Background
With the shrinking economy, the big businesses have become overladen with taxes. It is opined that if the SMEs contributed their fair share of taxes there could be a lot of revenue that may well have been collected for the benefit of the fiscus and ultimately for the benefit of the country. Fiscal exclusion has also been a factor influencing the lack of formalization of the SMEs. Depending on the type of registration undertaken by SME’s there are tax obligations that must be fulfilled by every business that is registered for tax purposes and this includes the SMEs. These include income tax, withholding tax, PAYE, VAT and Presumptive tax. These obligations may be greater or lesser depending on the structuring of the business. This piece of writing aims to indicate the tax issues that may affect the SMEs.
The Tax Benefits
In Zimbabwe 10% withholding tax is deducted on local businesses to business sales (B2B) upon payment to a supplier without a valid tax clearance certificate. By virtue of formalising tax affairs, SMEs can enjoy exemption of the 10% withholding tax on contracts with other businesses. In addition, it is now a prerequisite for most business transactions. SMEs relationships with big businesses is unavoidable sometimes. A valid tax clearance is one of the documentation required in order to participate in most tenders, including government tenders. Therefore if you do not have a valid tax clearance you will not only suffer withholding tax on payments from customers but you could also lose business opportunities. Further qualification for duty rebates and other import incentives are also linked to possession of a valid tax clearance. By regularizing your tax affairs, you will be entitled to claim expenses that you incur in your business.
Special Initial Allowance
SMEs even have a better capital allowance regime compared to big companies which write off capital assets against their income to reduce tax payable over three years at 50% in the first year then 25% wear and tear in the second and third year compared to 4 years of 25% per annum. SMEs do not enjoy assessed losses which can be carried forward for six years. When making losses the law allows you to use such losses to reduce taxable income, until the losses are used up or expires the company will not pay taxes to the fiscus. The reporting of such losses can be only done by a person or company who is formally registered for taxes.
Monthly payment of provisional tax
The income Tax Act provides for payment of provisional income tax in advance on a quarterly basis. And the quarterly payments are done in instalments of 10%; 25% 30% and 35% of the provisional income tax for each of the quarters of the year. The Income Tax Act provides that the Commissioner-General may, “on application by a taxpayer who qualifies as a “small or medium enterprise”, permit such taxpayer to pay provisional income tax on a monthly basis, that is, one month at a time in advance.” This facility is quite favourable and can allow for working capital management flexibility on the part of SMEs given that for most of them, their business models are quite different from those of large enterprises.
Lower rate of mining royalties
The sale of specified minerals by miners to the buying agents attract a deduction of tax at rates that vary depending on the mineral being sold. Payments to small scale gold miners, popularly known as “gold panners” or “makorokoza” for gold deliveries are deducted mining royalties at a lower rate of 3% as compared to the general rate of 5% applicable to other enterprises. The small scale gold miner should be classifiable as a “micro-enterprise” in terms of the mining and quarrying sector of the economy per the SMEs Act.
Access to funding
For SMEs to enjoy funding and fiscal inclusion, they must formalise their businesses. Formalisation of the SMEs opens up the access to funding and the protection of the law. Banks and financial institutions are more likely to fund formal businesses as opposed to informal businesses. For this they would proper books of accounts to be kept and the business to be compliant with the tax laws. Therefore a formalized SME that shows good organisation and a good business track record is more likely to get the much needed funding to expand the business as opposed to an informal one. A brilliant business idea may fail to grow because of lack of funding. Formalisation can bridge this gap.
IMTT
The recent revision of Intermediated Money Transfer Tax (IMTT) from 5 cents to 2 cents on the dollar value of transactions soar and takes a big knock on persons. The tax is however less burden for formally registered persons with formal books of accounts since transactions such as transfer of money for purposes of paying remuneration are exempt from the 2% IMTT. This tax is broad based and unavoidable by informal business. The Minister of Finance in his preamble to the introduction of this tax he stressed the target for this tax was largely those trading in the informal.
Conclusion
Formal SME’s that keep proper books of accounts, furnish tax returns and pay taxes are not subject to presumptive tax subject to them being in possession of a valid tax clearance. Informal SME’s on the other hand are liable to pay presumptive tax. It is a misconception that to be registered for tax is expensive. The reverse is actually true. Withholding tax applies on turnover for lack of tax clearance, the business losses on tax opportunities such as claiming business losses when they occur and above all when the taxpayer is eventually caught the law provides for back dating of tax registration and payment of taxes from the date the person was supposed to be tax registered. This comes along with stiff penalties and interest on late paid taxes and returns. It is wise as a business owner or company executive to gain more understanding on how to go about being tax compliant to avoid missing out on business opportunities and being on the right position for growth.