Tax benefits of formal businesses
Financial Gazette 21/11/2018
Marvellous Tapera
THERE is so much talk about Zimbabwe being a multi-billion dollar economy through its small to medium scale enterprises (SMEs). However, not much is being done to tap tax revenue from these enterprises, which are often viewed as informalised.
In a International Monetary Fund (IMF) working paper titled Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? prepared by Leandro Medina and Friedrich Schneider, it was reported that Zimbabwe is number two in the world in size of the informal economy after Bolivia. As result, big businesses have become overladen with taxes. It is opined that if the SMEs contributed their fair share of taxes a lot of revenue may well be collected for the benefit of the fiscus.
Fiscal exclusion has also been a factor influencing the lack of formalisation of the SMEs. There are tax obligations that must be fulfilled by every business that is registered for tax purposes and this includes SMEs, which may be greater or lesser depending on the structuring of the business.
Government attitude towards formalisation
There is evidence on the ground why SM Es should heed the call to register and save their businesses. First, flea markets have been eradicated as evidenced by the rigorous clean-up exercise to remove vendors and money changers, among many other informal traders. Recently, Statutory Instrument 246 of 2018 was published in the extraordinary gazette which criminalises the informal trading of foreign currency, a move targeted at eradicating informal trade in forex.
In addition to the foregoing, Finance; minister Mthuli Ncube, in delivering his monetary policy speech intimated that “… due to the increase in informalisation of the economy and huge increase in electronic and mobile phone-based financial transactions and RTGS transactions, there is need to expand the tax collection base and ensure that the tax collection points are aligned with electronic mobile payment transactions and RTGS system”.
This speech culminated in the revision of Intermediated Money Transfer Tax (1MTT) from 5 cents to 2 cents on the dollar value of transactions. The tax is a lesser burden for formally registered persons with forma books of accounts because certain transfer; of money such as for purposes of paying remuneration are exempt from the 2 percent IMTT. It may be difficult for an informal business without proper books of accounts to prove payment of remuneration.
The law and formalisation
The existing laws also favour formalised institutions. All businesses are required to withhold 10 percent on payments made to other businesses without tax clearance certificates. Additionally, there is 10 percent withholding tax on importation of goods in the absence of a tax clearance.
Further, duty rebate and suspension is linked to clean tax affairs which must supported by a valid tax clearance. A business that has not formalised loses out under such arrangements. Even banks favour dealing with formalised businesses. For bankable projects to be approved, these rely on proper books of accounts, cash flow projections and other formalities. The banks would need proper books of accounts to be kept and the business to be compliant with the tax laws if they are to approve loans.
Incentives such as assessed losses, capital allowances and tax holidays and rebates cannot be enjoyed by informal institutions because of the lack of relevant registrations.
Section 15(3) of the Income Tax Act (Chapter 23:06) permits assessed losses to be carried forward for six years, except for mining businesses which are entitled to be carried forward assessed losses indefinitely. Thus assessed losses reduce taxable income, until they are used up or expired. It is not possible to enjoy this advantage without being formally registered for taxes. Additionally, it is also difficult for unstructured businesses to be associated. To participate in lucrative government tenders and other big tenders, it is a pre-requisite to have a tax clearance. Furthermore, big businesses are reluctant to trade with unstructured businesses largely because of the keyman. The perception is that unstructured businesses lack continuity, therefore it may be difficult to establish long lasting business relationships with a business without a succession plan. If the owner dies, the business dies with the owner.
Why it may be difficult to remain informal
The die towards formalisation has been cast. The technology to enforce this process is already in place. Electronic transactions are now being closely monitored through the Financial Intelligence Unit created by an amendment to the Money Laundering and Proceeds of Crime Act.
Ecocash, Telecash, OneMoney and other mobile money transfer services can easily be traced as they leave a paper trail. Non-compliance can easily be detected through the mobile transfers and other payment platforms. When non-compliance has been detected, the ramifications are hard to swallow. The law provides for backdating of tax registration and payment of taxes from the day the person was supposed to be tax registered. This comes along with penalties and interest for late paid taxes and non-submission of returns.
Section 56 and 77 of the Income Tax Act provides for drastic measures of recovery of taxes. Section 56 provides for the personal liability of directors or owners for taxes after the non-compliance is discovered. Additionally, section 77 provides for legal action for the recovery of taxes, and also penalises a person who disposes property to avoid payment of tax. By implication, this entails that non-compliance will result in loss of property.
Informal institutions are encouraged to formalise in order to avoid the scourge of the law and may take advantage of the ongoing ZIMRA voluntary disclosure programme, which ends on December 31, 2018. It allows them to avert the inevitable day of reckoning when ZIMRA finds out the tax non-compliance issues and to benefit from the automatic waiver on penalties which effectively mitigates the tax liability.
Meanwhile, the government needs to come up with a simplified tax system for small businesses to incentivise tax compliance. The current system is only beneficial to the extent that if a small business has bought equipment, it is allowed to claim capital allowances over three years compared to four years for large businesses.
In conclusion, the world over no business has ever prospered through tax evasion. Eventually the day of reckon will arrive. It is therefore wise as a business owner or company executive to put your tax affairs in order to avoid the wrath of the law and gain from incentives and business opportunities that come with being tax registered.
Meanwhile, Matrix Tax School will be hosting its second edition of the Annual Tax Conference from May 22 to 25, 2019 in Victoria Falls.
• Tapera is the founder of Tax Matrix (Pvt) Ltd and CEO of Matrix Tax School (Pvt) Limited. He writes in his personal capacity.