13 February 2017

Zimbabwe: Value-Added Tax - Consumer Power Prevails

As Tapera Muza entered a butchery in Harare's city centre on Monday, his eyes were firmly fixed on the appetising meat displayed in the refrigerators.

Being a family man, he had set aside money to buy two kilogrammes of pork which is adequate to feed his family. He was however knocked backwards when he saw the price tag attached to his favourite portion of meat.

"I'm in a state of shock. I used to buy pork for US$3,90 per kg, but the price has shot up to US$5,15. The price hike is too steep and I can't afford the meat anymore. I will have to settle for something cheaper," an exasperated Muza said.

The price hike forced Muza to buy a kilogramme of pork instead of the usual two.

Muza's experience reflected the plight which faced most Zimbabweans after Finance minister Patrick Chinamasa announced the implementation of Statutory Instrument (S1) 20 of 2017 with effect from February 1.

The SI saw value-added tax (VAT) being charged on meat and meat products, maheu, margarine and cereals, as part of a desperate measure by the government to boost its ever-dwindling revenue.

However, after a huge public outcry and pressure from political parties, Chinamasa reversed SI20 which had caused a surge in prices.

"Following our debate and stakeholders' representation, where concerns have been raised regarding SI20, I am proposing to shelve implementation of SI20, which levies VAT on the listed products," Chinamasa said.

"This will allow for further consultations with relevant stakeholders, and these consultations begin with Parliament because I need input from the House."

VAT is a type of consumption tax placed on a product whenever value is added at a stage of production and at final sale. The amount of VAT that the user pays is the cost of the product, less any of the costs of materials used in the product that have already been taxed.

The decision to introduce the tax was informed by a need to widen the tax base, in a desperate bid to meet the US$4,1 billion 2017 national budget.

Government expenditure, most of it on wages, has successively resulted in budget overruns over the years.

With wages accounting for 91% of revenue, Treasury is currently struggling to fund capital projects.

Chinamasa was projected to spend US$3 billion on employment costs, in 2017, leaving only US$400 million for current operations, capital and social projects.

While admitting that he is in a tight spot, Chinamasa however acknowledged he had not consulted before introducing the levy.

But this is not the first time he has made such a mistake only to make a dramatic U-turn due to public pressure.

In July 2015 while presenting his Mid Term Budget Review, Chinamasa announced that government had banned the importation of second-hand clothes and shoes.

"I move to remove second-hand clothing and shoes from the open general import licence and any future importation of second-hand clothing and shoes will be liable to forfeiture and seizure," Chinamasa said then.

There was a huge outcry from ordinary Zimbabweans after the announcement as they felt the policy would pile further misery on the poor.

Due to the harsh economic climate which has resulted in company closures and job loses, many Zimbabweans are struggling to make ends meet. A large section of the population has resorted to buying second-hand clothes and shoes as a way of saving.

Many people are thus making a living through selling cheap used clothes and shoes.

It was therefore not a surprise when members of Parliament from across the political divide refused to pass the Finance Bill to operationalise Chinamasa's 2015 Mid-Term Budget Review, arguing it was insensitive to the poor.

Under pressure from the public, the government lifted the ban, saying although the policy still exists it should not be enforced at present due to economic challenges.

In June last year, the government issued Statutory Instrument (SI) 64 of 2016, which banned the importation of 42 products, sparking riots in Beitbridge, which borders Zimbabwe and South Africa. South Africa is the country's biggest trading partner.

Products that were removed from the open general import licence under SI 64 include cooking oil, salad cream, cereals, peanut butter, baked beans, camphor cream, coffee creamers and petroleum jellies, bottled water, tinned fruits and vegetables, dairy products, fertilisers, building material, wheelbarrows, roofing frameworks and furniture.

The decision infuriated many people who buy basic commodities outside the country because of the exorbitant prices in the country.

Government later amended SI64 after the ban triggered chaos. Individuals were allowed to import specified quantities of selected products.

The government also clarified that individuals who wish to import the products should secure a permit, which costs US$30 and is valid for three months.

A snap survey conducted by this newspaper in Harare's central business district (CBD), after the instruction to implement SI20, showed that the price of meat has gone up.

At a Colcom shop in the CBD, "fresh pork" was being sold at US$5,15 per kg, up from the usual US$3,90.

The price hike had however resulted in business slowing down. Although it was the first week of the month, just after most people's pay-dates, the tills were not ringing as much as they normally did prior to the introduction of the tax, an indication that the hike in meat prices has affected consumers.

A box of cereals was selling at US$3,39 per 500 grammes up from US$2,99 in Pick n Pay retail outlets. Many retail outlets were selling the product for between US$3,35 and US$3,40 whereas it was retailing for around US$3,00 prior to the measures.

Economist Prosper Chitambara said the fact that the government has been forced to change a policy, yet again, shows that policies are being driven from the top and not from the bottom as should be the case.

"The consultations which Chinamasa wants to carry out should have been done before the policy was announced. However, that is the problem which we have always had, that due diligence always becomes an afterthought," Chitambara said.

"Dialoguing with social stakeholders is necessary when coming up with policies; it is a problem in developing countries including Zimbabwe that policies are driven from the top instead of from the bottom."

The Confederation of Zimbabwe Retailers president Denford Mutashu said the statutory instrument had caused aggregate demand for affected goods to decline as consumers moved to cheaper products.

"The VAT was being reintroduced. It had been waived when we moved to the multi-currency regime. Generally such a policy causes a decline on the quantum on the purchase of those certain products as consumers move to other substitutes," he said.

Economist and former Economic Planning minister Tapiwa Mashakada said reliance on VAT ahead of company tax was a clear indication of the dire state of industry in the country.

"If you look at the structure of our tax heads, corporate tax contributes the least to the fiscus. VAT, Payee and customs duty are the highest contributors of tax revenues. The overdependence on VAT instead of company tax confirms the moribund state of industry," he said.

"That is why government had now adopted such desperate measures like taxing meat, which is a major source of protein for most people. This government has got a knack for anti-people policies."

Mashakada said the introduction of the tax hit the poor hard and was therefore ill-advised while showing that the government is insensitive to the plight of the poor.

He said by introducing more taxes the government was milking the poor.

Social commentator Blessing Vava said the policy was not well thought out.

"It is typical with our leaders, they have run out of ideas and now they are desperate, therefore they will look at every opportunity to tax Zimbabweans as a means of financing the broke government and ailing economy," Vava said.

"I also think they saw the huge outcry from citizens in that the move had a potential of triggering more protests against government."

The reversal of SI20 came as Consumer Council of Zimbabwe executive director Rosemary Siyachitema said her organisation was lobbying government to scrap the tax which had already begun affecting the depleted pockets of consumers.

"We will lobby and put forward to the powers that be for them to consider that it (VAT) is going to affect consumers' pockets going forward. We have already done it through our parent ministry," she said.

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