This is the first in a series of guest articles authored by Archbold Musamadya
This article is specifically directed to small business operators (SBOs). I personally noted that this category of business operators normally face challenges in appreciating business related law or, said otherwise, they take longer than usual to appreciate. This has seen many Zimbabwean small businesses remaining small for decades or may actually fail in their early days of launch. Unfortunately the Zimbabwean laws relating to businesses do not exempt SBOs from complying with them and in case of non compliance; the businesses will definitely face the full wrath of the law. In this writing I will explain the reasons and the need, as to why should businesses strive to comply with laws and regulations. I will also give examples of a few laws which directly affect businesses and with which the responsible authorities are really after the offenders of such laws and regulations. In my few examples I am not going to explain industry specific laws which apply to specific industries but I will only deal with laws that affect all businesses disregarding their industry. Industry specific laws include laws governing mining operations, food processors, transport industry, commercial/banking industry, tourism and hospitality, Telecommunications industry (Regulated by POTRAZ) etc. There are specific Acts of parliament that govern each specific industry operations. I encourage readers who are business operators to research on specific laws that affect their specific industries and try to comply with them.
Why the need to comply with Laws?
Compliance with the law is not only the right thing to do but it is also the most responsible thing a business operator can do. It is a sign of good corporate citizenship which is based on an ethical foundation. On the bad side of it, failure to comply with the law may result in a legal action against the business operator and, in most cases, when the law fights back, the offender is normally the loser. It must be noted that a law must be honoured and respected; it is different from a rule or a code. A law is not on a “comply or explain” basis but it is actually “comply or else” in nature. Many operators have proven to be reluctant to research and comply with laws applicable to them in a notion that if authorities catch up on them they can simply hide behind claiming ignorance of the law in question and they faithfully believe they can get away with that. Unfortunately at law, ignorantia juris non excusat (Latin phrase translated, Ignorance of law is not an excuse.) For interest sake, I am into business and management consultancy and we always perform compliance audits to determine if our clients are complying with relevant laws and regulations and this is the topic many of them do not wish to hear of. They always believe that the cost of trying to achieve compliance is higher than the benefit. Unfortunately having such a belief is a grave error and we normally rearrange such words to say “the cost of non compliance is higher than the cost to comply”.
When we advise our clients, say to remit their taxes to ZIMRA on time or engage ZIMRA for a payment plan, they are always reluctant. At times we even offer to engage ZIMRA on their behalf but they just feel we could be kicking a sleeping hungry lion. It is however worth it because when ZIMRA comes on its own accord there will be gnashing of teeth. From experience, I have dealt with such clients who religiously ignore our recommendations of advising them to comply with certain laws when we detect non-compliance but they are quick to adopt recommendations which improve their revenues and other operating efficiencies not knowing that one day the whole business might be compulsorily closed down due to non compliance with laws and regulations. Interestingly, at many instances a few months or years later, when responsible authorities have knocked on their doors and have caused the whole place to be hot to stay, we are the first people they call, “guys ZIMRA was here, the issue you once advised us on has broken loose and the situation is bad, please come help us negotiate with them.” Oh yes, this happens in practice.
At the church l go to I am an Usher and we always advise mothers to take care of their kids especially when we have identified that the child is likely to fall into trouble. At one time a certain mother looked at me in a tone which in substance said “Stop disturbing me I want to pray and you think my child is dumb to get lost or get injured?” Unfortunately one of the days the mother came asking me to help her search for her child and make an announcement in church for the boy had gone missing for hours now. I instantly identified her and quickly reminded her that I was the one who once told her a few weeks ago to always mind her boy for we always saw him in wrong places. She responded that she never thought that could happen to her son and she always thought Ushers are only there to disturb and seek unnecessary relevance (The rest is history but we thank God we later found the boy safe). This is the same in compliance with laws. Like that mother at church, a reader who is a business operator is actually thinking this issue of compliance is applicable to other businesses and in their case they are safe for they have been operating for years now without any drop of compliance. It is sad to mention that the next day the compliance issue catches up on them they will regret the day they ignored this article or any other advice on compliance with laws. Unlike that mother’s child, we may not be able to rescue the business from the jaws of the law since some laws are very aggressive and gruesome in nature.
Which Laws generally apply to all businesses and are more fatal in case of no-compliance?
I do not mean to say that there are some laws which we can just sweep under the carpet and deliberately adopt non-compliance. I however mean that there are some laws which will attract more attention if not complied with than others. For instance, it is an offense to drive without a driver’s licence and it is also an offence to drive a car with a number plate obscured, in the latter the police officers may stop you and advise you to go fix the plates but in the former they are less likely to only advise you to go and get a driver’s license, what they will do with you is common knowledge. The same applies to the laws I am referring to above.
Examples of specific Laws affecting businesses with which non-compliance may be detrimental.
In this section I will discuss The VAT Act 23:12, Income Tax Act 23:06 and the Labour Act 28:01. These laws directly affect all businesses and non compliance with them has a record of fatally bad consequences. Below is a list of definition of terms I shall use in my elaboration. I encourage readers to remain patient and read through attentively for I understand this may really be tiresome or “boring” but take it from me; this knowledge is worth a million dollars if one is a business operator or an aspiring business person who has been ignoring the legal side of businesses.
Definition of terms and acronyms
- SBO-Small business operator
- ZIMRA– Zimbabwe Revenue Authority. A government body responsible for the administration and collection of Taxes and Duties.
- Commissioner General (Commissioner) – This is the head of ZIMRA (Currently Mr Geshem T. Pasi). When one mentions the word Commissioner they will be in substance referring to ZIMRA but the tax language generally refers to the Commissioner as he is responsible for all tax administration issues.
- Registered operator– This is a business operator registered for VAT in terms of the VAT Act ( to be explained)
- Business operator (Operator)/Trader– Any person carrying on any business and not necessarily companies only, because not all businesses are companies but all companies are businesses.
- VAT Act 23:12
To many SBOs, or even consumers, this is not a new term to come by. We always read or see the term on many invoices or receipts, even on supermarket receipts. It’s however sad that we ignore it and just think it’s another form of trying to inflate prices by traders. VAT stands for Value Added Tax. This is tax levied on the supply of goods and services. Simplified, if the reader once saw a receipt where VAT was charged, normally at the bottom where the total is then shown, that amount was remitted to ZIMRA by the issuer of that receipt. It is not the seller’s money. The VAT issue is dealt with in the VAT Act and is administered by the Commissioner.
As a requirement by the Act, all traders who earn an excess of $5,000 per month in terms of revenue (sales not profit) are required to register for VAT with ZIMRA so that they become a Registered Operator. VAT registration will imply that the operator will charge VAT to customers and remit it to ZIMRA within stipulated time (failure to do becomes non-compliance). They will also claim some VAT input from ZIMRA. The last two sentences calls for a technical explanation which I do not want to get into in this article as it is only meant to inform SBOs of available laws. I will deal with issue to do with percentages and how the VAT is calculated (Referred to as the mechanics of VAT) in a future article.
What is key at this point is to inform SBOs that the Act requires the operator to register for VAT in the month they reach the $5,000 peg. Registration is not to be reminded to any person but the operator should handover themselves to the commissioner for registration and failure to do so is a breach of the Act. However, if the operator can prove to the commissioner that the $5,000 was reached by chance and is less likely to be reached in future, the commissioner may pardon the operator. So let me say that if an operator is trading and is earning at least $5,000 per month and they are not registered for VAT, such an operator has broken the law and can be charged. To be charged, the operator should be dealing with taxable supplies and generally 98% of businesses generally deal with taxable supplies, this again is the mechanics of VAT and I will not get dip into it.
When exactly will I be deemed to have breached the VAT Act?
As elaborated in the above paragraph, when an operator has failed to register for VAT when their sales have reached the prescribed minimum of $5,000 in any month, the operator is has in fact breached the provisions of the Act. At this point this is called compulsory registration, (Any operator may choose to register for VAT even when their sales are below $5,000 and this is called voluntary registration and it is done in order to give traders an advantage in trading in some instances, I will explain this further in my article about the mechanics of VAT in the near future).
Secondly, after being registered, operators may breach the provisions of the Act by failing to strictly follow the Act. For example, failing to remit VAT within stipulated dates, fraudulently remitting incomplete VAT collected, fraudulently claiming excess VAT input from ZIMRA (To explain VAT input in the Mechanics of VAT article), charging VAT to customers when in fact the operator is not VAT registered and of cause the VAT will not be remitted to ZIMRA, etc. The list of instances where non-compliance may happen is endless.
So what will happen if I do not comply with the VAT Act?
Non compliance calls for various actions against the operator by ZIMRA. The level of action depends on the provisions not complied with. However, actions range from 100% penalty of VAT amounts fraudulently prejudiced ZIMRA, interest on outstanding balances and imprisonment in some instances. These charges are very painful to operators especially given the period we are in where there is a fierce liquidity crunch and one is charged a penalty of 100%. When one fails to register for VAT when they have qualified for a compulsory registration, the commissioner may charge 15 percent on all the sales made by the operator since the day they reached the $5,000 peg and orders the operator to pay that amount. So may the reader calculate how much an operator may pay if they were supposed to register for VAT two years ago and assuming they were making exactly $5,000 each month. (A test to see if the reader is really following and a correct calculation should give $18,000)
How will ZIMRA know how much I am making and even all the other information for them to charge me?
The VAT Act empowers the Commissioner to the extent that at times I personally feel that the powers are at a premium. According to Section 44, subsection 7 and 8 of the VAT Act, the following may be done by the commissioner at any time he feels;
- If the commissioner feels that, or is caused to feel or believe that an offence has been committed by any operator, he may, through a magistrate;
- Search the premises of the taxpayer
- Open and remove or cause to be removed any items to help his case
- Seize documents
- Retain documents or articles removed for a reasonable period for investigation and criminal or other procedures.
For the purposes of carrying out provisions of this act AND if he has reasonable grounds that this is necessary the commissioner may;
- At any reasonable time during the day enter ANY business premises.
- Require any person to produce for inspection any document or computation
- Require any person to prepare or produce any printout or reproduction of computer records
- Take possession of items mentioned above
- Require any suspect to give their name and address
I will not further explain the above and I believe that the reader will see the gravity of the powers and how anything can happen to operators. If it hasn’t happened to you never think it is not happening.
- The commissioner also has the power to place a garnishee order with the operator’s bankers in order to garnish amounts from that account to allow him to recover any tax payable. For instance, if an operator is troublesome in paying a certain amount of tax, the commissioner can simply order the bankers of the operator to transfer a certain amount into ZIMRA’s account. This order does not call for any authorisation by the operator but they will only be informed that a certain amount has been transferred to ZIMRA by an order of the commissioner. Very interesting I guess.
- The commissioner may apply to the Master of the High Court requesting him to consider ordering the operator to cease trading on the basis of reckless trading with an intention of defrauding creditors and prejudicing the state of funds by the operator. This provision is in terms of the Companies Act 24:03. If the master feels that the operator is surely trading recklessly and with the intention of defrauding creditors he may order the operator to cease trading. Please note that any person can utilise this provision in the Companies Act should they feel a certain company is conducting business recklessly. I am not going to explain the Companies Act but it is however another Act very critical to business operators registered as Limited companies either private limited or public limited. I encourage readers who have the said registered companies to research on the provisions of this Act. So this clearly implies that should the commissioner be frustrated by an operator’s behaviour towards tax payments, he may handover the operator to the master of the high court to specifically allow him to consider cancelling the operator’s trading licence.
These are some of the powers vested upon the commissioner to help him uncover unscrupulous business operators.
Part 2 is coming soon; I will be explaining the Income Tax Act and the Labour Act. I will then finally explain the steps and sources of assistance an operator should take when they wish to begin observing laws and regulations. Please keep checking on this site for the article.
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About the Author
Archbold Musamadya is a Trainee Chartered Accountant and he is currently serving Articles with a firm of Chartered Accountants in Zimbabwe. He holds a B. Comm Accounting Honours degree with NUST (2013). He also holds a Post Graduate Diploma in Advanced accounting with UNISA (2014). He is currently studying for a Post Graduate Diploma in Applied Accounting with UNISA and also a ZCTA accreditation with the Institute of Chartered Accountants in Zimbabwe (ICAZ).
The information in this article is provided for general guidance only and on the understanding that it does not represent, and is not intended to be, advice. Any views or opinions presented in this article are solely my own and do not necessarily represent those of my employer, ZIMRA, StartupBiz Zimbabwe or any other person or organisation. Whilst care has been taken in its preparation, it should not be used as a substitute for consultation with professional accounting, tax, legal or other advisors. Before making any decision or taking any action, you should consult with an appropriate specialist or professional. No warranty is given to the correctness of the information contained in this article, or its suitability for use by you. To the fullest extent permitted by law, no liability is accepted by Archbold Musamadya for any statement or opinion, or for an error or omission or for any loss or damage suffered as a result of reliance on or use by any person of any material in the article.