Zimbabwe: High Tax Loss Risk As Economy Re-Dollarises

20 January 2023

With the Zimbabwean economy set to move towards full "re-dollarisation", economic analysts have warned of growing risk of serious potential tax loss coming along with the growing use of the US dollars.

The trends in the re-dollarisation have "deepened" with domestic sales in the U.S dollars now close to 80 percent, according to economics professor, Gift Mugano.

With the bulk of the transactions reportedly being in cash, they are seen as favouring tax evasion.

Last year, the Government enacted legislation to entrench the multi-currency system, which makes both the United States and Zimbabwe dollars legal tender for all local transactions for the duration of the National Development Strategy 1 (NDS1), the country's medium-term economic blueprint, which runs until 2025.

Before the enactment of the law, the Government had already legalised the use of foreign currency for local transactions in March 2020 at the height of Covid-19.

There was phenomenal growth in the use of US dollars including loans to corporates and individuals, payments of utility bills and local authorities, and salary payments.

The US dollar-based retail transactions also increased after the narrowing of the gap between black and official exchange rates since August last year when the Government put in place several measures to stabilise the local currency and tame inflation.

After significantly declining from 140 percent in May 2022 to between 5 percent and 15 percent in November, the foreign exchange premium rate is ,however, increasing in light of the rising exchange rate on the parallel market, now around $1 200 to US$1.

Prof Mugano said the re-dollarisation, compounded by the high informality of the economy would be "detrimental" to revenue collection efforts by the Government, the State-owned tax collecting agency since most transactions are cash-based.

"The risk comes with the potential loss of fiscal revenue on the backdrop of informalisation of the U.S. dollar sales," Prof Mugano told Business Weekly in an interview.

The 2 percent Intermediated Money Transfer Tax on domestic foreign currency transfers and 20 percent domestic export retention was discouraging businesses from "exclusively banking" all their U.S. dollar cash sales, Prof Mugano added.

"A snap survey I did shows that companies are facing exchange rate loss of 15 - 17 percent on the back of the 2 percent IMTT, bank charges and 20 percent export retention. The losses emanating from export retention, in particular, are arising from the existing disparities between the official exchange rate and black market rates.

"Based on this observation, the temptation is very high for businesses that collect cash not to deposit it in the banks thereby narrowing the tax base. This is why you hear about thousands of dollars being raided by robbers at business premises."

Prof Mugano said the policy matrix of the 2 percent IMTT and 20 percent domestic export retention was "doing more harm than good and must be scrapped.

"However, since the Government insists on these policy instruments, my submission is that technocrats at both the central bank and the Ministry of Finance and Economic Development should carry out an academic exercise on the pros and cons of the 20 percent export retention and the 2 percent IMTT," said Prof Mugano.

"They all have the numbers and thus are qualified to make an informed decision as to whether these current policy instruments are bringing more benefits than harm."

Carlos Tadya, a Harare-based economist added; "The business is already over-taxed" and the migration to re-dollarisation creates loopholes for avoiding paying tax.

"(The) under-ground cash activities and transactions are increasing and this will lead to a significant shrinkage of the tax base.

"Some businesses are offering customers discounts on conditions that they are not receipted to avoid using fiscal devices that record taxable sales transactions," he added.

Last year, Finance and Economic Development Minister Professor Mthuli Ncube, warned that re-dollarisation, coupled with high informality would shrink the taxable base, as most transactions were "going underground where most activities are cash-based."

He said Government would consolidate the stabilisation measures and strengthen tax collection efficiency through audits and other administrative measures.

Mthuli said the Government was modernising tax systems, broadening the tax bases as well as introducing more efficient ways of raising revenue from the informal sector.

Last week, the Zimbabwe Revenue Authority (ZIMRA) started implementing a Block Management System (BMS) that classifies all taxpayers into specific geographical locations or zones to improve tax collections. The BMS came into effect on January 1 this year, the State-owned tax collector said in a notice last week.

The system involves zoning of taxpayers by geographical location and assigning ZIMRA officials to manage all taxpayers within a given zone or block. It will include flea markets, farms, industrial areas as well as informal traders and rural business locations.

Under the BMS, ZIMRA officials will engage all taxpayers through door-to-door visits, checking on all tax compliance issues including daily sales schedules, registration for tax purposes, returns submission, payment of taxes and fiscalisation.

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