The World Bank has proposed a broad set of policy reforms to arrest the country’s growing informalisation.
The growing informalisation, which authorities had mistakenly referred to as the new economy and the real deal after the death of the old economy, is threatening formal businesses and in the process disrupting revenue inflow to Treasury coffers through taxes.
This comes as the government appears to have no solution in sight to encourage the informal sector to pay taxes.
The government has directed all businesses to have point-of-sale machines and that licences must only be issued to businesses that are registered for tax purposes.
According to the World Bank, there is a need to remove various macroeconomic obstacles — such as a high parallel market exchange rate premium combined with punitive exchange rate controls — as well as the administrative obstacles that manifest in cumbersome tax compliance for small and medium enterprises.
These bottlenecks, the Bretton Woods institution said, contributed to informalisation.
It called for reform on the controversial Intermediated Money Transfer Tax (IMTT). Taxing formal transactions incentivises the use of the informal, cash-based system. Instead, IMTT should be made tax deductible for companies (thereby incentivising formalisation),” it said.
IMTT has found no takers since its introduction in 2018.
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There have been concerns that the high informalisation in the economy meant that the tax punishes those that are already tax-compliant.
What the tax has done in the economy is that it has triggered cash transactions as businesses and consumers evade the tax head. It is estimated that about US$2,5 billion in cash is circulating in the informal sector, away from the glare of the tax authorities.
A friendly tax regime would have encouraged the use of plastic money which would have increased financial inclusion and injected the money circulating outside the banking system into the formal channels.
The World Bank says the potential fiscal gains from macroeconomic stabilisation and reversing informalisation are substantial. It estimates the potential medium-term gains in increased tax revenue collection at 3,4% of GDP.
The Bretton Wood institution's call to reform IMTT is not the first since the introduction of the controversial tax as part of government’s move to raise revenue to meet growing its obligations.
Business member organisations (BMOs) such as the Confederation of Zimbabwe Industries and the Zimbabwe National Chamber of Commerce (ZNCC) have made submissions to Treasury on IMTT review.
In its submissions for the 2024 national budget, ZNCC asked Treasury to differentiate IMTT applications between businesses and consumers.
“The burden of the IMTT tax is huge on business and, therefore, the chamber proposes that the Finance, Economic Development and Investment Promotion ministry should allow IMTT to be tax deductible and it should be removed when remitting tax to Zimra,” ZNCC said.
The proposal fell on deaf ears.
Now that the World Bank has made recommendations, Treasury officials will stampede to make the necessary corrections. Do we need the World Bank to tell us that IMTT has been an additional cost on business when BMOs have said so? It's high time the government listened to BMOs.
