THE intermediated money transfer tax (IMTT) has perpetuated a culture of informality, driving transactions underground and resulting in revenue leakages, the Bankers Association of Zimbabwe (BAZ) said this week, calling for reductions in the tax rate.
The government introduced the 2% IMTT about six years ago to boost revenue inflows. Since then, it has faced criticism for driving up prices in the domestic market and adding to the burden of economic actors already stretched by prolonged volatility.
In a document submitted to Finance minister Mthuli Ncube this week, sharing bankers’ expectations for the 2024 mid-term budget review, BAZ called for the tax to be reduced. They argued that the bulk of transactions had shifted to the informal market as businesses tried to avoid taxation, leading to revenue losses.
“The rate of 2% IMTT on electronic transactions has exacerbated disintermediation, promoting the use of cash by the transacting public and discouraging the use of formal channels,” BAZ said.
“The increased use of cash in transactions is happening in informal establishments, which tend not to be registered for wider tax obligations, such as VAT (value-added tax), PAYE (pay-as-you-earn), corporate tax, hence this is resulting in increased revenue leakages.
“IMTT increases the cost of doing business and, therefore, discourages informal entities from conducting their businesses formally. IMTT is punishing both individuals and other entities that want to transact formally.”
Export competitiveness is also negatively affected due to the increased cost of production, which reduces the country’s capacity to earn foreign exchange and improve the balance of trade, BAZ said.
“If IMTT is reduced, volumes and values of transactions through formal channels will increase, thereby widening the tax base. Effectively, tax revenue will increase,” it said.
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“Increased cash transactions are exposing cash handlers to robberies, some of which have resulted in loss of life. With respect to outbound payments, could IMTT be charged in ZiG (Zimbabwe Gold) to avoid customers applying for USD (United States dollar) to cover IMTT in addition to what they need to settle their off-shore obligations.
“A reduction in IMTT will also cushion the transacting public during this challenging time due to the El Niño-induced drought.”
BAZ suggested that IMTT should be allowed as a deductible tax expense for entities up to date with corporate and personal income tax.
They also proposed adjusting the USD flat rate charge applicable to the maximum threshold given the 2% IMTT rate change.
Currently, the flat charge is US$10 150 for transactions above US$500 000, yet 2% of US$500 000 is US$10 000, punishing high-value transactions.
BAZ said the 2% IMTT on outbound foreign payments should only be applicable when effecting the final payment to avoid double taxation.
Zimbabwe National Chamber of Commerce president Tapiwa Karoro told The Standard recently that IMTT should be tax deductible for businesses.
“The burden of the IMTT tax is huge on business and therefore, the chamber proposes that the Ministry of Finance and Economic Development should allow the IMTT to be tax deductible and it should be removed when remitting tax to Zimra,” he said.
Confederation of Zimbabwe Retailers economist Innocent Marimo said: “Our major concern centres around the reduction of the Intermediated Money Transfer Tax, which has been a major source of outcry from the business community. High IMTT rates escalate transaction costs, affecting liquidity and working capital for businesses.
“By reducing IMTT, companies can retain more capital, which can be reinvested or used to manage cash flow effectively. Furthermore, a competitive global environment necessitates lower IMTT rates to encourage both local and foreign investment.
“It is under these considerations that we urge the government to recognise the significance of this tax reduction in fostering economic growth and enhancing Zimbabwe’s competitiveness,” Marimo said.
BAZ also submitted that the mid-term budget should set a minimum threshold for transfer pricing reporting and benchmarking, which will save taxpayers time and money as some transactions were not significant enough to warrant benchmarking and documentation.
“The high informality in Zimbabwe has significantly impacted the banking sector and the economy in several ways including limited financial inclusion through reduced access to banking services; cash-based economy where informal transactions contribute to cash-based transactions, and limiting the circulation of money within the formal banking channels,” it said.
The informality also promotes tax evasion and reduces government revenue, affecting public finances, which in turn impacts the broader economic environment in which banks operate.
“The large informal sector poses challenges for anti-money laundering and combating the financing of terrorism compliance, as informal transactions are hard to trace and monitor,” BAZ said.
“We recommend the following strategies: the simplification of the registration process to make it easier and less costly for informal enterprises to become formal.
“Offer tax breaks or incentives for small businesses that transition to the formal sector, encourage compliance without imposing heavy initial burdens.”
Statutory Instrument 96 of 2022 stipulates that cash withdrawals of US$1 000 and above attracts a levy of 2%.
“As industry, we are of the view that this may result in the market avoiding depositing USD into the banking system to avoid paying the tax and may increase the informalisation of the economy as transactions will be on a cash basis outside the formal channels,” it said.
“We, therefore, recommend that the 2% levy on cash withdrawals of US$1 000 and above be reduced. We lobby for exemption on VAT charged on importation of the e-payment infrastructure that promote digital transformation for the purposes of digitalising financial services.
“This will reduce the cost of importing the equipment and thus reduce the charges that are passed on to the customer.”
BAZ said there was a need to align withholding tax due dates to the 10th day of the month following the month in which the transaction was effected to reduce administrative burdens.
They also suggested a new technique for determining provisional tax-based on interbank rates, as the use of the average auction rate on quarterly payment dates is no longer practicable due to the auction system being non-operational.
Ncube is expected to present the 2024 Mid-Term Budget Review Statement on Thursday next week.
