Corporation's business operations. The company may find itself with two primary options to address this situation. First, they could reduce the sugar content in their drinks which the Cca-Cola company might not agree to in spite of this potentially impact the taste and consumer preference. Delta already offers Coke Zero, a sugar-free alternative. Second, they could choose to increase prices, which could make their products less competitive in the market. Consequently, Delta may face the prospect of either raising prices or experiencing reduced production as a direct result of this tax policy.
Government has also increased passport taxes, from US$120 to US$200 for an ordinary passport while emergency raised to US$300 dollars.
The substantial increase in passport fees, which now positions them as the most expensive in the SADC region, has a detrimental impact on the population. In contrast, passport fees in countries such as Lesotho, South Africa, Malawi, Swaziland, and Zambia are significantly lower, typically amounting to less than US$25. This sharp rise in passport fees will create increasing challenges for individuals who wish to leave the country, especially as living standards continue to deteriorate creating high crime, unemployment and illegal emigration.
The increase in passport fees will exacerbate poverty in the country and reduce remittances, as the elevated cost of US$200 for a passport will be burdensome for many people who previously struggled to earn even US$150 for basic survival. The government's decision to implement such high fees seems counterproductive, as reducing passport fees could have potentially increased remittances and eased the strain on limited resources within the country. Imposing heavy taxes on a population with an unemployment rate of over 80% can be seen as a harsh and unfair practice, further exacerbating the challenges faced by the struggling population.
Stashed money in a vault
The budgetary allocation has provided the State with access to funds held in Safety Deposit Boxes within financial institutions. It has vested the commissioner with the authority to exercise discretion in accessing these boxes at any given time, thereby mitigating the risk of tax evasion.
Previously, due to privacy laws, it was not feasible to access safety deposit boxes without a court order. ZIMRA has been granted expanded authority to unilaterally open custody vaults in order to verify their contents. This applies to both financial institutions and other entities providing custodial services for cash holdings.
Many Zimbabwean citizens have refrained from using traditional banks to store their funds, especially after experiencing significant losses during the financial crises of 2008 and 2019. Consequently, they have opted to keep their savings in safety deposit boxes. The recent measures introduced by the government may compel individuals to relocate their cash to banks located in neighbouring countries such as Zambia or Botswana. Alternatively, some may choose to purchase their own safety deposit boxes and store money within their residences.
This, however, fails to address the underlying reasons why people prefer to use safes rather than banks. It is important for the government to investigate and address the factors driving individuals to opt for personal safes over traditional banking services such as confidence deficit and policy slippages rather than curing symptoms.
The budgetary measures have failed to address crucial aspects such as exchange rates and currency devaluation, instead placing a disproportionate emphasis on tax-related issues. The tax burdens imposed on both companies and individuals are deemed excessive, particularly considering the already onerous tax regime prevalent in Zimbabwe. There are other avenues to explore than straining the business community and individuals. The country is experiencing an annual loss of 1.2 billion in revenue due to gold leakages, equating to 100 million per month. It is important to note that this figure does not account for other valuable resources such as diamonds, lithium, platinum, tobacco, and PGMs. Correcting these leakages should be a primary focus in order to address these fiscal gaps effectively.
It is imperative to address the political and economic issues that are exacerbating the strain on companies including the tax regime. Continued financial burdens on businesses will result in reduced production, earnings, FDIs, and further economic decline. High taxes not only harm businesses but also diminish confidence levels, contributing to a state of disarray in both political and economic spheres.
It is worth noting that the government already imposes various taxes, including carbon taxes, surrender portions, corporate taxes, value-added tax, AIDS Levy, and pay-as-you-earn taxes. Given this existing tax burden, the question arises as to why additional strains are being imposed on companies and individuals? The focus should be shifted towards addressing revenue leakages from gold and other valuable resources, as well as rectifying the political and economic landscape.