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Tax authorities need to find ways to force payments back into channels that leave a paper trail

Edmund Kudzayi Political Mondays
THERE has been a significant increase in the number of luxury vehicles on our roads. Equally notable are the many mansions being built in affluent neighbourhoods across the capital. Although these observations are merely anecdotal, it does seem as though there is a class that is somehow doing very

well.

This is difficult to reconcile in an economy that suffered a decade of recession, the collapse of a currency and is not yet out of the woods. Where are people getting the money? More importantly, where are the accompanying taxes?

This peculiar situation seems to support claims by Government that the informal economy is in fact thriving and providing jobs to millions of people.

It is worthwhile noting that the UN’s International Labour Organisation puts our unemployment rate at 6 percent.

Government statisticians are surprisingly a bit more restrained, putting the figure at a modest 11 percent.

What is clear from these numbers is that most people are not simply sitting at home waiting for industries to reopen.

This radical shift in how our people are employed has rendered the current tax system inadequate; it was designed for and can only be effective in a formal economy.

Tax collectors typically rely on paper trails to nail tax evaders.

Unfortunately, this approach does not work in an environment where businessmen and informal traders deliberately avoid the banking system and make a point of not keeping any incriminating records.

An additional problem is that informal economies create so many obscure players as to make enforcement by inspection expensive and impractical.

The tax authorities need to find ways to force payments back into channels that leave a paper trail.

Brute force will not work, hopefully our black market days have taught us that hard lesson. The most effective policies are those that result in voluntary behavioural changes as opposed to those that employ an army of door to door inspectors.

Electronic payments

The only way the authorities can get their hands on money in the informal economy is by leveraging electronic payments such as mobile money and debit cards.

If the authorities put in place regulations that compel all traders and businessmen to have an electronic payment option for transactions over $10, that would be a game changer.

VAT currently stands at 15 percent. To incentivise consumers to use electronic payments instead of paper money, VAT could be levied at 12 percent for all electronic transactions.

This would have the immediate effect of turning every consumer into a zealous tax inspector.

If a meal in a restaurant costs $100 many customers would prefer to pay by card or mobile money if that meant saving a very significant $3.

If a business does not offer electronic payments as an alternative, then it would then be compelled to give the customer a punitive 7 percent discount but still be required to forward 15 percent to Zimra.

This would make non-compliance expensive and would not require menacing Zimra inspectors to visit every trader in the country; by demanding his rights, the consumer unwittingly becomes an enforcement agent.

This system would not work without reforming our financial services sector.

The extortionist charges currently levied by banks for using a debit card would certainly need to be revised.

The same is true of mobile money operators.

Banks would have no reason to oppose such reforms since they stand to benefit the most if money starts moving through formal channels.

The numbers I have suggested are entirely arbitrary but the mechanics of this system are pretty straightforward.

The discount must be sufficiently large as to motivate a change of behaviour in the consumer while at the same time being at a level such that the loss of revenue to Zimra is compensated for by the resultant increase in compliance.

Lifestyle audits

There have been reports in the Press warning that Government will soon launch lifestyle audits targeting errant bigwigs.

While I doubt this is a serious proposition, it is worthwhile noting that trying to implement such a policy retrospectively would probably be illegal.

In any case, lifestyle audits in a system that does not support individual tax reporting would not have any reference points.

Unless one is legally obliged to account for all the money that has come into their possession, they cannot be legally compelled to remember the source of everything they own.

Instead of placing the tax reporting burden solely on companies and employers, individuals earning above $5 000 per year (an arbitrary example) or owning assets worth more than $24 000 (also arbitrary) must be required to submit their own taxes and a declaration of assets owned.

If in two years we suddenly find that an individual’s assets have doubled, then there can be a basis for investigating tax evasion.

This system cannot work retrospectively. If the authorities are serious about introducing lifestyle audits, they need to accept that those who got away were lucky and simply focus on future infringements.

Money is changing hands and profits are being made but the authorities must realise that they simply don’t have the regulatory tools necessary to get their hands on it.

Ndatenda.