Building A Sustainable Tax Base To Contain Fiscal Deficits In A Deflationary Environment

“The world we have created today has problems which cannot be solved by thinking the way we

thought when we created them.”

Albert Einstein.

Scope of Presentation1. Introduction

2. Tenets of a Sustainable Tax System

3. Tax Base Sustainability Initiatives

4. Sustainable Tax Base – Zimbabwean Context◦ Anti-Corruption Campaigns◦ Automation◦ Increase Number of Taxpayers◦ Industry Capacitation

5. Conclusion

IntroductionTax revenue enables Government to fulfill its obligations such as

provision of social services, infrastructure, and other vital services which facilitate production, enhance growth and provide stability in the economy.

Normally, Tax Revenue is one of the major sources of Government Income, but in Zimbabwe it is currently the primary source of income for the Government.

Government allocates scarce resources among competing needs to fulfil its obligations. So the size of the tax base determines the success and sustainability of its programmes.

Tenets of a Sustainable Tax System

Sustainable Tax System that is: Fair, Simple, Equitable. And: Ensures those who can afford it pay the mostRaises enough money to meet community needs Collects money efficiently with minimum costs to tax payers Is simple to understand and discourages dodgy tax schemes

Clearly Zimbabwe has a Sustainable Tax Problem

Deflation

Deflation is defined as a fall in the general price level or negative rate of inflation.Deflation often triggers recession and discourages spending especially luxury goods because it creates uncertainty. Therefore, periods of deflation often lead to lower economic growth; (this in turn creates more deflationary pressure in the economy, a vicious cycle.Deflation increases the real value of money and the real value of debt and makes it more difficult to repay debts. Labour markets often exhibit ‘sticky wages’. In particular, workers resist nominal wage cuts (no one likes to see their wages actually cut, especially when you are used to annual pay increases. Therefore, in periods of deflation, real wages rise.

Threats to Tax Base Sustainability Initiatives

Tax Administrations concern about Base Erosion and Profit Shifting (BEPS). Tax compliance problems through evasion and avoidance Weak capacity to determine the tax base and tax gap (without tax gap data you can’t determine compliance).Legislative framework to deal with those issues. Challenges to the Tax Authorities Regional Treaties or Trade Agreements as a threat to sustainability. Government to negotiate treaties that create equity and serve the interests of both parties to the treaties.

Threats to Tax Base Sustainability InitiativesMorality of taxpayers, corruption and underhand activities. Under-reporting of Income even in developed countries (IRS 2006 $376 billion). Tax non-filing $28 billion. UK 2009 46 billion pounds 6%. In developing countries 15% to 30% of tax liability.Corruption strongly associated with low revenue inflows. ‘Informality’ - Establishing streamlined tax regimes for small businesses, and extending to them the methods of taxpayer segmentation.Inability to tax high-income earners, sustainability of the tax base under a deflationary environment should follow the footprints of money.

Sustainable Tax BaseThe Efficiency and Effectiveness of the Tax Administration is key to ensuring the sustainability of the tax base:

Automation of Business Processes Anti-corruption campaigns Simplification of legislation Capacitating industry Income Tax Reform Taxpayer education Know your customer and customer’s customer Expansion of the tax base Enforcement strategies that are customer-centric

Anti-Corruption Campaigns

Corruption reduce fairness of a tax system, overburdens compliant taxpayers thus widening the fiscal deficit.

The following are some of the strategies employed to fight corruption: Automation Life style audits Asset declarations by ZIMRA staff Whistle blowing Use of hotlines Prosecution

Automation

Automation promotes convenience, efficiency and accuracy of returns and reduces cost of tax compliance. Fiscalisation and the tax management system ASYCUDA World Electronic Cargo Tracking system E-services, e.g. e-filing, e-banking

Still have teething problems and connectivity problems

Broadening the taxpayer base

Further simplification of the tax regime

Harnessing informal sector

Street mapping

Engagement and Linking into the databases of other regulatory authorities and relevant Stakeholders.

Capacitating Industry

Revenue collection remains a function of the level of economic activity and hence limits to measures without reversing deflation and stimulating economic recovery Strategies to accelerate economic recovery Promotion of local industry capacity, Buy Zimbabwe to

build local demand Targeted and time framed protection of local industries Targeted and time framed tax concessions

Conclusion

Given the current deflationary economic environment, huge challenge to achieve a sustainable tax base.New Income Tax Bill seeks to address some of the challenges associated with the building of a sustainable tax base.Anti-corruption campaigns will enhance revenue collection and this calls for collaborative effort from all stakeholders. Expansion of the tax base and the taxpayer base a key success Factor for Tax Authorities to ensure sustainability.

Gratitude

Thank You! Siyabonga!

Tatenda!