The Zimbabwe Revenue Authority (Zimra) is reviewing the tax system with a view to boost the country’s revenue base by accommodating small to medium enterprises (SME). This review may include the introduction of Turnover Tax if recent pronouncements by Zimra are anything to go by.
In a speech read on behalf of the Zimra Commissioner General by the Executive Officer for Corporate and International Affairs John Chakasikwa, Faith Mazani said,” Zimra understands the importance of SMEs and how they impact on the economy. We are in the process of reviewing our taxing systems to accommodate the SMEs so that they contribute meaningfully to the economy, but also with limited cost on their part. Our research is looking at the feasibility of introducing Turnover Tax, which will be a percentage on the income made by any person engaging in any kind of business.” Collection of taxes from SMEs has been riddled by many challenges for a while now.
Background and advantages
Currently, SMEs have several tax obligations which may include Presumptive Tax, Income Tax, Value Added Tax (VAT) and Pay As You Earn (PAYE) among others. However, due to the fact that SMEs are highly informalized, collections by Zimra have been difficult. In addition, the cost of compliance has always been higher than that of non-compliance because of rampant bribery of Zimra officials. On their part, Zimra has made efforts to improve compliance by relaxing certain penalties and offering some incentives. There is still room for improvement. It is against this backdrop that Turnover Tax is being mooted.
If implemented correctly, a turnover tax is meant to make things simpler for small companies thereby encouraging them to fulfill their tax obligations. Turnover tax is normally calculated against the turnover of a business as opposed to a percentage of profit. This reduces the administrative burden of SMEs as there is less need to keep detailed records of expenses. In South Africa where it is already being implemented, Turnover Tax replaces Income Tax, Vat and other taxes and only companies earning an annual turnover of R1 million and below qualify.
In 2018, Corporate Tax amounted to US$809.02 million, up from US$730.50 million recorded in 2017. Other taxes like PAYE and Vat also increased in 2018. It is this momentum that Zimra wants to build on. Estimates are that SMEs constitute about 70% of registered taxpayers contributing close to 20% to tax revenue. But, Zimra is owed more than $4 billion by tax defaulters and this is worrying and it calls for strategic intervention. In fact, many more SMEs are reluctant to register for tax due to its complicated nature and the fact that some want to keep their money to themselves.
Turnover tax does have its disadvantages though. Firstly, companies making small profits or losses will always be left worse off if they are made to pay turnover tax. This is because turnover tax tends to ignore expenses while focussing on gross income. Secondly, those companies that rely on selling high volumes while earning low margins may feel hard done by a turnover tax. Their gross revenues may result in them paying high taxes but if we take their expenses into consideration, the picture changes drastically. They are left with nothing. To counter this, Zimra may have to set different tax rates depending on the type of business and this may prove problematic.
Without giving a verdict, turnover tax is an area needing thorough research before implementation in Zimbabwe. Its ability to ramp up tax collection figures cannot be ignored, but some businesses may be left suffering if certain blind spots are not taken care of. Zimra should tread carefully here.