At the beginning of 2019 the government extended the VAT on imported services burden to persons who are registered operators to the extent such persons use the imported services to produce taxable supplies. Prior to 2019, only persons who were not VAT registered and those consuming or utilising imported services to produce exemption exempt would bear the VAT on imported services. Barely 12 months later the Minister of Finance Honourable Professor Mthuli Ncube seeks to repeal the same law. As he seeks to return to the law as held prior 1 January 2019 through the back door. The law proposing this amendment is contained in the Finance Bill no 3 of 2019 which passed its second reading on the 17th of December 2019 and now being moved to the third reading. This change is the main focus of this article, as fully explained in detail below.

As alluded to above, the laws on imported services as they applied prior to 1 January 2019 affected only persons who utilised, consumed or used imported services in the production of non-taxable supplies. Non-taxable supplies refers to supplies which are VAT exempt or which are outside the VAT scope. Essentially organisations such as banks, insurance companies, pension funds, educational institutions, medical aid societies, registered operators to the extent they produced exemption supplies, individuals importing services for personal consumption etc were the bearer of the VAT on imported services. The playing field shifted on 1 January 2019 to include services imported by registered operators were such services are also used to produce taxable supplies. This is because the definition of imported services was changed to refer to “supply of services that is made by a supplier who is not resident in Zimbabwe or carries on business outside Zimbabwe to a recipient who is a resident of Zimbabwe to the extent that such services are utilised or consumed in Zimbabwe.” This new definition entails that the recipient of the services must be a resident of Zimbabwe who acquires services from a non-Zimbabwean resident or from a Zimbabwean supplier who carries on business outside Zimbabwe and such services are utilized or consumed in Zimbabwe. Therefore any person who imports services as defined, is required to account for VAT on imported services. The Finance Bill no 3 of 2019 is not proposing any change to repeal this position. Everybody who imports services, unless such services are the type which would be zero rated or exempted if the supplier had been a resident of Zimbabwe, should self-assess and pay VAT on the imported services to the ZIMRA within 30 days of time of supply of the imported services. Time of supply is defined by the date of the invoice or the date the supplier of the services is paid, whichever comes first.

So what has changed? The Finance Bill no 3 of 2019 which will become law once gazetted, possibly to commence on 1 January 2020 is proposing an input tax claim for registered operators to the extent they have utilised, consumed or used the imported services in the production of taxable. It seeks to achieve this by proposing an amendment to the definition of input tax to include imported services. Secondly, by amending section 15 (2) of the VAT Act to allow claiming of VAT incurred on imported services. The services concerned should have been acquired by a registered operator wholly for the purpose of consumption, use or supply in the course of making taxable supplies. To the extent the services are acquired by the registered operator partly in production of taxable supplies and some other purpose the only part of VAT on imported services to be claimed is that which relates to production of taxable supplies. A registered operator needs to be in possession of an invoice and should have paid the tax to the ZIMRA to qualify for the input tax claim. The invoice is not in the strict sense a tax invoice. In essence registered operators will be allowed to recover VAT on imported services with effect from 1 January 2020 which they would have incurred and paid to the ZIMRA. The effect is that the impact of VAT on imported services payable by the registered operator will be reduced by the refund to the extent the imported services are utilised, used or consumed in the production of taxable supplies. This means that the Minister would have turned the full circle if the proposed change is signed into law. This was the law prior to 1 January 2019 with the only noticeable change being that a registered operator will first declare and pay VAT on imported services for him to be allowed to make the claim.  

Whilst the new law will provide relief to registered operators, a position which existed prior to 1 January 2019, albeit this is coming at an administrative cost compared to the previous law. Improving the regulatory environment and reducing cost of paying taxes are among the topical issues to facilitate the easy of doing business in Zimbabwe. It appears the manner in which the proposed change will be administered will add to cost of doing business for the registered  operators, let alone the cashflow implication compared to the position that existed prior 1 January 20219.  Companies need working capital to survive the current economic onslaught and the Minister should heed the call for a rescue package for job creation and survival of companies. Any leakages would worsen the situation for the already struggling companies. The proposed change also challenges the permanency of the government policies for planning and sustainability purposes. No matter a policy is for the benefit of the business community it should have a reasonable shelf life for it to bear fruits. In the first place policies should be well thought out before they are introduced.  

In conclusion, despite there being no relief in 2019 for registered operators supplying standard rated and zero-rated supplies, 2020 brings good news to this group of operators as they can now claim VAT they paid on importation of services. However this has not been conveniently drafted because the relief comes at a cost. The operator must pay the tax, complete and file returns and then claim the VAT back.