CZI’s view on indigenisation levy
AS the Confederation of Zimbabwe Industries (CZI), we have always been in support of empowerment based indigenisation. CZI reaffirms its support and agrees and embraces the aims of the indigenisation programme. CZI also welcomes efforts being made to clarify the Indigenisation and Economic Empowerment Act. The recently announced guidelines make the flexibility of the Act inherently clear. Clarification of this flexibility will dispel the many misconceptions that have been built around the Act.
The CZI has outlined recommendations on the level and nature of the proposed empowerment levy. The levy has two key objectives, which are to help fund the process of indigenisation and to act as an incentive for compliance
In the spirit of the Zimbabwe Agenda for Socio-Economic Transformation and the thrust towards reducing the cost of doing business, it is important that the levy is structured in such a way as to have little or no impact on the cost of doing business.
If we get the levy at the right level, it would complement other measures proposed in the frameworks and would see a natural process of increasing empowerment unfolding. We have given considerable thought to how a levy could be structured and different ways of applying it.
We do not recommend any sort of levy on turnover for several reasons.
Firstly, a turnover based levy will be a direct increase in the cost of doing business, something we are already trying to address as a nation to increase viability and competitiveness of the economy.
The relationship of profit to turnover across sectors varies widely and as such any turnover based levy would affect companies in very different ways. This would result in unfair treatment of some companies in favour of others. Certain companies natural levels of profitability are in the region of two percent to three percent of turnover even in a strong economy. This means that almost any level of turnover based levy is crippling.
Companies with net profits below 10 percent would go into loss positions. The implication is that there would be reduced corporate tax collections by the Zimbabwe Revenue Authority (ZIMRA); and in essence what was going to ZIMRA would go to the Indigenisation Fund. This would worsen government’s revenue collection position.
The deeper any value chain is locally, the more negatively affected that value chain would be by a turnover based levy which applies at each level of the chain and compounds through the chain. In this way, a turnover-based levy penalises local value addition and rewards value chains with minimal local participation. In other words it favours imports.
As CZI, we did an analysis of companies on the Zimbabwe Stock Exchange in terms of what the companies realised as profits and calculated those figures as a percentage of revenue. Of the total surveyed companies, over 80 percent reported profits below 10 percent of turnover, and of the 80 percent, about 52 percent actually reported losses. This gives an indication that most companies would not be able to sustain a turnover-based levy.
Given the fact that compliance will take time to achieve, a turnover based levy would cripple many companies and hurt the economy. Given the complex interactions between companies, even fully compliant companies would suffer where their non-compliant suppliers or customers are affected. The negative impact would cut across the economy, adding to our economic woes.
We looked at other options of imposing the empowerment levy, focusing on different aspects other than turnover which can yield similar results and have less negative impact on businesses/investors. Some of these options included levy on corporate tax; levy on PAYE paid by the employer only; tiered flat on turnover, incentives such as tax and other fiscal incentives rather than punishing measures.
There is no perfect levy; any levy will have some downside impact. Looking at the options we recommend a levy set at two percent of what a company pays as pay as you earn (PAYE). This will not drastically increase the cost of doing business in Zimbabwe but still provides a strong incentive for compliance given the thin margins most companies realise in profits.
This option would encourage compliance and also help fund the programme. In 2015, government collected PAYE of about US$770 million and imposing the levy on this would effectively generate revenue of about US$15 million annually. The fact that PAYE is contributed monthly means that the levy would also accrue to the fund on a monthly basis. We believe that this would be the most effective option for implementation of the levy.
In order to guard against misuse or embezzlement and ensure good governance and management of the fund, we also recommend a cap for money from the fund which is to be used for recurrent expenditure by the fund managers. We recommend that this cap be set at not more than 10 percent.
The finalisation of the empowerment levy is the last remaining piece to complete an effective and holistic economic empowerment programme for the nation.
We recommend a levy of two percent of PAYE paid by the employer only, the rebate structure would apply as outlined in the guidelines.
This levy would provide a strong incentive for compliance, be easy to collect, and help raise meaningful funding for the empowerment programme. At the same time it would not dramatically increase the cost of doing business.
We believe empowerment objectives can be achieved without upsetting the current efforts to increase viability and competitiveness as well as attracting investment into the country.
CZI encourages members to engage their line ministries over compliance matters and ensure that they operate within the confines of the law. CZI also wishes to highlight that a significant number of companies have complied and indications are that over 600 companies have either submitted their plans or have had their plans approved.
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