Zimbabwe’s tax revenues are rising, with the Zimbabwe Revenue Authority managing to collect US$773,7 million in the first three months of this year, significantly above its target which in turn was significantly higher than the revenue collected in the first quarter of last year. The most positive element of this rapid rise in revenue is that it is not coming from new or
higher taxes; in fact in almost all the few cases where tax rates have been changed they have come down. The rapid rise in tax revenue mainly comes from the State taking the same percentage of a much larger economy.
It also seems that Zimra has been hunting down those who were underpaying or not paying, although this becomes ever harder as the authority moves against the smaller businesses and the one-man shows, having already forced compliance on the major tax-payers and most of the middle ones.
There are several positive aspects to the Zimbabwean tax regime that make tax collection easier and which raise the money the Government just has to have without damaging the economy.
Most economists recommend that tax regimes should be simple, have fairly low rates but without any exceptions, and be more inclined to tax consumption rather than production, especially in a country like Zimbabwe where capital for investment is so scarce.
Zimbabwe seems to qualify as an almost model example.
VAT, a pure consumption tax, brings in the largest slice of tax revenue. A few basic food items are left off the list, but basically anyone buying anything pays an extra 15 percent to Zimra.
Sellers collect the tax, and Zimra puts in effort to ensure that the tax is both collected and accounted for.
Cheating for quite modest traders and suppliers is now almost impossible and while vendors, for example, might escape the fact that they have paid VAT when they bought their stock means that around 90 percent of the VAT has already been handed over.
Zimra’s statistics on VAT collections show another very welcome trend. More than half of all VAT is now charged on Zimbabwean made goods rather than imports, a most welcome change from what we saw when we switched currencies and started growing the economy again, when it seemed as though imports were king.
The same growth in the local economy was seen in the growth of corporate taxes; based on expected growth from last year Zimra hoped to collect US$69,3 million. But the growth was even faster and more than US$75 million was collected.
Again a modest rate with few exceptions means compliance is cheaper than cheating.
Individuals paid more though, US$145,5 million, which was a little less than expected, thanks to the Government raising the tax threshold and widening tax bands.
Both were necessary and while VAT and most other taxes have acceptable rates, Zimbabweans still pay quite high income tax rates on lowish incomes.
The maximum rate is fine; it just happens that people who do not earn that much hit that rate for some of their income. But the lowish rates mean that pay increases do matter and do benefit earners.
Zimra keeps its collection costs low, largely by making other people do most of the collecting of the small sums, like VAT on every purchase and PAYE on most income earners.
It is cheap, for every dollar collected, to make thorough inspections of the accounts of even a middle-sized firm.
The one area where tax collection is difficult is in the small-scale sector. The presumptive taxes have helped, and the switch from sales tax, collected only at point of final sale, to VAT, collected at each stage along the way, means that the bulk of this consumption tax is paid even if tuck-shops cheat.
Even farm produce is now being partially taxed, with the tobacco levy growing in importance as that crop expands its harvests.
But the only real way to tax most farmers is to tax them when they spend their profits, and that the VAT system does remarkably effectively. For many farmers it is the only tax they actually pay and so effective collection has to remain a priority with Zimra.
The Zimra interim report is a hopeful sign that the economic policies being pursued are the right one.
The largest source of tax, VAT, is paid by everyone with any disposable income at all. Production taxe rates are fairly low but produce good money without damaging the ability of producers to produce and earners to earn.
Since at worst they lose just over a third of profits or extra income they still have an excellent incentive to maximise earnings. And equally importantly Zimra seems to be ensuring high compliance. If all taxpayers know that everyone liable is paying, then they pay with fewer objections. People dislike taxes but hate cheats a lot more, so Zimra need to keep the pressure on.