Mthuli’s tax plan: Catalyst or catastrophic?

05 Oct, 2018 - 00:10 0 Views
Mthuli’s tax plan: Catalyst or catastrophic? Mthuli Ncube

eBusiness Weekly

Taking Stock Kudzanai Sharara
Finance and Economic Development Minister, Mthuli Ncube, on Monday announced fiscal measures, one of which, will in just one swoop, help Government deal with its ballooning budget deficit or reduce the much talked about high levels of recurrent expenditure.

Minister Ncube’s latest fiscal plan of amending the Intermediated Money Transfer Tax of 2003, will expand the tax collection base and bring into Government coffers more than half of what it is currently getting.

Initially, the tax was set at 5 cents per transaction, which was a specific tax, but now Minister Ncube has reviewed the tax from 5 cents per transaction to 2 cents per dollar transacted, effective October 1, 2018.

The latest move will bring potential revenue amounting to $3 billion to treasury, money which, among other things, can be used to plug off the country’s budget deficit which is causing serious fiscal imbalances in the economy.

Government has been running a budget deficit for several years now. While running a budget deficit is not peculiar to Zimbabwe, the situation is, however, different as Government has failed to control the country’s overall spending.

The variance between the budgeted deficit and the actual out-turn has been too big as shown in 2016 when Government budgeted for a $150 million deficit but ended the year sitting on a deficit of $1,4 billion.

The gap was also evident and even bigger in 2017 where Government budgeted for a $400 million deficit but ended the year with a deficit of $2 billion.

Worse is expected in 2018 where Government has already budgeted for a $672 million budget deficit. If the past trend is to continue, then the gap will be much wider, having already reached $1,3 billion by the end of June this year. But with the new tax plan, there will be no deficit to talk about.

The tax plan, if successfully implemented also has the potential to reduce Government spend on recurrent expenditure which has been accounting for more than 90 percent of a $4 billion National Budget. The funds can also be used for capital formation.

With the construction sector now on record saying 50 percent of the requirements for infrastructure development can be accessed locally, the country will now only need to borrow half of its requirements from external funders.

Most importantly, the new measures will easily capture the informal sector and other small businesses, which for years have not been making any meaningful contribution to treasury coffers. With most transactions of approximately 96 percent now being conducted electronically, the new measures will capture the informal sector.

But, the tax plan can also been viewed by some as catastrophic as it has the potential to significantly reduce margins for most businesses. For some it will make investments meaningless. Below I share submissions from an analyst at Trigrams investment:

When you consider investment and economic theories including economic history and plain common sense they all tell us that people invest to make a positive return, including social investors. When the profit motive is removed the activities affected tend to die down.

Only governments are known to invest in and sustain loss making activities, but in most of these are justified as having a “greater good”. It is in the context of investors, return, natural justice and greater good that we need to look at the recent revenue measure announced by the minister.

No country has ever prospered without harnessing savings from its own population and without its own people dictating the economic areas in which investment was to be made.  While people can point to the Marshal Plan and various, post war economic plans, the truth remains, without the input of the population very few countries have achieved meaning development.

The profit motive is central in all these initiatives and as a country this is the time to really interrogate what we want and how to get it.

Tax impact on stock market investment
Coming to the impact of the 2 cents tax per dollar and its impact on the stock market investments and the general investment and saving environment in the country, the first thing to note is that the 2 cents tax is higher than the brokerage (at 0,92 percent) charged by stockbrokers who survive from facilitating investment on the stock market.

Total charges when you buy shares amounts to 1,693 percent and when you sell amounts to 2,443 percent giving a combined total charge of 4,136 percent. That means to make a profit, your investment has to go up by over 4,136 percent. When you factor in the new tax which basically is 2 percent, the investment now needs to go up by 10,136 percent and 7,846 percent of that is taxes that are collected by government.

As an industry, this renders stock market investments unviable for market players and unprofitable for investors. The insurance companies, pension funds and asset managers who are key economic aggregators will basically not be able to harness meaningful savings for investment in the stock market or any other market for that matter.

Another way to look at the challenge the 2 cents tax has on investments is that in an effective 50 transactions, all savings in the investor’s account can be potentially wiped out by this single tax, before we factor in other taxes such as withholding tax and VAT.

As we await the minister’s next statement today (Friday the 5th of October), we implore him to consider the greater good in his policy making and not seek to tax away the problems that Government caused.

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