The Minister of Finance and Economic Development Mr Chinamasa recently announced that there will be a proposal for a simplified tax regime which will be put in place in 2016 in an effort to improve revenue collections for the state. This would be a good step if the implementation of the tax regime is properly administered. However, we should not be blind to the fact that there are some underlying issues that can make this initiative fail if they are not first addressed.
Simplifying the tax system alone will not resolve the revenue crisis, but addressing the challenges associated with the current revenue collection process and then simplifying the tax system will improve revenue collection.
A simplified tax system would probably raise compliance rates, and reduce tax evasion. It is perceived that people do not pay taxes because they do not understand the tax law, hence by clarifying and simplifying tax rules, people would be able to understand the tax law better and it would likely make it easier to enforce the law as well.
Also complicated tax systems are professed as unfair and suspicious, people would just feel as if they are being cheated hence by simplifying the tax system, people would have more confidence to comply.
However, when implementing a new reform, it is important to analyse all the underlying factors that have been hindering the success of the current system some factors can be resolved easily while others may be difficult to deal with. By doing this, we would be setting a foundation for the successful implementation of the new reform.
The Zimbabwe tax system has been deemed too complex and it has not been raising the revenue the country requires for development. Tax laws have been deemed so complex that even with the best intentions, it is almost impossible to comply with them. And the temptations to cheat have be overwhelming, particularly for corporations that can use transfer pricing and tax havens to avoid taxation.
Despite the fact that the tax system is complicated and needs to be simplified, Zimbabwe‘s current tax system, like most developing countries has been facing diverse challenges. The major challenge is that the country’s tax base is already very low.
Due to the decline in the level of formal business activities the majority of revenue is collected from a narrow base as a result of limited taxable economic activities hence the dependence on a very small number of tax payers.
Data from the IMF shows that the average fiscal revenue-to-GDP ratio (without grants) in sub-Saharan Africa (SSA) was around 20 percent of GDP in 2010. It also reveals that corporate taxes and trade taxes account for a lower share of tax revenue as a ratio of GDP compared to income tax and taxes on goods and services.
So the challenges that the tax system face can be defined in two folds as the external economic challenges and the internal administrative challenges within the system whereby under the economic challenges, we are looking at the low taxable business activities and difficulty in taxing the large informal sector. And in terms of administrative challenges, we are looking at the complexity of the system to the people as well as infrastructure of the tax system.
Enhancing the success of a simplified tax system
To create an efficient tax administration, government needs to address the current shortfalls in the tax system and set up practical steps in introducing a simpler tax system. The design of a simplified tax system should be as unbiased as possible in an effort to minimise interference in the allocation process. The system should also have simple and transparent administrative procedures so that it is clear if the system is not being enforced as designed. In a bid of introducing a more simplified tax system, policy makers need to have the political will to ensure that the tax reform is implemented and followed through. Simplified tax systems have the advantage that they can boost development by giving countries more autonomy.
Building capacity, strengthening infrastructure, combating corruption and developing a transparent financial system play a critical role in ensuring that a simplified tax system is successful. Without addressing the above factors first, the fruits of implementing a simplified tax system will not be seen. Tax revenue is central to the success of economic development in any nation.
When a country has a strong tax base it ensures stability in the economy and predictability of the fiscal environment which will ultimately promote growth and, in the longer term, reduce dependence on development aid. Taxation is about “good governance”, the answer is not only in implementing a simple tax system but in governing it and administrating it well. Tax systems work as vehicles for enhancing state-society relations and improving public accountability. In other words, how taxes are raised matters as much as how much.
It is not easy to make tax systems work especially in an environment with limited tax sources. There is need for a whole change of the mind-sets and attitudes of policy makers, tax officials and the ordinary people.
Ordinary people may be unwilling to pay tax, frequently because of the perception that officials themselves may be corrupt, and that governments may consistently misuse public funds. If this kind attitude persists no matter what kind of tax reform is implemented as long as the attitudes of the agents have not changed the success of that tax reform is compromised.
But what can be done to change the attitudes of a rational people? Implementing mechanisms that will boost confidence in the general public may promote compliance. Mechanisms that discourage corrupt tendencies and promote transparency at the tax official level as well as at the government spending level will boost confidence in people.
For example, the current provision in the constitution of consultations from the public in matters of the state and the economy. This is an initiative that encourages transparency and accountability and hence boosts confidence. Such participatory mechanisms may encourage tax compliance and also discourage corruption as well as ensuring that tax systems are understood, transparent and fair.
The changing global environment is also a factor to consider when implementing a new tax reform. In as much as some may argue that taxation is an internal issue it is important to acknowledge that the external environment also poses new challenges. There has been an international shift away from taxes on trade, and this has added to the problems of domestic revenue raising. There is therefore a critical need to strike a balance between an attractive tax regime for investment and growth, and securing the necessary revenues for public spending.
Regardless of the above challenges, a simplified tax reforms will provide a base for direct interaction (and formalisation) between the state and small businesses. By simplifying our taxes, we will make them more equitable and allow our economy to function more efficiently. Simpler taxes would lower taxpayers’ costs of complying with the tax system in terms of time, money, and mental anguish, thus reducing the overall burden of taxation.
However, what we are saying is that we shouldn’t be satisfied with just simplifying the tax system but we should focus on making the simplified tax system work by addressing all concerns that may affect the success of the simplified tax system to raise the required revenue.