The 2% Transaction Tax Could Be Effective If Implemented Less As A Punishment And More As An Encouragement

Tinashe Nyahasha Avatar
EcoCash Zimbabwe, Bill Manager, Automatic Bill Payments

The recently introduced tax on electronic transactions has seen some revisions since it was announced on the 1st of October this year. These revisions have all been welcome because they make the tax a little more bearable.

The first revision was that $10 and lower values would not be taxed. The last one could be the most significant so far, the government exempted bank to mobile wallet transactions from paying the tax thus removing the double taxation situation which had been created.

Since the president of the republic promised that the tax will be undergoing some revision, it’s important to put thoughts out there so they can be considered as part of that review process. It’s always easier to complain after the fact instead of taking the leaders at their word and engaging in the conversation with them.

The minister’s underlying motivation

The underlying motivation for this tax seemed to be the need to expand the tax base for government given that most of Zimbabwe’s business is informal. The minister introduced the tax by saying:

Treasury introduced the Intermediated Money Transfer Tax with effect from 1 January 2003 through the Finance Act 15 of 2002. The tax was set at 5 cents per transaction, which was a specific tax. However due to the increase in informalisation of the economy and huge increase in electronic and mobile phone based financial transactions and RTGS transactions there is need to expand the tax collection base and ensure that the tax collection points are aligned with electronic mobile payment transactions and RTGS system.

Two problems though:

Problem 1: The tax may encourage even more informalisation and cash centredness

If the starting problem is that our economy is increasingly informal then the tax itself could be the equivalent of throwing in the towel and thinking it is what it is. The stance will be that there is nothing we can do about this informal economy so might as well get tax some other way no matter how much it hurts everyone including those who are already paying taxes.

The tax itself will then have the unintended consequence of encouraging the moving of money in cash and informally at that. So, instead of addressing the problem of informalisation the tax actually encourages it.

Problem 2: The tax is arbitrary and similar to the hut tax of 1894

The ‘hut tax’ was introduced in 1894, the early days of colonial settlership in Zimbabwe. It’s objective was to make the local people work on the farms and other enterprises of the colonial settlers. Before the tax, the locals did not want nor need to work for the colonialists because they were not participants in their monetary economy.

The tax was thus enacted to create a need for money in the African home. Every home now needed money to pay the hut tax and the only way to earn money was to work for the settlers. The tax was an arbitrary ten shillings per every hut that you had. This was obviously not a fair tax by a fair government but an oppressive one that believed in getting whatever it wanted at whatever cost. We can’t have room for arbitrary taxes anymore.

Arbitrary taxes hurt real businesses

Last time I used our business here at Techzim as an example: we had to cut out all products that we wanted to introduce but would give us less than 2% margin. We were happy with sub 2% margins because we are an internet business and we know we have the potential to address a huge market which makes low margins feasible.

The 2% tax is not based on increase (profit) but on transactions. It thus doesn’t matter what the transaction is about or how much margin one has if it’s a business transaction- the tax is unchanging and this is what I imagine to have been the structure of the Biblical Zacchaeus taxation.

Tax must not be a determinant of whether a venture is profitable or not but it must itself be determined by the level of profitability otherwise tax becomes a discouragement to business enterprise. Indeed the transaction tax discouraged us from offering services we wanted.

What then could be the solution?

In order to meet the earlier stated underlying motive by the minister the tax could be structured in such a way that those that are already being taxed by the government do not pay it. It becomes the government’s burden to make tax registration simple and easy for businesses of all types and individuals of varying levels of employment.

There should be fair and affordable taxes on businesses of varying sizes and a business (even a sole proprietorship) should be exempt from the transaction tax as long as it has a valid tax clearance. It should become easy for a plumber or a vegetable vendor to register for tax and the tax payable must be made cheaper than the 2% transaction tax you pay on all transactions when not registered.

If you are employed and your employer is cleared for tax you also get exempted of this tax. Maybe exemption will be up to your salary’s worth of transactions.

Banks and other service providers would then be the gate keepers. If you present a tax clearance certificate (which is valid for a year) then you will have exemption when you transact.

Yes, there is a big problem of corruption at ZIMRA and there is huge likelihood that tax clearance certificates will be dished out to individuals for no reason than that hands have been greased. However, the problem of corruption is a problem that the government should be solving anyway, not by applying a hut tax to everyone but by actually solving it.

Again, yes this will be a far harder solution to implement BUT the point is not to have easy solutions just for the mere reason that they are easy. Let the solution be hard on the government but reasonable for individuals and businesses.

I know there are many holes to poke at this. However, my objective is not to necessarily propose a solution that works but to stimulate the creative juices of those who are smart enough, mandated and privileged to legislate and regulate our economy.

What other ideas can you think of?

PS: In case you haven’t bought already, buy the Techzim Insights report on the state of the payments sector in Zimbabwe for only $9.99 via Ecocash below:

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  1. Tonderai

    In my view, using KYC principles is the best route to use. Banks already have KYC guidelines for account opening and maintenance. The same way that new card-based, low cost accounts are limited in terms of transaction amounts, is the same way that the tax should be applied. If your account is KYC compliant, e.g. you’ve submitted proofs of employment, income, tax clearance, etc for the year, then you should be exempt from the tax.

    1. tarikahari

      Even employed people are now informal these days

  2. Anonymous

    This needs to be scrapped period. ED and Co change your policies to meet democratic standards and go and look for investments from the WEST, that is what we pay you to do. So we can all enjoy the fruits like we once did. And get a new RBZ Gov and a democratic Finance Minister, problem sorted.

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