HARARE – Increasing value-added tax (Vat) on all meat products, including edible meat offals and cereals, is a draconian measure that will sharply hike the price of the basic commodities for hard-pressed consumers and slash consumption, rather than generate the extra income Zimbabwe is seeking, top economists warned yesterday.
Finance minister Patrick Chinamasa on Wednesday hiked Vat to 15 percent on all meat products, including offals and fish, rice, maheu and margarine, under Statutory Instrument (SI) 20 of 2017 as one of a package of measures Harare hopes will help unlock funds needed to boost government finances.
Rice, fish and meat were previously exempt from the 15 percent Vat, and economists warned that ordinary Zimbabweans will struggle to shake off the disruptive effects of the tax increase.
A kg of boneless, skinless chicken breasts is now retailing for $5,28 while an equivalent beef round or back leg red meat is now selling for $6,64.
The food basket rose by $11,30 or 8,49 percent from $133,06 by end of December to $144,36 by end-January 2017, driven by the Vat hike, the Consumer Council of Zimbabwe said on Thursday, putting food inflation firmly back on the economic agenda.
Zimbabwe National Chamber of Commerce (ZNCC) said increasing Vat would hurt badly consumers already struggling to survive.
“The 15 percent Vat on meat products and cereals will raise the price of these commodities for consumers already operating on low disposable incomes.
“The most likely response by consumers to the price increases will be to reduce their purchase of such products,” ZNCC said in a statement.
“This also has tax implications on government. When the price is increased by 15 percent, the products can become beyond the reach of many consumers and they may decide not to consume the product if they have a choice.
“Alternatively, the consumer may reduce the volume of the goods consumed and spend the same amount but on less quantities of the product.
“Government will in the short run benefit from the Vat incremental revenue but eventually lose on income tax and even Paye due to reduction in demand which will affect profitability and employment levels.”
Economist Kipson Gundani said the measure would depress sales and reduce the state’s take, as happened after the previous Vat raises.
“They are basics, hence producers and retailers are likely to pass on the Vat to the consumer in the form of price increases,” Gundani told the Daily News on Sunday.
“It’s unfortunate that the consumer bears the brunt of the policy at a time when they have little at their disposal.”
George Mushipe, spokesperson of the Apex Council — the umbrella union for State workers — said they were going to officially respond to the hike this week, amid tightening of labour market conditions that have peaked with government staggering salaries and failing to pay the government workers bonuses.
“We are going to meet as Apex Council next Tuesday then issue out an official position,” Mushipe said.
According to the Zimbabwe National Statistical Agency, government employs 300 000 workers, a number which does not include the army, air force, police and prisons.
Chinamasa said the tax increase would depress sales initially, but the policy was necessary to shore up the economy in the longer term.
While the country experienced deflation throughout 2016, authorities have projected inflation to average 1,1 percent on an annualised basis this year, with month-on-month inflation rate in December up 0.04 percentage points to 0.06 percent, according to Zimstat.
Consultant economist Gift Muganhu said the immediate impact of the Vat hike will be a sharp increase in prices of the commodities.
“Producers don’t pay tax; they pass it on to consumers. There are only few exceptional cases where we share the burden, particularly in areas where demand for the product is low.
“In many cases, the consumer pays the total value of the tax. In this instance, if you look at those commodities, they are basic products; because they are basic, we need them,” he said, describing the impending price rise as “unfortunate.”
“People have no money, look at the national budget, there is going to be decrease in aggregate demand because people have no money, people are not working, life is hard, those working are not paid on time, those working are paid late.
“This is a wrong approach by the minister,” Muganhu said.
He said the move increases the country’s tax burden, causing less competitiveness, with the total tax rate around 30 percent, making Zimbabweans the highest taxed citizens in sub Saharan Africa.
“The ministry is looking for money. But if you keep on milking a cow, it will die. You need to get more cows than to keep on milking because you want more milk,” Muganhu said.
“You need more cows, it’s a question of increasing the tax base. In the short-term, the minister can reduce the high taxes paid by the informal sector, for example, presumptive tax,” he said referring to a tax chargeable on small to medium enterprises in Zimbabwe which involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on the taxpayer’s accounts.
“It’s a tragedy, its draconian, it’s unfair,” he said.
In the medium term, Chinamasa may consider removing the impediments on the doing business environment by simplification of the complex taxation system, he said.
“Unoita seuri kuroora mukadzi (getting a Vat certificate is like going through lobola rituals),” he said.
“We need to open up the legal environment over and above the political environment.”