The Finance Act 13 of 2023, accompanied by significant statutory instruments, substantially altered the landscape of what goods and services qualify for various VAT rates.
Zero-rating, which previously applied to certain essential goods, has been eliminated, meaning a standard 15 percent rate now hits items that were previously tax-free.
However, some products previously taxed at 15 percent have been moved to an exempt category.
“This restructuring carries a heavy burden for many traders,” Vice President of the Zimbabwe Institute of Tax Accountants, Simon Gwenzi, told The Financial Gazette’s annual Taz Review Breakfast meeting last Thursday.
“Businesses that now incur VAT on inputs, but sell exempt products, lose the ability to recover that VAT. It becomes a direct hit to their bottom line.”
The potential for this cascading cost effect contradicts the often-held assumption that exempting items from VAT automatically lowers consumer prices.
As Gwenzi elaborated, if an exempt product’s supply chain includes elements that still incur VAT, that unrecoverable tax will likely be baked into the final price.
The changes weren’t limited to product categorisation. The government has lowered the threshold for mandatory VAT registration from an annual turnover of US$40 000 to US$25 000.
“Historically, VAT registration was primarily for well-established businesses. This new threshold pulls in far more startups and smaller enterprises,” Gwenzi noted.
While the government seeks to expand its tax base, critics worry that the changes risk hampering entrepreneurial growth. The potential for higher costs, particularly for businesses now selling exempt items, poses a challenge to their profitability and expansion plans.
“There’s a real need for clarity and awareness, particularly among smaller businesses that may suddenly find themselves with complex tax obligations,” Gwenzi added.
“The overall goal of increased domestic revenue is important, but the execution of these changes could have unintended consequences if not carefully managed.”
This comes as Zimbabwe’s tax strategy continues to be a source of debate as the nation navigates complex economic challenges.
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