Mthuli’s budget gamble: No extra spending, while 2% tax on forex transactions is highlight of new tax measures

Finance Minister Mthuli Ncube has predicted Zimbabwe’s economy to slow down by 4.5%, but held back from asking for more money in his mid-term review statement Thursday.

His forecast means he believes the economy will do worse than the 3% decline he initially predicted. However, it is still more optimistic than the predictions of the World Bank, the African Development Bank and the IMF, who see the economy falling by as much as 10.4% this year.

According to Ncube, “the impact of the pandemic (on Zimbabwe) is lower commodity demand and prices, reduced tourist arrivals due to travel restrictions, currency volatility, high inflation”.

There was no supplementary budget, as ministries had still not spent over half of their budgets, he said. By June, Ministries had spent 46% of their votes, leaving 54% unused. The government would have to “operate till the end of the year” with what it has, as it reallocates funds to COVID-19 and other essential spending.

“This position enables us to avoid tabling a supplementary budget, given our current levels of spending,” Ncube said.

This may be a signal, an optimistic one, by Ncube that he believes he will be able to slow down inflation. Despite rising inflation, he may be gambling that he can get through the year without spending more than he budgeted for.

However, rising inflation makes it harder to budget, and this may also have convinced Ncube not to ask for more money but to settle for spending only what he collects going forward.

He said: “Treasury will be dealing with arising expenditure pressures as we consolidate our fiscal position during the remainder of the year, taking account of revenue performance against inescapable reprioritised expenditures.”

Highlights:

  • A revised crop output assessment shows that Zimbabwe will produce less food this year. Output will be down by 0.2%, against the 5% growth originally anticipated. However, the harvest of traditional grains will be 103% bigger than last year
  • Mining, which earns 60% of Zimbabwe’s forex, will fall by 4.1% in 2020, reflecting the impact of COVID-19 and forex shortages
  • The manufacturing sector will contract by 10.8% in 2020 against the 1.9% originally forecast
  • Tourism will contract by -7.4% in 2020, hit by COVID-19
  • There was a “relative improvement” in power generation during the first quarter of 2020 compared to the last quarter of 2019. Total electricity generated amounting to 1 294 GW/h, up from 1 226 GW/h

  • Tax revenue still makes up the bulk of revenue. The government collected ZWL$33.4 billion, which is 97.6% of all revenue. Non-tax revenue contributed ZWL$828 million, just 2.4%, to total revenue
  • As at 31st May 2020, total foreign currency inflows were US$2.35 billion, against foreign payments of US$1.55 billion.
  • Ncube had an optimistic forecast on inflation. He expects it to slow down in the second half of 2020 to 300% in December 2020, “responding to current monetary and fiscal policy interventions”. Inflation stood at 737.3% in June, slowing slightly from 785.6% in May.

Here is what you need to know about the tax measures announced.

Tax free threshold up, but…

Previously, the Government increased the tax-free threshold to ZW$2,000 per month.

Seeing as “prevailing market conditions have necessitated further review of employee salaries and wages,” Ncube said, the tax-free threshold has been increased further from ZWL$2 000 to ZWL$5 000 per month.

However, this may not have a major impact due to the inflation since the last adjustment. For example, according to Zimstat, a family of five needed Z$8,484.00 just to afford the basics in May.

Ncube adjusted the income tax bands to begin at ZWL$5 001 and end at ZWL$ 100 000. A person earning over that will pay 40%, as from 1 August 2020.

2% now applies on forex transactions

In 2018, Ncube introduced the 2% on all electronic transactions. However, this did not include any forex transactions – until now. From August, if you pay for something in forex, electronically, there will be a 2% charge.

“Following the legalised use of foreign currency in domestic trade, there has been an upsurge in electronic transfers of foreign currency for transaction purposes. The current exemption has, thus, created an unfair advantage for taxpayers transacting in foreign currency, thereby raising equity considerations,” Ncube says.

Many US dollar transactions are currently cash-based. As many transactions moved to forex, the amount of money government has been earning from the 2%, which helped Mthuli close the deficit last year, has also slowed. Income from this tax was slightly below the target in the period by ZWL$74 million, with collections amounting to ZWL$976.9 billion, against a target of ZWL$1.1 billion.

Zimbabwe banks forex
You will now pay 2% on USD electronic payments. Many USD transactions remain cash-based

The preference for foreign currency by “most business has undermined the revenue generating capacity for IMTT”, says Ncube.

Transactions of up to Z$300 will not pay the tax, up from Z$100. For forex transactions, the tax will not be charged on transactions of less than US$5.

The maximum tax payable per transaction by companies has been raised from ZW$25 000 to ZW$50 000 on transactions with values exceeding ZW$2 500 000. On forex transactions, a maximum tax of US$2 000 will be paid, with a value exceeding US$ 100 000.

Companies will have to produce customer sales receipts showing USD trades, which are currently not provided for under the law. Retailers will now have to configure fiscal devices to capture all transactions in the currency of trade and also produce invoices in the currency used.

The 2% tax will be felt in the pockets of consumers.

Health workers’ tax free allowance

Health workers will not pay tax on their COVID-19 Risk Allowances for 12 months, starting from 1 April 2020. This was already announced when President Emmerson Mnangagwa presented his Z$18 billion bailout package on May 1.

Nurses and doctors have gone on strike, demanding US dollar salaries. On Monday, specialists also gave a two-week ultimatum to the government to pay them in US dollars.

A small tax break for frontline workers, but still no living wage (Pic: Philimon Bulawayo/Reuters)

Tax breaks for COVID-19 donors

Companies that make donations to medical facilities owned by the government, councils or religious organisations now get tax deductions of up to the equivalent of US$100 000. To qualify, a donor would have bought equipment or drugs for these facilities, or funded the construction, extension or maintenance of these hospitals.

Tax incentive for domestic tourism

Foreign tourists, the mainstay of Zimbabwe’s tourism sector, have stayed away due to the COVID-19 crisis. According to the budget, there has been a 90% drop in hotel occupancies and an 80% dip in international air traffic into Zimbabwe.

Tourism facilities have recently reopened, but only for locals. However, high costs have kept locals at bay. Ncube is to exempt accommodation for domestic tourists from VAT for 12 months, starting from this August.