Reduce 4% forex IMTT : Experts
BY FREEMAN MAKOPA
The cash-strapped ZIMBABWE government has been urged to lower the new Intermediate Money Transfer Tax (IMTT) in foreign currency to 1% from 4% to boost revenue collection.
Last month, as part of measures to promote the use of local currency, President Emmerson Mnangagwa announced a new IMTT of 4% on all domestic currency transfers. The idea was to make foreign currency transactions expensive so that people would switch to the Zimbabwean dollar.
The measure was introduced at a time when the central bank estimated that US$1.5 billion was being traded in the informal market, well in excess of formally circulating foreign currency.
However, within the informal market, consumers use hard cash in daily transactions to avoid taxes as well as high mobile phone and banking charges.
“The level of informalization in the country is now estimated between 70 and 75%. This means that the underground economy in Zimbabwe transacts billions more than the formal economy,” economist Victor Bhoroma said in an interview.
The underground economy is weighing heavily on economic recovery efforts as tax revenues dwindle and the Treasury is forced to institute more taxes on the few taxpayers.
He said Zimbabwe’s complex fiscal environment was largely responsible for the country’s increasing rate of informalization, depriving the government of much-needed revenue for economic growth.
To manage this, Bhoroma said the government needs to simplify its tax model and create robust systems that monitor business transactions in real time and enforce tax compliance.
“The government needs to invest in internet-based systems that monitor business transactions to maximize other taxes affected by informalization, so that IMTT can be kept at 1%,” he said.
The government introduced the 2% IMTT tax in 2020 due to the increase in mobile money and banking transactions.
However, in recent years, formal businesses have asked the government to remove some of these taxes, arguing that they are unsustainable and increase production costs.
Bhoroma said the government’s recent decision to increase the IMTT on domestic currency transactions will lead to massive US dollar shortages.
“The latest ruling stifles deposits with local financial institutions, encourages informalization and discourages transparency on various businesses and traders.
“Economy players will do everything possible to avoid the IMTT tax and hard currency trading,” he said.
“This increases demand and creates shortages of foreign currency in the formal sector as people would prefer to hold hard currency rather than e-money,” he said.
The country is again in the grip of a severe economic crisis characterized by shortages of foreign exchange, unemployment of more than 90%, low production and high inflation.
Barely three years after the reintroduction of the Zimbabwean dollar, its value has fallen dramatically. From $210 to US$1 in early March to $500 to US$1 on the parallel foreign exchange market.
The Zimbabwean Coalition on Debt and Development (Zimcodd) has said Finance Minister Mthuli Ncube should introduce measures allowing the free flow of foreign currency in the country to deal with the current cash crisis, instead of propose the IMTT of 4%.
“This exerts a disproportionate negative impact on the poor majority with small exchange balances that can hardly move the exchange rate.
Raising the tax on cash withdrawals also raises transaction costs, thereby reducing the real value of income, mainly for those at the lower end of the income distribution scale,” said the pressure group.
“More so, authorities should be aware that not all domestic currency transfers are done to provide liquidity to the black market, as some of these currency transactions are done by companies that replenish, settle utility bills utilities or pay for essential supplies, like industrial inputs while others are done by households paying for essential services like
Zimcodd added that the new policy direction would likely trigger US dollar inflation which would fuel Zimbabwean dollar inflation.
“Given already elevated imported inflation due to severe global supply chain disruptions, an impending poor 2021-22 agricultural season, and the potential for political slippages ahead of the 2023 general election, policy measures are exacerbating the suffering of poor citizens as corporations can pass the burden of resulting inflation onto the consumer, especially on staple foods with inelastic demand,” Zimcodd said.
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