Zimbabwe’s efforts to harness tax from the informal sector may be encountering significant challenges, after the Treasury managed to collect a mere 3 percent of its target during the first eight months of the year, according to Government financials for the month ended August.
An informal economy (informal sector or shadow economy) is the part of any economy that is neither taxed nor monitored by the government.
The Government introduced presumptive tax, a fixed-rate levied on informal businesses that do not maintain proper financial records when transacting.
The tax applies to specific sub-sectors, including hair salons, bottle stores and public transport operators among others.
The primary goal of the presumptive tax is to integrate informal businesses into the formal tax system, thereby expanding the tax base and boosting Government revenues.
The Government’s August financials, however, show that only ZiG 35,2 million was collected against a target of ZiG 1,2 billion in the first eight months of this year, highlighting the significant challenges the Treasury faces in collecting revenue from the informal sector.
This is despite the size of Zimbabwe’s informal economy being estimated to be 64,1 percent of the total economy, which represents approximately US$42 billion at gross domestic product (GDP) purchasing power parity (PPP) levels, according to the Zimbabwe Chamber of Commerce referencing IMF estimates.
The International Monetary Fund (IMF 2018) data estimates that almost 5,2 million people trade in the informal economy in Zimbabwe, most of whom are women.
Zooming in on August’s performance, the Government collected about ZiG 4 million in presumptive tax against a target of ZiG 260,1 million.
In terms of the broader target, total revenue for August 2024 was ZiG7,5 billion, falling 3,84 percent short of the budgeted ZiG7,79 billion.
Key shortfalls were seen in taxes on income, down 18,73 percent and Value Added Tax, which fell by 16,79 percent.
However, customs duty and taxes on financial transactions outperformed the budget target, partly offsetting the deficit.
Year-to-date, revenue stands at ZiG 51,65 billion, underperforming the target by 6,72 percent.
Total expenditure for August 2024 was ZiG 8,16 billion, exceeding the budget by 7,12 percent.
Key drivers were higher costs for goods and services, up 19,16 percent.
Year-to-date, total expenditure reached ZiG 58,45 billion, closely aligning with the budget forecast of ZiG 58,03 billion, with only a slight variance of 0,7 percent.
Overall, the Government recorded a ZiG 666,31 million deficit in August, against a forecasted surplus of ZiG 175,17 million.
This brings the year-to-date deficit to ZiG 6,8 billion, significantly above the budgeted ZiG 2,66 billion.
High non-compliance levels
Economists say the high level of non-compliance among informal businesses has significantly contributed to underperforming revenue collection, which, combined with rising expenditure, has resulted in a large fiscal gap.
Confederation of Zimbabwe Retailers (CZR) president, Dr Denford Mutashu, attributed the subdued presumptive tax collections to the imposition of “steep” levies by the government.
He explained that many self-started businesses, particularly small-scale and informal enterprises, have not yet reached a level of growth that enables them to bear the burden of high taxes.
Furthermore, he said that some businesses categorised under presumptive taxation were “too insignificant” to make a meaningful contribution to Government revenue, especially considering the current high tax thresholds.
To address these issues, Dr Mutashu proposed a tiered presumptive taxation model.
This approach would involve categorising businesses based on their size and nature, allowing for a more tailored and equitable tax system.
By implementing a tiered system, the Government could avoid a one-size-fits-all approach that may be detrimental to other businesses.
Dr Mutashu believes that a tiered system would encourage greater tax compliance.
Instead of forcing taxpayers to pay high taxes, which may lead to evasion, a more flexible and proportionate system could foster a sense of fairness and responsibility.
By aligning tax obligations with business capabilities, the Government could increase revenue collection while supporting economic growth.
Said another economist, Professor Gift Mugano: “The poor performance of revenue collection by Treasury, particularly in targeting the informal sector, has been necessitated by the increase of informality, massive informality and of course trading being done in cash.
“So, when people are trading in cash, it is very difficult to foster compliance against tax evasion. You would note that the Ministry of Finance (Economic Development and Investment Promotion) once introduced the 2 percent tax (Intermediated Money Transfer Tax, or IMTT), which was a masterstroke and very good instruments to foster compliance in as far as tax collection is concerned, or rather taxing the informal sector.
“It was very effective at the beginning to an extent that revenue contribution of the 2 percent tax to total tax revenue was around 16 percent of total revenue.
“But it was happening like that because there was a lot of online payments, which were taking place through mobile payment platforms. So that created a vehicle or a bridge for the Treasury to collect tax.”
Prof Mugano said the decline in the contribution of the IMTT tax was due to economic agents avoiding online payments and the high cost of the tax. This, coupled with the challenges of enforcing presumptive tax on a large informal sector, has led to significant tax evasion and revenue shortfalls.
He said informal sector had become a growing threat to the formal sector, potentially undermining its growth and development.
The rapid expansion of informal employment, from 75,6 percent to 87,7 percent in the last five years, highlights this trend.
Security threat
According to the Zimbabwe National Chamber of Commerce (ZNCC) State of Industry and Commerce survey of 2023, a significant 71 percent of Zimbabwean businesses operate informally, placing an undue tax burden on the few formalised businesses.
A study by the University of Zimbabwe researcher, Curren Pindiriri, estimates that informalisation cost the Treasury approximately US$1,15 billion between 2020 and 2023.
Finance Minister Professor Mthuli Ncube, has repeatedly highlighted the risks to revenue collection posed by high levels of informalisation.
Prof Mugano said the level of informality and the intensity of informality is such that a person who is standing on the road, trading airtime, trading vegetables, selling some clothing stuff; that person will just walk away when they see enforcement agents.
“So, it’s a real challenge.”
To address this issue, Prof Mugano suggested the Government must implement structural policies that stimulate production and create a conducive business environment for investors.
By fostering formalisation and reducing the attractiveness of the informal sector, the Government can ensure sustainable economic growth and job creation.
Further, the Government must implement a robust industrial policy that supports local production. A local content policy should be prioritised to promote domestic manufacturing, with the goal of increasing local production to over four billion US dollars.
By reducing reliance on imported goods, the Government can stimulate economic growth, create jobs and ultimately shrink the informal sector.
“We need to find viable solutions because if we do not do this, the informal sector will make everyone’s life difficult,” said Prof Mugano. “It’s going to kill the formal sector; it’s already killing it.
“The formal companies are closing; look at how the supermarkets are closing, look at the losses being recorded by formal supermarkets; look at how companies are struggling to make ends meet. And now it is Government failing to collect the revenue.
“We have seen that there is a serious underperformance on the revenue collection while at the same time expenditure is increasing. That is tragic.
“So, we need to change the game plan and begin to think on how we can rebuild this economy. How can we reverse this informality.”
Harare-based economist, Carlos Tadya, highlighted the Government’s struggle to collect taxes from the informal sector, emphasising the difficulty of bringing this segment into the formal economy.
“With only 3 percent of the target collected, it is clear that more robust strategies are needed to improve tax compliance and generate much-needed revenue,” said Tadya.
He added a combination of low tax compliance within the informal sector and rising Government expenditure “is aiding” a perfect storm for Zimbabwe’s fiscal health.
“Urgent measures are required to improve tax administration, incentivise formalisation, and control spending to prevent further deterioration of the fiscal gap,” he said.
The recently launched Zimbabwe Industrial Reconstruction and Growth Plan (ZIRGP) proposes measures to accelerate the adoption of simplified tax models for Small and Medium Enterprises (SMEs) and expedite the development of a formalisation strategy to broaden the tax base.
The plan aims to simplify compliance procedures for small retailers to encourage them to formalise their operations.
To address this issue, the ZIRGP proposes measures such as simplifying registration processes, implementing minimum mandatory licensing requirements through the Shop Licensing Act, promoting electronic transactions, including the use of bank accounts, plastic money, and Point-of-Sale (POS) machines.
Source: Business Weekly