Industry Fears Collapse After VAT Deferment Withdrawal

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HARARE – Zimbabwean businesses, especially those in the manufacturing sector, are facing significant challenges following the Treasury’s decision to abolish the Value Added Tax (VAT) deferment provision.

This policy change has sparked widespread concern over potential company closures.

The VAT deferment provision allowed companies importing capital equipment worth more than US$500,000 to delay VAT payments for up to six months. However, the Treasury ended this program due to a high number of beneficiaries failing to settle their outstanding tax bills after the deferment period.

Finance Minister Mthuli Ncube, according to Business Weekly stated, “Treasury notes with concern, the number of beneficiaries that are not honouring their VAT obligations upon the expiry of the deferment periods.

In view of the above, with immediate effect VAT deferments granted to operators with outstanding VAT payments on tax deferred are hereby withdrawn forthwith. This means that tax is payable immediately, failure of which enforcement measures are provided in the tax legislation will be applied.”

Many businesses have been importing capital equipment to modernize their operations and improve productivity. However, they often struggle with outdated machinery that frequently breaks down, hampering productivity. The sudden removal of VAT deferment exacerbates these challenges, potentially leading to cash flow crises and company closures.

Trust Chikohora, past president of the Zimbabwe National Chamber of Commerce (ZNCC), warned, “If Treasury does not reconsider its decision, more company closures are looming. They need to work out payment plans with the Zimbabwe Revenue Authority (ZIMRA) because sudden demands for payment could lead to garnished bank accounts, making it impossible for companies to pay their employees and other bills.”

A tax expert who preferred anonymity highlighted the initial intent of the VAT deferment: “The facility was meant to give relief to companies bringing in investments of a minimum of US$500,000 through capital equipment. Removing this deferment puts a cash flow strain on these businesses, potentially leading to penalties and interest that could force closures.”

Trust Chikohora emphasized the need for flexible solutions: “An amicable solution involving specific payment plans must be worked out. Otherwise, closing companies will result in no revenue for the Treasury.”

Experts argue that the failure of companies to meet their VAT obligations often stems from cash flow problems, not a refusal to pay. They suggest that the Treasury should examine why companies defaulted and consider more flexible terms.

Another tax expert, Trust Chiroora, noted that the current deferment period might be too short for capital-intensive industries: “The imported equipment may have lengthy gestation periods before generating revenue. The window for VAT deferment might lapse before the equipment is fully operational.”

From Seoul, South Korea, where he was attending the 2024 Korea-Africa Business Summit, ZNCC president Mike Kamungeremu urged the Treasury to consider each case individually: “Some companies may have genuine reasons for defaulting. Penalizing everyone equally is unfair. We need to support companies to survive and then pay their debts.”

Confederation of Zimbabwe Industries (CZI) president Kurai Matsheza echoed these concerns: “We are still investigating why our members failed to meet their obligations. If the Treasury proceeds with this stance, it will have adverse implications on the affected companies’ viability.”

The sudden withdrawal of the VAT deferment provision has placed Zimbabwean manufacturers in a precarious position. As businesses and industry leaders call for a more nuanced approach, the future of many companies hangs in the balance. The government’s next steps will be crucial in determining whether the sector can navigate this financial challenge or face widespread closures.