eBusiness Weekly
Kudzai M. Mubaiwa
Last week was Global Entrepreneurship Week, an initiative that is hosted each November, with thousands of events and competitions in 170 countries to inspire millions to engage in entrepreneurial activity while connecting them to potential collaborators, mentors and even investors.
We hosted a full day of workshops, the first of which was on the Business Model Canvas and it was a full house. At the end when we opened up for comments and questions, there was consensus that the session was valuable in theory, but the practice of managing a business itself was hard work.
One young man asked a simple question: how best can I scale my enterprise? The trainer’s response was simple, that one must formalise in order to grow.
Formalising entails moving from just an idea or concept that is executed for gain, to setting it up to be a proper business persona and system that is recognised at law and ultimately contributes to local economic development.
The first step then is to register a formal entity — popularly this is a Private Limited company, but after interventions the responsible ministry also brought in a less pricey option known as the Private Business Corporation, best known as the PBC.
Naturally, the next step in formalising would be to get a bank account which this new standalone entity would transact from. These first two processes are not an issue with most small business owners; neither do they take exception to other actions that come with formalising such as registering with industry associations and setting up internal systems.
Many, however, fear registering for tax. Tax collectors were not popular in biblical times and remain so. In our work with micro-enterprise and small to medium enterprises, no one likes the idea of paying tax.
Small business owners refuse to sign up for tax even when they should because they are completely unaware or do not understand how it all works.
They have a feeling they will be asked for most of their earnings. There is a very strong belief that income tax is charged on turnover, when in fact, you are only taxed at 25,75 percent of your net profit.
That percentage unsettles many people. Computations for pay as you earn (PAYE) are also petrifying for many, yet most small businesses employees earn less than the $300 tax free threshold and even the higher paid ones fall under the lower limits.
There is also a lot of confusion over who qualifies for value added tax (VAT), as the common thinking is that every business owner must sign up for it, when really only those with a monthly $5 000 turnover or $60 000 annual turnover qualify.
Zimbabwe Revenue Authority should probably do more by way of demystifying tax for first time users of their services —their usual first quarter training sessions need to be consistently done throughout the year, with additional online channels to ensure greater reach.
Some small business owners who do know about tax and how it works refuse to pay tax because they feel it is tedious. Indeed, for the busy person, a monthly visit to the Zimra offices to submit PAYE returns, a quarterly one for the income tax returns and the other annual returns are a bit much.
The whole process of registering for all this is relatively easy, but the subsequent visits put off many likely tax payers.
The introduction of e-services somewhat softened this perception but did not deal with the fact that most enterprise owners felt that tax matters are rather intrusive and they would rather not tell anyone, especially government, how much they are making.
These are the same ones who prefer to be charged the 10 percent that is shaved off per every transaction over $250 in order to save themselves the trouble of engaging consistently with the tax collectors, who are perceived as working like typical civil servants — slow, inflexible, and perhaps insolent.
Consultants are available to assist for a fee, but for most small enterprises it is a cost that they would rather avoid. (It would be interesting to compare the figures of money lost when ten per cent is removed for want of a tax clearance certificate to the cost of getting help to be tax compliant from a consultant).
On that score of making as much of a saving as possible, many small business owners thus refuse to pay tax because they want to maximise revenue, margins are thin in this environment, and being dynamic as it is, a one month event or announcement can wipe out a full year’s profit. As such all outflows are scrutinized and minimised.
There is also a general sense of rebellion driven by general disgruntlement with government because they do not see where their tax money is going — not so much in public infrastructure but particularly so in entrepreneurship support.
With the recent announcement of the intermediate money transfer tax, now commonly known as the two percent tax, this position will be further entrenched — small business owner’s sentiment is now that of “we paid you some tax already, why do you think you deserve more?”
After all one of the drivers of this tax was certainly to tap into the large transactional volumes and cash in. A simple survey in the queue each time we submit pay as you earn and quarterly returns will show that many small businesses are posting nil returns at best and some negative returns, mainly because they are struggling and just breaking even, but of course some of course have now mastered how to avoid tax without evading tax.
Finally, the recent move to separate RTGS FCA’s and NOSTRO FCA’s has resulted in increased confusion.
Businesses that were increasingly dealing in mobile money options like Ecocash and where possible in cash only will practically deliberately go underground now.
No one is engaging them at their SME level to provide clarity on what they should be doing as local traders or exporters in treating tax, often consultations are only done with big businesses and there is not one single SME inclined organisation that has as much bite as those of big business.
No one then can appeal to their better nature of use moral suasion to ensure small business contributes, though they have the capacity to do so.
They are small and nimble enough to transact away from traditional bank accounts that would be garnished by the taxman and will do so. Put simply, the tax infrastructure in Zimbabwe is extremely unfriendly to local small businesses.
When it is collection time, the demand is the same as big business, but support in almost non-existent. Government would do well to look into making it easier for a small business owner to be aware, able, and inspired to positively contribute to the economy by paying tax.
Until then, the 2 percent may be all the tax they ever get.
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