New tax bands amplify currency distortions

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The Minister of Finance and Economic Development, Professor Mthuli Ncube, had his budget approved recently and interestingly the new tax bands to be used for 2022 financial year are paged at parallel market rate of US$1 to ZWD250.

The Zimbabwe Revenue Authority (ZIMRA) has published the memo on the new tax bands on various platforms and indications are Treasury projects the official to around those figures by year end.

The new bands have received mixed feelings with issues of currency confusion as well as what some called anti-progressive taxes, while others say its a good step in the right direction.

What quickly caught the eye was the conversion rates of tax bands from the local Zimbabwe Dollar to the other accepted currencies  such as the US dollar. The Reserve Bank of Zimbabwe (RBZ) insists on trying to bring currency detractors to book, the same tune the ministry is singing. But if the tax bands are anything to go by, they point to the contrary.

Income tax is always closely monitored with employees trying to see if they are not subjected to income tax. In 2022 the remuneration tax table says that a person earning $300,000 or US$1,200 per annum are not subjected to any tax.

Its good that tax threshold has increased as it also pushes up disposable income for most citizens, thereby increasing aggregate demand and growth in the economy is achieved.

But if you take a closer look at the two currency exchange rates, you would see that the Treasury used an exchange rate of US$1 to $250 which is a 123 percent above the RBZ current auction rate of $112 to the US dollar. This is also seen on the same document where the infamous intermediated money transfers tax (IMTT) came in at $1 000 or US$5,00 giving an effective exchange rate of $200 to the dollar and that is a premium of 78 percent on the official exchange rate.

These implied rates used to convert the tax thresholds are within the current parallel market rates of $180 to $230 per dollar. It then brings in questions of which exchange rate is the nation supposed to follow when it comes to pricing of their goods as well.

The effect of such moves is that they trigger parallel market rate movements, which are detrimental to our economy and come back to stab in the back the citizens they wanted to free. Such actions in the end trigger inflation that then derails all targets the RBZ had set to achieve on the monetary side.

It is understandable that the Treasury had forecasted the direction of the local currency and the magnitude of depreciation of the currency at year end and set with the forecast in mind. However, if that was their reasoning, it was better for them to do the change in two halves, with the other adjustment coming in the mid-term budget.

A dilemma for treasury is that they are also a consumer, if not the biggest consumer in the country, and they will be charged at parallel rates by their suppliers. It now ends with government trying to get enough income via taxes to fund its expenditure at the parallel market rates.

Besides the exchange rate confusion, it seems Treasury has taken upon itself to end hybrid working and push people back to their offices as they are now taxing data and airtime given to employees by their employer.

This in itself comes back to reducing innovation as businesses will reduce such a benefit as they are the ones to be taxed on the benefit.

ZIMRA said provision of data and airtime by the employer to the employee for use at the home or outside work premises are a benefit that is taxable in the hands of the employee and the deemed benefit is pegged at 30 percent of the cost to the employer.

The positive in the new tax regime was the 30 percent withholding tax to suppliers with no tax clearances. It was moved from 10 percent last year, and the steep penalty becomes a deterrent for those who do not want to be taxed.

A penalty of 10 percent gave companies the incentive to avoid paying tax therefore many people avoided tax payments.

Conclusively, in a country that is super sensitive to any government move that sounds bad signals, the authorities should continue treading carefully in order to not lose the small goodwill gains that they have been making in the past two years. – Business Weekly