SME Association of Zimbabwe

th
6 Floor Batanai Gardens, Jason Moyo Avenue, Harare
+263 8644 098517, +263 778 055076,
enquiries@smeaz.org.zw
www.smeaz.org.zw

15 October 2018

The Secretary
Ministry of Finance and Economic Development
Attention: Mr G.T. Guvamatanga

Dear Sir

RE: REQUEST FOR INPUTS INTO THE 2019 NATIONAL BUDGET STATEMENT
Your letter requesting our input into the 2019 National Budget statement dated 2 October 2018
refers. After consultation with our membership, the following issues have been brought forward for
your consideration:

OVERVIEW

The SME sector is currently battling numerous challenges, not least of which are inability to access
foreign currency on the formal markets, inability to access cash, and a hostile operating environment
characterised by rising inflation on one end, and dwindling demand on the other. We therefore hope
that the 2019 budget will bring in place a fiscal regime which is primarily conducive for growth of
SMEs into large corporations. That way, we can play our part towards increasing productivity, our
contribution towards the fiscus, and reducing unemployment.

There are a myriad of issues bedevilling the SME sector at the moment, but we feel that the ones
highlighted below deserve urgent attention in order to preserve sustainability and growth of the
sector, and to increase the level of formalisation.

MODIFICATIONS TO THE 2% TRANSACTION TAX

In introducing the 2% per dollar transaction tax, the Minister indicated that there would be
modifications implemented in due course, but it was necessary that the tax be introduced forthwith
in order to curb the fiscal deficit. We feel that in the spirit of this pronouncement, there is need to
take into account salient features and factors within the SME sector which may make the 2%
transaction tax detrimental to the overall objective of increasing revenue collection.

Taxing of Non-Tax Compliant SMEs

Problem
One of the often-cited problems in the SME sector is that many, if not most players there are not
registered with the Zimbabwe Revenue Authority for tax purposes. The 2% transaction tax has
therefore been cited as a way of ensuring that errant SMEs are also brought into the tax fold.

The problem, however, is that the 2% transaction tax is also levied on SMEs that are tax compliant,
thereby increasing their tax burden. SMEs are already struggling to survive in this harsh
environment, therefore the imposition of an additional tax worsens this struggle. It stifles their
growth and ability to contribute towards creation of employment.

Proposed Solution

We propose the following as a solution:

• The 2% tax should become a presumptive tax, applicable to SMEs that are not tax-compliant,
and those that are in arrears on their tax obligations. In this regard, the tax could even be
raised to as high as 5%.
• We further propose that the 2% transaction tax be considered as a payment towards one’s
tax obligations, where it is levied. This would apply particularly to those SMEs that have
fallen behind in meeting their tax obligations. Where one has paid the tax and they were
either not registered with ZIMRA or did not have a tax clearance, the tax should be
considered as part of their payment towards their tax obligation.

Additional Exemptions

Problem

In the event that the 2% tax cannot be treated in the manner described above, we would point out
that there are some transaction classes left out which we feel should also be included.

Proposed Solution
We propose the following additional exemptions be incorporated:

• Drawdowns on loans, and loan repayments.

• Payments for acquisition of capital equipment.
• Working capital related payments (i.e. buying and selling of stock).

The impact of the 2% tax, especially on working capital, is detrimental, as it drains the business of
working capital. It penalises higher business activity, putting emergent businesses in a catch-22 as to
whether to grow sales or not.

We would also propose that the exemption threshold be moved to $1 000.

FORMALISATION OF FOREIGN EXCHANGE MARKET

Problem

It is a well-known fact that the formal markets for foreign currency are not meeting demand, and
that there is vibrant trading on the “parallel” market. Such a situation is undesirable from all angles,
as it:

• Informalises foreign currency trading.

• Creates inefficiency in pricing, which increases the overall cost of doing business.
• Opens up genuine business people to fraud and illegality.
• Prevents foreign investors from coming into the country, hence defeating the “Zimbabwe is
open for business” mantra.
• Crowds out the productive sector as speculative pressure pushes the value of the currency
beyond normal market demand parameters.

The rates we now see on the market are a clear indication of speculative activity, as well as people
buying foreign currency as a means of hedging or storing value, rather than for
productivity/transactional purposes.

Ironically, the authorities as well as ruling party itself stand accused as being major players in this
market, and the dominant players in the market have strong ties to government ministers.

Proposed Solution

It is imperative that the trading of foreign currency is formalised, to avoid the above problems. We
previously sent recommendations on how this could be done, and we stand ready to engage further
on this crucial matter. Maintaining the status quo will simply serve to hike the local cost base,
increase speculative attacks on the local currency and hinder the productive sector.

FISCAL DISCIPLINE

Problem

We cannot emphasise the need for fiscal discipline on the part of government any more than has
already been done. Fiscal indiscipline on the part of government creates increasing obligations on
the rest of the economy, and we as SMEs are not spared. Increasing the tax burden simply means
that government is drawing away from our capacity and ability to increase productivity, re-directing
resources towards what is often consumption spending.

Fiscal indiscipline also results in monetary expansion, which in turn erodes the value of the local
currency. We therefore get hit twice: both in increased taxes, as well as in reduced value or worth of
our cash holdings, as well as diminishing buying power relative to our international peers.
Proposed Solution

It is imperative that proposals to halt fiscal indiscipline go beyond being mere plans, to being
implemented, and implemented resolutely. As citizens we have been on a downward spiral for the
better part of 21 years, since debasing of the currency started as a result of fiscal indiscipline. We
pray that this situation is arrested and turned around with immediate effect.

We recommend that the Reserve Bank of Zimbabwe become an autonomous institution, reporting
directly to Parliament, rather than the current scenario where they are a department or wing of the
Ministry of Finance.

ACCESS TO LOANS

Problem
Much as there are funds that have been marked for SMEs, it remains almost impossible to access
this funding due to the following factors:

• Most if not all the financial institutions that are supposed to disburse the funding are
unwilling to handle the facility because:
o It is not profitable for them.
o They have other money at higher rates which they would rather lend
o They cite the fact that they are liable for ensuring that the money is paid back as an
impediment, given the low returns.
• There is still insistence on collateral security, even for facilities such as value chain financing
and asset finance, where risk should be mitigated on the strength of the underlying
transaction or the asset purchased.
• The rates being charged by MicroFinance Institutions (2% per month) is too high for small
and medium sized businesses.
• Tedious requirements are still the norm. Even where one is applying for order finance or
invoice discounting, one is asked to produce the full range of documents including financial
statements, cash flow projections, detailed proposals and a myriad of other irrelevant
things.

Proposed Solution
We have successfully run programs with institutions such as Inclusive Financial Services (a
microfinance institution) to disburse money to youth and women, and they have a better
understanding of such lending. Unfortunately they are currently limited to issuing loans totalling a
maximum of $50 000.

We therefore propose that Associations such as ourselves be allowed to work with financing
partners of our choice, whom we know are able to disburse the funding more effectively. We can
assist the SMEs in drafting proposals and in financial literacy and financial management training,
then refer such SMEs to funding partners for disbursement of funds.
PAYMENTS TO SME SUPPLIERS

Problem

SMEs supplying government, its departments and agencies continue to experience problems when it
comes to getting paid. The situation is so bad that financial institutions will not provide order finance
or invoice discounting facilities to SMEs that are supplying government, parastatals and agencies.
Because they still need to grow, SMEs are impacted negatively when working capital is held up in
such a manner, and they cannot get recourse to financial markets to access bridging finance.

Ironically, large corporations and connected individuals supplying the same government institutions
actually get paid in advance, prior to having delivered anything!

Proposed Solution

Contracts to SMEs should be made payable “Payment on delivery” to ensure that they are able to
continue sustaining and growing their businesses.

INCENTIVES FOR GROWING SME’s

Problem

While we appreciate the immediate concerns around stopping the bleeding and stabilising the
economy, which has led to drastic short-term measures to halt the economic decline, we fear that
the same measures will result in declining productivity and negative growth for small and medium
sized businesses.

This is in direct contrast to the need for growth-oriented enterprises that can solve the twin
problems of a declining tax base and burgeoning unemployment.

Proposed Solution

Government needs to develop a medium-to-long term policy targeted around fostering and
enhancing growth of SMEs into large corporations. This should never be at the mercy of short-term
considerations. The only sustainable solution to assure government of a broad and growing tax base
is growth of SMEs into large corporations.

In that vein, an SME taxation framework, similar to the Special Economic Zones, needs to be
developed to incentivise entrepreneurship and formalisation. If we are able to give multinational
companies five-year tax holidays, why is the same not possible for SMEs whose permanent presence
and contribution to the country is guaranteed?
PENALTIES AND INTEREST ON LATE PAYMENTS FOR TAX

Problem

The 100% penalty regime for late payments of tax is crippling, particularly as many such late
payments are the result of delays in payments from debtors, including government. Interest on
“erroneous” computations for QPD payments is also punitive and unfair, particularly for businesses
with seasonal fluctuations in income streams. The QPD system assumes uniform accrual of profits,
yet in practice profits may even only be made right at the end of the year.

Proposed Solution

In addition to the suggestion for a more accommodative tax framework for SMEs’ we suggest that
government use a less punitive method for dealing with delays in payment. As alluded to above, a
system can be put in place where, for example, ZIMRA can automatically invoke that 5% of all
receipts into an SME’s bank account be garnished and applied towards arrears clearance in the event
of default. This works better than the harsh penalties and the 100% garnishee system currently in
place. It also ensures that when the SME receives receipts that are late, a portion is immediately
applied towards arrears clearance.

PROMOTION OF LOCAL PRODUCTION, IMPORT SUBSTITUTION AND EXPORTS

Problem

Our economy is currently heavily dependent on imports, including for items which could be
produced locally. This issue is very much in the public domain, yet nothing tangible has been done to
address it.

Proposed Solution

Deliberate strategies need to be implemented to identify and highlight specific items that are being
imported that we can produce locally. Local value addition and exports are also key areas requiring
exploitation.

Provision of information to the general public, and putting in place incentive structures for SMEs to
venture into local production and exports is an imperative if we are to correct our negative Balance
of Payments position. Accessible financing and support schemes for such activities need to be put in
place to enhance the chances of success.
REVIEW OF LABOUR LAWS

Problem

While this area is not directly under the Ministry of Finance, our labour laws are incompatible with
the state of our economy. High minimum wages (compared to our regional peers), punitive
termination procedures, a plethora of paid off-days (leave pay, sick pay, maternity leave e.t.c) make
Zimbabwe an unattractive investment destination for foreign investors, and a costly one for local
businesses, especially SMEs.

Proposed Solution

Government needs to fast-track the process of labour law reviews to ensure that we have a
competent labour environment that promotes decent jobs while also safeguarding business owners.
Wages need to be linked to productivity and performance, in order to level the employee-employer
playing field.

CONCLUSION

The country has been lacking a cohesive, inclusive economic growth agenda for the better part of 21
years now. We believe it is time for the new dispensation to not only recognise the contribution of
SMEs to the economy, but also to realise that putting in place the right fundamentals will enable the
sector – and by implication the country - to grow.

The vision of a middle-income state by 2030 cannot be met without harnessing the collective
energies of the SME sector to create decent jobs, increase productivity and foreign currency
generation. We stand ready to deliver, if given the right operating environment.

We thank you for your invitation, and we hope that the above inputs will be factored into the next
Fiscal Policy Statement and National Budget.

Yours Sincerely

Farai Mutambanengwe

Executive Officer