The pangs of the post Covid-19 crisis coupled with the recent Russia-Ukraine war have put an unprecedented strain on food supply worldwide.
Zimbabwe has not been spared the global economic woes, which are further exacerbated by the effects of hyperinflation and onerous taxes that have left most taxpayers struggling to survive.
One sector that is key to the decent survival of many is agriculture. In Zimbabwe, agriculture largely influences the economic, social and political lives of the majority of people. It is also the source of sustenance for most rural Zimbabweans who play a big part in providing food security to the country. At a commercial level, the sector produces export crops such as tobacco, cotton and horticulture products, which bring in foreign currency, improving the balance of payments. The agriculture sector is one of the biggest employers in Zimbabwe and the key to the success of downstream industries, among them the manufacturing industry. Government has led efforts to minimise the tax burden on farmers by introducing suspension of duty, incentives, and special deductions.
Withholding taxes on contracts applies to amounts payable to all persons who enter into contracts. WHT on contracts, simply put, is a tax that is deducted from payments due to suppliers that do not possess a valid tax clearance. The amount is withheld by the payer for remission to Zimra. This tax was enacted in terms of section 80 of the Income Tax Act and its basic purpose is to ensure payment of tax by all businesspersons. WHT, also known as retention tax, is an effective tool to combat tax evasion and facilitate easy collection of tax by the fiscus. In recent years, the WHT on contracts was increased from 10 to 30 percent in a move seen as a measure to increase tax compliance by all businesspersons in the country. The threshold amount for which WHT has been levied is ZWL500 000 or
US$1 000.These are aggregate amounts in a tax year.
It is a government requirement for the payer of income to withhold or deduct tax from the payment (income) accruing to the payee and remit that tax to Zimbabwe Revenue Authority (Zimra). The withholding collection mechanism is operated in such a way that it is the payer not the payee, who remits the tax to Zimra, thus, WHT is deducted at source, the payee receives the net of income after tax. Income which has suffered withholding tax on contracts is not subject to further taxation.
In Zimbabwe, a dilemma is arising in which on one hand, the government is trying to raise taxes to finance operations and, on the other, raising costs of production, and farmers have not been spared this. As hyperinflation erodes the value of the Zimbabwean dollar, prices of inputs, including seed and fertiliser, have soared. This has left many small-scale farmers unable to close the gap between increasingly costly agricultural supplies and their little savings. With this background, a submission that having WHTs levied on farmers is not helping the situation.
While we can imagine how the increased rate of WHT has caused alarm among the uncompliant, it would be important to note that the relationship between business survival and payment of taxes is of great importance. Most small-scale farmers do not have capacity to implement reporting systems that lead to tax compliance, hence a greater deal of them default to WHT on contracts. These small-scale commercial farmers find themselves losing the income they could have used to increase productivity. This development is a drawback on the overall national prosperity, as these farmers contribute significantly to national agricultural productivity.
As the Russia-Ukraine war continues, the potential scope of physical and economic disruptions to food and energy systems rises. These effects may have swift and severe consequences in regions and industries far from the initial occurrence. Unlike the previous global food-price crisis, driven by the 2007-2008 financial crash, the current upheaval comes after governments and households have spent two years coping with the Covid-19 pandemic, the most significant economic shock since World War II.
The government needs to prepare for the likelihood of food shortages by positioning farmers at the forefront of agricultural intensification through even more tax concessions on the very punitive tax measures such as WHT on contract.
In conclusion, the obstacles that farmers face due to administrative difficulty in attaining tax clearances coupled with the lack of knowledge clearly proves that removing WHTs on farmers will be a major step in securing food security. Although the approach will be regarded as drastic for the fiscus, it should be viewed as a short-term solution while government works on finding long lasting solutions such as educational workshops to help farmers formalise and register their businesses.
Meanwhile, Matrix Tax School will be hosting a seminar on Income Tax and Transfer Pricing returns on March 26, 2023 at Cresta Sango in Msasa, Harare.
Tapera is the founder of Tax Matrix (Pvt) Ltd and the chief executive of Matrix Tax School. He writes in his personal capacity.