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An Assessment of the Effectiveness of the VAT Regime in Zimbabwe

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Katarina Panaishe, Zimbabwe Revenue Authority (ZIMRA)

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An Assessment of the Effectiveness of the VAT Regime in Zimbabwe

  1. 1. AN ASSESSMENT OF VALUE ADDED TAX (VAT) SYSTEM IN ZIMBABWE PRESENTED BY KATARINA PANAISHE RESEARCH & DEVELOPMENT OFFICER AFRICAN TAX ADMINISTRATORS’ RESEARCH DAY: 19TH OCTOBER- ENTEBBE, UGANDA
  2. 2. PRESENTATION OUTLINE •Background •Research methodology •Data analysis and results •Conclusion •Policy implications Prepared By Katarina Panaishe & Sereki Mapfeka 2
  3. 3. INTRODUCTION • The Zimbabwe Revenue Authority (ZIMRA) is a quasi-government institution under the Ministry of Finance and Economic Development. • Its primary mandate is to collect revenue including value added tax (VAT). • Over 80% of government expenditure is funded from ZIMRA collections. • VAT was introduced in Zimbabwe in 2004 to replace the Sales Tax. • VAT contributes an average of 23% to total revenue in Zimbabwe as compared to about 27% in RSA(SARS,2016) and 21% in OECD countries (OECD, 2016). • VAT/GDP ratio in Zimbabwe 7% as compared to 7% in RSA and 6.2% in ATO countries (ATO PUB, 2017). Prepared By Katarina Panaishe & Sereki Mapfeka 3
  4. 4. RESEARCH PROBLEM Target vs Net Annual Collections •Total revenue collections have been declining Prepared By Katarina Panaishe & Sereki Mapfeka 4 2011 2012 2013 2014 2015 2016 Net Collections (US$ Bln) 2.60 3.26 3.43 3.60 3.50 3.25 MOF (US$ Bln) 2.50 3.23 3.64 3.82 3.76 3.61 % Variance 4.00% 0.93% -5.77% -5.76% -6.91% -9.97% -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 US$Bln Target vs Net Annual Collections Net Collections (US$ Bln) MOF (US$ Bln) % Variance
  5. 5. RESEARCH PROBLEM Refunds • Refunds have been increasing from 2011 to 2016 on gross VAT collections. • VAT refunds paid to VAT registered operators contributed an average of 24% of the gross vat revenue collections over the period 2011-2016. • Refunds reached their peak in 2015 mainly due to refunds claims by the mining sector. • Overally, refunds indicate an upward trajectory up to 2016. Prepared By Katarina Panaishe & Sereki Mapfeka 5 2011 2012 2013 2014 2015 2016 VAT Refund (US$ Bln) 0.2 0.2 0.14 0.23 0.28 0.21 Gross VAT (US$ Bln) 1.29 1.28 0.7 0.74 0.83 0.81 % Refunds/ Gross VAT 16% 16% 20% 31% 34% 26% 0% 5% 10% 15% 20% 25% 30% 35% 40% 0 0.2 0.4 0.6 0.8 1 1.2 1.4 %Ref/GrossVAT AmountUS$Bln 2011-2016 VAT Refunds Linear (% Refunds/ Gross VAT)
  6. 6. RESEARCH PROBLEM •Revenue forgone on zero-rated supplies contribute 50% of potential VAT collections. •There is, therefore, need to relook at the structure of VAT zero-rating and exemption in order to discover changes that can maximize revenue collections . Prepared By Katarina Panaishe & Sereki Mapfeka 6
  7. 7. OBJECTIVES Key Objective: To establish the feasibility of widening the tax base by focusing on lists of zero-rated and exempt supplies. Specific objectives being: To analyze the structure of the VAT system in Zimbabwe To establish major suppliers of exempt and zero rated goods and services in Zimbabwe To benchmark the Zimbabwe structure with the generally acceptable VAT taxation principles. To carry out statistical simulations (modelling) to establish different relationships that can create base case for Zimbabwe. To give practical recommendations for widening the tax base in Zimbabwe. Prepared By Katarina Panaishe & Sereki Mapfeka 7
  8. 8. SCOPE The research covered: VAT system in Zimbabwe focusing on VAT on local sales data for year 2016. Prepared By Katarina Panaishe & Sereki Mapfeka 8
  9. 9. SIGNIFICANCE OF THE STUDY The study is important in bringing out the following benefits: •Widening of tax base through policy change. •Determining industry/sector linkages in relation to supplying points that maximize revenue within the supply chain. •Manage retroactive zero rating which does not only write off taxes due, but reduces the tax base. •Benefits to the body of knowledge/academia Prepared By Katarina Panaishe & Sereki Mapfeka 9
  10. 10. METHODOLOGY •Desk study •Type of data Primary data from SAP system Secondary data from ZIMRA reports and Zimbabwe Statistics Agency (ZIMSTAT) •Population size To test for preliminary results, data for 2016 was used and Focus was put on population for zero-rated suppliers for 2016 because of their impact on revenue collections. Prepared By Katarina Panaishe & Sereki Mapfeka 10
  11. 11. METHODOLOGY Sample size •The data on zero rated supplies was sorted according to sector/industry. •Data then ranked according to Value of Supply (VOS). •Top 10 sectors/industries with the highest VOS were selected. •Top 2 sectors (mining and manufacturing) were selected. Prepared By Katarina Panaishe & Sereki Mapfeka 11
  12. 12. METHODOLOGY Sample size •Identified top 10 suppliers within manufacturing and mining sectors according to VOS. •Picked first companies from each for analysis. In-depth research will be done on many other supplies • Industry linkages for sugar & gold were established using Input- output tables. •Different simulations were done on the supply chain to identify possible scenarios that can be adopted to widen tax base. Prepared By Katarina Panaishe & Sereki Mapfeka 12
  13. 13. DATAANALYSIS AND RESULTS Prepared By Katarina Panaishe & Sereki Mapfeka 13 VAT simulations introduction Preliminary testing was done on sugar manufacturing and gold mining to illustrate the different industry linkages and the possibility of changing zero-rating or exemption points within the supply chain to widen tax base.
  14. 14. DATAANALYSIS AND RESULTS Gold VAT simulation •Most of the mining output in Zimbabwe is for export. •Gold exports are zero-rated to promote exports and this has seen huge VAT refunds to mining companies. •The current and proposed scenarios on supply of gold are shown in next slide. Prepared By Katarina Panaishe & Sereki Mapfeka 14
  15. 15. DATAANALYSIS AND RESULTS Current Scenario (US$) Proposed Scenario (US$) Scenario Curren t Rate Propose d rate Value of Supply VAT charge d VAT due VAT charged VAT due Imports Supplies 15% 0% 1,000,000.00 150,000 .00 150,000.00 0.00 0.00 Local supplies exempt 15% 70,000,000.00 0.00 (150,000.00) 10,500,000.00 10,500,000.00 Miner 0% Exempt 120,600,017.67 0.00 0.00 0.00 0.00 Export 0.00 10,500,000.00 Prepared By Katarina Panaishe & Sereki Mapfeka 15 Current And Proposed Scenarios For Gold Supplies
  16. 16. DATAANALYSIS AND RESULTS Gold current situation • Miner receives inputs from both local and imports suppliers. • Some of imports supplies are covered by customs rebates which make them VAT exempt while other inputs are standard rated or zero-rated. • Miner exports gold through the authorised agent. • Exportation of gold is zero-rated and this results in refunds which erode the tax base. • Miners also receive 5% export incentive from the central bank. Prepared By Katarina Panaishe & Sereki Mapfeka 16
  17. 17. DATAANALYSIS AND RESULTS Gold proposed scenario •Nine simulation scenarios for inputs were carried out to assess the impact of each. •The proposed scenario suggests exempting supply of gold both locally and on exports. •Exemption on local and export is done to ensure the principle of fairness is upheld on both exporters and production for local consumption. •The scenario makes savings on revenue through reducing refunds since there are no refunds on inputs for exempt supplies. Prepared By Katarina Panaishe & Sereki Mapfeka 17
  18. 18. DATAANALYSIS AND RESULTS Gold proposed scenario •Exporters continue to benefit from: The export incentive scheme offered by Central Bank. Rebates concessions on specified expenditures for mining. •The option of exempting gold supplies is well in line with the destination principle. Prepared By Katarina Panaishe & Sereki Mapfeka 18
  19. 19. DATAANALYSIS AND RESULTS SUGAR VAT SIMULATION Current (US$) Proposed (US$) Scenario Current Rate Propo sed rate Value of Supply VAT charged VAT due VAT charged VAT due Sugar cane producer 0% 0% 20,000,000.00 0.00 0.00 0.00 0.00 Sugar Manufacturer 0% 15% 90,383,160.51 0.00 0.00 13,557,474.08 13,557,474.08 Wholesaler/Retailer 0% 15% 100,000,000.00 0.00 0.00 15,000,000.00 1,442,525.92 0.00 15,000,000.00 Prepared By Katarina Panaishe & Sereki Mapfeka 19
  20. 20. DATAANALYSIS AND RESULTS Current scenario •Supply of sugar is currently zero rated. •Zero-rating is a tax expenditure in that 15% of potential revenue is forgone. •Refunds are also claimable on standard rated inputs and this negatively affects the tax base. Prepared By Katarina Panaishe & Sereki Mapfeka 20
  21. 21. DATAANALYSIS AND RESULTS Proposed scenario •The scenario proposes standard rating of sugar in subsequent linkages in the supply chain. •Has capacity to minimize the refunds bill hence widening the tax base •Supplies of sugar for export will also be exempt from VAT to enhance revenue collection by reducing the refunds bill. Prepared By Katarina Panaishe & Sereki Mapfeka 21
  22. 22. PRELIMINARY FINDINGS 1. Major suppliers of zero rated goods and services were identified from mining and quarrying; manufacturing; agriculture, forestry and fishing; transportation and storage; and administration and support services. 2. Repositioning of VAT zero-rating and exemption a supply chain determines the amount of vat revenue to be collected in an economy. Prepared By Katarina Panaishe & Sereki Mapfeka 22
  23. 23. PRELIMINARY FINDINGS 3. Exempting both local and export mineral supplies (e.g. Gold) reduces refunds bill thereby widening the tax base. 4. Standard rating of sugar supplies increases revenue collections thereby widening the tax base. Prepared By Katarina Panaishe & Sereki Mapfeka 23
  24. 24. CONCLUSION •The success of the VAT cannot be taken for granted; it requires good design and implementation Kayaga (2007). •In like manner, the current VAT system in Zimbabwe requires fine-tuning and continuous improvement. •Broadening the tax base may not necessarily have to depend on increasing tax rates but rightfully determine the ideal category within a supply chain that can ensure more revenue is realised to fiscus. •The success of a VAT regime therefore requires good design, implementation and continuous review. Prepared By Katarina Panaishe & Sereki Mapfeka 24
  25. 25. TAX POLICY IMPLICATIONS •Changing the current VAT Taxing scenario to the proposed scenarios calls for legislative changes that can allow for lawful implementation. •A strong political will is also key for success of policy implementation. Prepared By Katarina Panaishe & Sereki Mapfeka 25
  26. 26. Prepared By Katarina Panaishe & Sereki Mapfeka 26

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