Background
There is so much talk in both informal and formal forums of Zimbabwe being a multi- billion dollar economy through the small to medium enterprises. It is believed that not much has been done to formalise the informal sector to allow the collection of revenue from the SME’s, yet SMEs are strongly competing against the big companies for business. In the IMF working paper titled Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? prepared by Leandro Medina and Friedrich Schneiderit was reported that Zimbabwe is number two in the world in size of the informal economy after Bolivia. 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 our country. Fiscal exclusion has also been a factor influencing the lack of formalization of the SMEs. 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. Poor tax planning may be costly on compliance, administration and ultimately the general success of the business. This piece of writing aims to indicate the tax issues that may affect the SMEs and give recommendations on what can be done to improve compliance of SMEs.
There is compelling evidence on the ground on why the SMEs should heed the call to register and save their businesses. Firstly, free markets have been eradicated as evidenced by the rigorous clean up exercises to remove the vendors, the money changers amongst many other informal traders. Recently, Statutory Instrument 246 of 2018 was published in the extraordinary gazette which criminalises the informal trading of foreign currency, a move targeted at removal of informal trading in forex. In addition to the forgoing, the Minister in delivering his speech on the Monetary Policy intimated that: “… due to the increase in informalisation of the economy and huge increase in electronic and mobile phone-based financial transactions and RTGS transactions, there is need to expand the tax collection base and ensure that the tax collection points are aligned with electronic mobile payment transactions and RTGS system” This speech culminated into the recent revision of IMTT from 5 cents to 2 cents on the dollar value of transactions. This takes a big knock on the informal sole traders. The tax is however a lesser 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. A sole trader without proper books of accounts may not benefit from this exemption. This tax is broad based and unavoidable by informal businesses. In my view, all these exercises are being undertaken to formalize the economy. SMEs have two choices, to either shape up or shape out!!
Furthermore, the existing laws are crafted in such a manner that they favour formalised institutions as opposed to informal institutions. In Zimbabwe all businesses are supposed to withhold 10% on payments made to other businesses without tax clearance certificates. Additionally, there is 10% withholding tax on importation of goods in the absence of a tax clearance. The taxes are payable by the seller and importer of goods respectively. For SMEs that have not formalised, they lose out on revenue that is withheld on contracts that they enter with other formal businesses in the absence of a tax clearance. The 10% withholding tax applies on turnover for lack of tax clearance. By virtue of formalising tax affairs, SMEs can enjoy exemption of the 10% withholding tax on contracts with other businesses. Even the laws governing the banks are crafted against the informal institutions. For bankable projects to be approved, these rely on proper books of accounts, cash flow projections and other formalities. The lack of books of accounts is a deterrent towards the approval of such loans. For bankable projects the banks would need proper books of accounts to be kept and the business to be compliant with the tax laws. Informal institutions do not qualify for these loans. To a great extent informal institutions do not enjoy the benefit and protection of the law by lack of formalisation. Incentives such as assessed losses, capital allowances and tax holidays and rebates cannot be enjoyed by informal institutions because of the lack of the relevant registrations. Informal institutions 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 expired in which case 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.
From a commercial point of view, it is argued that big businesses do not trade with unstructured businesses without tax clearances. To participate in lucrative government tenders and other big tenders, it is a pre-requisite to have a tax clearance. A tax clearance implies formalisation, which entails that informal businesses cannot participate and are not considered at all. Also, foreign lucrative markets are also difficult to tap into without being formally structured. The export incentives do not apply to informal businesses. Big businesses are reluctant to trade with unstructured businesses on a strategic point of view. The perception is that unstructured businesses lack continuity therefore it may be difficult to establish long lasting business relationships with a business without a succession plan. If the owner dies, the business dies with the owner, a situation that most big businesses who create mutually beneficial strategic partnerships with other businesses consider before engaging in business ventures.
The dye towards formalisation has been cast. The technology to enforce this process is already in place. Electronic transactions are now being closely monitored through the Financial Intelligence Unit created by the amendment to the Money Laundering and Proceeds of Crime Act. Ecocash, telecash, one-money and other mobile money transfer services can easily be traced as they leave a paper trail. None compliance can easily be detected through the mobile transfers and other payment platforms. When non-compliance has been detected, the ramifications are very difficult to swallow. The law provides for backdating of tax registration and payment of taxes from the date the person was supposed to be tax registered. This comes along with 100% penalties and interest on late paid taxes not to mention the penalty that is attached on non-submission of returns. Section 56 and 77 of the Income Tax Act provide for the drastic measures of recovery of taxes. Section 56 provides for the personal liability of a representative taxpayer. This entails that the principals of informal institutions will be personally liable for taxes after the non-compliance is discovered. Additionally, section 77 provides for the legal action for the recovery of taxes, and also penalises a person who disposes property to avoid payment of tax. By implication, this entails that non-compliance will result in loss of property.
With all this said, there is still time for informal institutions to formalise before being rejected by the system. The ZIMRA has the ongoing voluntary disclosure program which ends on the 31st of December 2018. Informal institutions should take advantage of this program and avert the inevitable day of reckoning when the ZIMRA finds out the tax non-compliance issues. Voluntary disclosure results in the automatic waiver on penalties which effectively mitigates the tax liability.
Conclusion
It is a misconception that to be registered for tax is translates to expenses. The reverse is actually true 10% 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. In addition to the forgoing, there is 100% penalty and interest on late paid taxes not to mention the penalty that is attached for non-submission of 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. Enroll for a course with Matrix Tax School to assist you to with practical tax and business solutions to turn your nursery into a forest.