2016 ATRN ANNUAL CONGRESSTHE EFFECTIVENESS OF ZIMBABWE’S PRESUMPTIVE TAX

REGIME ON INFORMAL AND SMALL BUSINESSESKamutanho Shingirirai

(Zimbabwe)

skamutanho@zimra.co.zw ; kamutanhos@gmail.com

1 September 16KAMUTANHO S ZIMRA

The paper seeks to evaluate the effectiveness and provide insights andrecommendations on Zimbabwe’s use of presumptive taxation on informal andsmall businesses post 2008 era in which Zimbabwe used a stable US dollars .

It involved an extensive review of literature, others’ experiences and an examinationZim’s own presumptive tax regime by analyzing data gathered through interviewsand questionnaires administered to tax officers and practitioners, consultants,informal/small scale business operators and SMEs ministry staff; and finally profferingrecommendations based on the findings.

Amid burgeoning informal enterprise and SMEs at the turn of the 2nd millennium,Zimbabwe re-engineered its means and ways of revenue collection by introducingpresumptive taxes on selected informal businesses.

The presumptive taxes are levied in the informal transport sector, informal tradersand cottage industries and paid quarterly though rates vary across categories. (ITASec 36c arw 26th Sch.)

This brought with it challenges relating to compliance and effectiveness, putting inplace the correct mechanisms to collect, “somewhat disputable” presumptive taxrates and the general effectiveness of the whole presumptive tax regime.

INTRODUCTION

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• In this subject most sources consulted gravitate towards the findings and writings ofVictor Thuronyi and Yitzhaki.

• Informal or Small businesses are difficult to define given the difference in sizes ofeconomies of various countries.

• Generally, informality refers to all unobserved economic and productive activities thatare driven by tax and social security evasion and/or by attempts to avoid compliancewith legal standards and administrative procedures.

• In Zim

• SMEs ministry defines SMEs based on employees , total assets and the legalstructure.

• Small & Medium-sized Association of Zimbabwe –SMALL turnover of less thanUS$240,000.00 per annum whilst medium sized enterprises have turnover betweenUS$240,000.00 and US$1million.

• It is evident that informal businesses are relatively small and perhaps unincorporated,owner or family managed and operated with few, if any employees and their activitiesare often labour intensive meaning fewer interactions with the market traders oftangible goods that may be in the tax net.

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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THE GLOBAL VIEW Data deficiencies on informal and small business operations across country borders and

render comparisons meaningless.

The International Labour Organisation (ILO) Report (2002a) states that the informalsector in Sub Saharan Africa represent approx. 75% of non-agricultural employment. In2002 ILO report 2002c the sector accounted for 72% of employment in Sub SaharanAfrica excluding 78% in South Africa is excluded.

Chen (2001): 93% of new jobs created in Africa in the 1990s were in the informal sector.

This confirmed the changes caused by the dynamics of globalisation, economic reformsand competitive pressures on the labour market of late.

Further research points to stagnation of employment growth in the formal sector, whilethe informal sector of the continent has burgeoned in production & employment as well(Xaba et al, 2002).

In Zimbabwe for example, employment in the informal and or small business sectoraccommodates about 88% employable population [Zimstats, 2012].

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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CONCEPTUAL FRAMEWORK of informal enterprise The dualists: informal economy is separate marginal economy largely divorced

from the formal economy and provide an income or safety net for the poor (ILO,1972).

The Structuralists: informal economy as subordinated to the formal economy andemployed to reduce costs by privileged capitalists who seek to subordinate pettyproducers and traders (Castells and Portes 1989).

The legalists somehow concur with the dualists and believe that informal workarrangements are rational response by micro-entrepreneurs to over regulation bygovernment bureaucracies (De Soto, 1989).

NB: Evidently Informality matters to policy makers (and fiscal authorities).

If no proper intervention takes place civic virtues & tax morale are depleted-samewith loyalty towards public institutions.

This is in the case of Zimbabwe epitomised by operators in most cottage-likeindustrial parks like Siyaso in Mbare (Harare) and Green Market (timber and metalfabrication) in Mutare remain largely untaxed.

WHAT LITERATURE

OTHERS

SAY (Contd.)

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WHY TAX OF INFORMAL BUSINESSES/SMEs? Revenue enhancement from booming informal sector

Taxpayer neutrality across businesses

Not taxing small businesses disincentives business growth.

Fair and effective taxation of SMEs enhances society’s perception of the fairness of thesystem. Terkper (2003) states that ignoring informal sector activities dampenscompliance morale and increase the risk of non-compliance.

In order to regain legitimacy, governments should look for ways to “baptize” informalactivities into the formal system. Broadening the tax base and developing a culture ofcompliance can achieve more than simply increasing revenues; it can be a way of re-engaging citizens with the state without legitimising the breaking of other regulations.

Tax Accountability Link-Governments that dependent upon earned revenues such astaxes (as opposed to unearned revenues, for example, mineral wealth and aid) are morelikely are to be responsive to citizens for various reasons. Widening the tax net will sparkoff a virtuous cycle of taxation accountability that is at the heart of consolidatingdemocracies (Joshi and Ayee, 2006).

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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A HARD-TO-TAX SECTOR• From a tax administration perspective the informal entity though known to be

existent, official government documentation of business activities is lacking andas such assessing them for tax a mere impossibility.

• The above ground informal (contrast with below ground) sectors often containsevere compliance capacity limitations ranging from;

• lack of general skills-innumeracy and illiteracy or financial illiteracy common inZim

• lack of mere specific tax compliance skills such as ability to issue invoices

• maintain transaction records and accounts or;

• the ability to comply with rather complex tax laws and procedures.

• The compliance game is more than simply administrative enforcement of taxesimposed on the unwilling interactions between taxpayers and the state representan important facet of the evolving and arguably endogenous social contract indeveloping countries and this is not easily accommodated by classical models ofunderreporting and compliance (Murray and Fox, 2013).

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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DEFINITION OF PRESUMPTIVE TAX Yitzhaki (2006)-presumptive taxation exists where the legislator is using one tax

base in order to approximate another. This occurs where there is a gap betweenthe tax base as stated in the law and the base used in the implementation of thelaw. In practice, the ideal base could be hard to measure or verify or costly toidentify and a proxy that is easier to identify and verify may be used.

It is a legal presumption that the taxpayer’s actual income is no less than theamount resulting from the application of indirect methods. The concept covers awide variety of alternative indicators of determining the tax base e.g., region,industry, gross turnover, number of employers, size of the firm, assets of thetaxpayer as applied in different countries.

LEGAL CHARACTERISTICS OF PRESUMPTIVE TAXa) Rebuttable versus irrebuttable taxation

Rebuttable taxation; can be appealed by the taxpayer through proving that his actualincome is less than that which has been assessed under presumption-applicable towealth persons whereas irrebuttable taxation cannot be appealed.

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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Mechanical (exclusive) versus minimum taxation

Variations of irrebuttable taxation. Under exclusive taxation the tax liability isdetermined under presumption alone whereas under minimum taxation the tax liabilityis no less than that which is determined under the presumptive rules.

b) Formal versus discretionary taxation

Formal taxation entails determination of tax according to established rules whilstdiscretionary taxation assumes a high degree of tax authorities’ discretion whendetermining tax liability. The former is administratively simpler and less susceptible tocorruption; but it is less equitable and insensitive to the taxpayers’ particularities.

PARTICULAR METHODS OF PRESUMPTIVE INCOME TAXATION Industry Specific Methods-These are minimum taxes based on turnover or assets that

can be applied to all taxpayers including large companies within a particular industry.Specific methods are Israel tachshiv-a standard assessment method-and French forfait-an estimated assessment method based on advance agreement between the taxpayerand the tax authorities.

Percentage of Assets, Percentage of Gross receipts & Reconstruction of income-Variations of this which are net worth, or bank deposits, or expenditure methods.

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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ZIMBABWE PRESUMPTIVE TAX LEGISLATION Income Tax Act of Zimbabwe (23:06) s. 36C arw 26th Sch. “there is charged, levied

and collected throughout Zimbabwe at the rate from time to time in the charging Act,a tax on the basis of the presumed income (commonly known as a “presumptivetax”) of those persons engaging in any of the trades, occupations or undertakings.”

A tax-compliant local authorities can be invited to enter into an arrangement withZIMRA authorizing it to collect, in return for the retention of not more than 10%presumptive taxes collected by the latter, from persons liable to pay presumptivetax within the area of jurisdiction of the local authority.

The return for ptax is due on the 10th of the month following the end of the quarterin question.

The performance of ptax hasn’t been congruent with the size of targeted informalsector growth.

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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Advantages Simplifies tax administration taxes & improves compliance by small taxpayers.

Consistent of government revenue flows.

Makes planning easy and are useful for those starting businesses.

Combats aversion since the tax base is pre-determined.

The tax assessment, methods may lead to more equitable distribution of the taxburden, when normal accounts based are unreliable due to taxpayer compliance oradministrative corruption.

Rebuttable presumptions encourage the taxpayer to keep proper accounts.

Exclusive ptaxes incentivizes earning more.

It minimises the adverse effects of progressive taxation.

Provides a source of costless information for the government.

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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Practical ChallengesThe Zimbabwean presumptive tax system is very similar to the Israel tachshivwhere the rates are pre-determined and fixed. It suffers;

violation of progressivity nature of tax and arbitrary of rates given theheterogeneity of informal businesses

parameter updates bias and the economic and spatial distances within whichthey operate

information inadequacies lead to crude application the tax regime where sometaxpayers being taxed unfairly and inefficiently.

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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FOSTERING COMPLIANCE AND MEASURING THE EFFECTIVENESS OF PRESUMPTIVE TAXES

Implementation and evaluation of presumptions need to juggle various yet conflictinggoals, e.g., reduction in compliance costs, provision of incentives to operate the formaleconomy, reduction in tax evasion, and growth in tax in revenue.

Evaluation of effectiveness should look beyond mere revenue generation abilities butconsider;

the ability to graduate small firms into the mainstream business and tax system;

marginal collection and administrative costs;

ability to curb corruption and graft in the imposition of taxes on small businesses and;

proper balance and checks should be put in place where revenue collection isdelegated remembering that failure broaden the tax base can translate into a highereffective tax rate on formal business which in turn disincentives formalisation.(Thuronyi (2004);Fox and Murray (2013); Palmade (2005).

The correct mix of sticks and carrots is requisite and so is strong enforcement across awide array of taxpayers and procedures that enhance voluntary and non-confrontationalwillingness to pay.

WHAT LITERATURE

& OTHERS

SAY OR DO (Contd.)

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Responds gathered indicated the following: The non-involvement of relevant stakeholders in setting tax rates.

Tax rates are too high and the not tailored for different localities-urban, peri-urban, ruraletc.-make them ridiculous in some instances, e.g. salons.

Informal businesses still employ accountants because the ptax system is notunderstood or fear the tax apparatus-education need.

No co-ordination between the revenue authority and other relevant stakeholders-localauthorities, licensing authorities, vehicle registry and toll gate operators.

No development linked specifically to presumptive taxes and informal businesses inlocalities is interpreted as ineffectiveness.

Gvt. hesitancy to enforce taxation of the informal traders/SMEs uniformly sometimespolitics overrides.

Collection of vehicular presumptive taxes by the vehicle licencing department is awelcome and positive development which enhances compliance and less prone tocorruption as there is use of ICTs but legislators should close the loophole opened byallowing transport operators (omnibuses & taxis etc.) to register for income tax.

Implementation of ptax need to be fine-tuned and more resourced within ZIMRA.

FINDINGS

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The research culminated into the following recommendations;

Presumptive tax rates should be reconsidered at least biennially in line withobtaining realistic economic conditions.

Involve affected ministries (SMEs-and bona fide representative organisations likeZNCC etc., Treasury-and ZIMRA, and local authorities) in determining ptax rates.

Consider differentiating tax rates according to locality such as rural, urban and soon and so forth.

Need to undertake an extensive education and public awareness campaign toensure that people understand the need to pay taxes and the operation ofpresumptions.

Need to introduce, through education ministries, tax education into Zimbabwe’seducation curriculum (elementary, primary level, secondary and tertiary levels).

A broadened and decentralized reward and appreciation system should be put inplace intra- and inter-regions to recognise and honour compliant small businessesand local authorities.

CONCLUSION &

RECOMMENDATIONS

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Embed presumptive taxes (as withholding taxes) in local levies as rural folksare semi-literate and too elderly esp. in remote areas-for example, grindingmill owners and tuck-shops in rural areas etc.-negative perception about theauthority as majoring on trivial operators whereas easy to apply measurescan be employed.

Government to set clear and evaluable developmental projects related toinformal business based on targeted collections nationally and withinlocalities.

A specialized section/taskforce should be set within ZIMRA to solely dealwith the restructured and re-engineered presumptive tax regime. Ifproperly re-engineered less manpower may be required than is the casenow.

Use of other collection points, e.g., co-ordination with gvt. licensing units,toll operators and local authorities with frequent banking andreconciliations to curb non-remittance of funds to the authority.

Consider adding miscellaneous categories to cover for the gaps created bythe current ptax classes, e.g. grocery/corner shops etc.

CONCLUSION &

RECOMMENDATIONS

(Contd.)

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THE END

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