Zimbabwe started levying a 15 percent value-added tax on basic foodstuffs on Wednesday.The tax affects meat and staple foods such as cereals, rice and potatoes.Other goods listed by the finance ministry include margarine, fish and pork.
In any functioning economy Value Added Tax is supposed to be government’s biggest contributor of revenue. This reflects the level of economic activity of trade and value addition.If there was more economic activity and hence more consumption of locally made goods government would be collecting more VAT.
However in Zimbabwe last year PAYE was the greatest contributor of government revenue at 49 percent thus economic activity was low. This has forced government to put a 15% VAT on goods that were previously exempted .
Instead of adding more goods that should pay VAT or raising VAT the government should simply be ensuring that there is more economic activity. It has failed dismally on this front.
The reason the VAT has been effected is because the government wants more money to cover its ever increasing expenditure. The government has failed to pay bonuses for civil servants and recently Police Commissioner Augustine Chihuri admitted new police recruits haven’t been paid in 6 months. 94% of government’s dwindling revenue goes to salaries.
This move shows that the Zimbabwean government is desperate to raise money mostly likely to pay for its ever increasing wage bill.
The government is resorting to taxing its poor.Any increase in VAT will fall heaviest on the poor and middle class. The poor cannot even afford food and the middle class barely earn enough to pay income tax and will be paying double tax.
The government of Zimbabwe has tempered with VAT in the past. They increased VAT in the 1990s in order to raise funds to pay for the war veterans gratuities. The economy went down and never recovered from there. There was a lot of civil unrest during that time led by student and labor unions.
Effects of the VAT on Zimbabwe economy
This time around definitely price of basic goods like rice fish meat will go up.When these commodities become more expensive ordinary people will look for alternatives or look for the things in the informal markets. This will simply boost illegal rice fish imports in the country.
The VAT comes at a time government is trying to remove vendors from the streets in the fight against typhoid. What this means is you are having a government that is trying to get rid of vendors selling food staffs on the streets but it comes up with a VAT policy that directly undermines those efforts. Demand for vendor goods is going to increase.
Last year the government imposed Statutory Instrument 64 which is supposed to promote local industries. However the same government is now making local goods even more expensive through this VAT. This will only force people to resort to smuggled alternatives given that the country’s borders remain porous.
It is going to become more costly to use plastic money as point of sale machines (POS) are found only in reputable supermarkets. This move therefore is likely to see demand for hard cash increasing as people resort to buying these commodities in the informal economy where they will be cheaper.
The informal economy will flourish and most likely undermine government’s efforts to collect more revenue. Government is clearly undermining its own policies in a bid to raise more revenue.One wonders if those responsible for policy making in the government ever think about their actions.