Zimbabwe scraps VAT on basic goods after wave of price increases

Zimbabwe, hard pressed to raise internal revenue for the 2023 fiscus, has stayed some tax increases and implementation of new ones to contain a fresh wave of price increases across basic and key commodities.

Inflation, which closed 2023 at 26.5%, has been a major drawback for Zimbabwe and was threatening to inflame after Finance Minister Mthuli Ncube introduced VAT on many basic foodstuffs.

Companies such as bakeries, manufacturers of foodstuffs and others started implementing price increases this month to reflect the new tax regime.

Ncube had sought to raise more revenue for the state through the new tax measures contained in the 2024 Finance Act, including a new withholding tax on non registered retailers and wholesalers.

This had been earmarked to force informal economic players to register for tax purposes but had backfired as it became a burden on formal businesses such as manufacturers.

Zimbabwean manufacturers under the Confederation of Zimbabwe Industries undertook an impact analysis on the implementation of the new tax measures stipulated in the 2024 budget.

Issues such as compliance on route to the market, mitigation of consequences of the sugar on health through a special surtax, and a few tariff lines that were omitted on exemption from VAT were raised by local businesses.

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“We sought to detail the specific impact details of the new measures. In short, the 2024 tax measures in addition to raising the cost of business acted as a further deterrent to business and investment so we engaged the government and they agreed to rescind some of the measures including lowering the surtax on withholding tax and removing some items from VAT,” said a large local company CEO who is also a member of the CZI.

In a statement on Tuesday, the Zimbabwean Finance Minister eased some of the measures, saying “retailers can purchase from manufacturers as long as they have obtained a valid tax clearance certificate”and are VAT registered.

Manufacturers are now also permitted to sell to institutions such as hotels and other corporates that are registered for tax purposes without levying the 30% VAT tax.

“Treasury’s attention has been drawn to the impending increases in prices of the basic commodities, as a result of the re-arrangement of the Value Added Tax system where some of the goods have moved from zero rating to exemption, in line with regional practice and in the interests of revenue to the Fiscus,” said Ncube.

He explained that basic food items that include bread, milk, cooking oil, mealie meal, salt, sugar, flour, were now exempt from VAT, and added that “there should be no price increases.

“Price increases on other basic commodities that include meat, rice, bath and laundry soap, washing powder, toothpaste and petroleum jelly that have been moved to standard rating should be minimal.”

In 2024, Zimbabwe is looking up top mining and agriculture to develop economic growth but is also focusing on taxing the large informal sector.

Zimbabwe has also had to lower a new surtax on sugar content, adjusting it downwards to US$0.001 /gram. This special surtax “apply on added sugar only” and will also be effective even when manufacturers substitute sugar with sweeteners.

Analysts at IH Securities said the fine-tuning of the measures introduced by Treasury through the 2024 National Budget would likely “eliminate the fears of price increases” that had gripped consumers in Zimbabwe.

Business leaders are also apprehensive about exchange rate losses, especially as the official exchange rate lags the official exchange rate. This was further distorting the pricing environment and eating into margins of business operators.

“The Confederation of Zimbabwe Industries (CZI) has proposed the use of an exchange rate of not more than 20% below the official rate to minimise exchange losses. Currently, businesses apply an exchange rate of the auction rate plus a 10% margin when trading,” added the analysts from IH Securities.