28 April 2011

Zimbabwe: Tax Performance Confirms Economic Recovery

INCOME taxes on employees and company profits quickened above expectation in the first two months of the year and helped keep Treasury accounts in surplus, adding to the growing stock of evidence the real sector of the economy has turned the corner.

However, fiscal space remained crowded out by overshooting employment costs, which breached the budget provision by 4,6 percent in January and by a much higher margin of 14,4 percent in February, led by civil service wages.

Government has struggled to hit breaks on employment costs comprising wages, pensions and other allowances since dollarisation two years ago, and has lately been forced into commitments unmatched by revenue performance to forestall strikes.

Abridged financial reports published by the Accountant General for January and February show that fiscal surplus grew by 311,8 percent in February, compared to about 30 percent in January following a surge in revenue.

The contribution of indirect taxes -- value added tax and customs duties - to the national purse recorded an unexpected contraction in February, except excise duties, while direct taxes surpassed set targets for a second month.

Taxes on income and profits in both fiscal periods hit US$67,9 million in February, 57,6 percent higher than Treasury's target of US$43 million for the month, driven by pay as you earn, and trailed by corporate tax and the domestic interest and dividend income tax head.

Individuals contributed US$46,5 million against a target of US$33,2 million, followed by companies, which accounted for US$14 million, about US$8 million higher than the official projection.

In contrast, value added tax (VAT) slumped to US$61,6 in February against a target of US$70,4 million, from US$70,2 million the month before during which the tax head was expected to contribute US$94 million.

The robust recovery in income and profit tax and the sustainable increase in excise duties, according to a tax expert, are a sign that the real sector is slowly regaining eminence and strengthening its capacity to drive the revival of the public sector.

"In a normal, growing economy, income tax on employees and companies should be the highest contributors to tax revenue because their activities create value," said Rameck Masaire, a tax expert with Ernest & Young.

"The good news for our economy is that our reliance on imports has lessened and this shows that the economy is improving, but VAT is still the leading tax head. This shouldn't be the case.

"We would like to see employees and companies contributing more," said Masaire.

In the first year of dollarisation, customs duty accounted for the bulk of fiscal revenue, followed by excise duties and VAT.

Taxes on individual income and company profits were overly subdued and contributed the least income.

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