THE Ministry of Finance standardised the Intermediated Money Transfer Tax (IMTT) at 2% for both United States dollar (USD) and Zimbabwe Gold (ZiG) transactions.
Previously, local currency denominated transactions faced a 2% IMTT, while foreign currency transactions were subject to a 1% IMTT. Therefore, the 2% standardised IMTT represents a one-fold increase for USD denominated transactions.
The recent review in IMTT follows a plea from the business community to have the IMTT reduced, particularly for USD transactions, as this tax had an effect of increasing the cost of doing business in Zimbabwe.
The IMTT is a tax on electronic payments or transfers made by payers (both individuals and corporations). It does not directly affect the recipients of payments. The tax is typically levied on transactions related to the acquisition of assets, payment for expenses, and settlement of liabilities.
Therefore, since this tax typically affects anyone and everyone, who transacts through the formal banking channels, it is imperative to assess the impact of a 100% change in the tax on USD transactions.
This aforementioned change aimed to align the IMTT rates for Nostro account US dollar transfers with local ZiG transfers. However, it is important to note that over 80% of the transactions in the economy are denominated in foreign currency, while the informal sector also relatively constitutes a circa 80% of the economy.
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Firstly, the recent increase from 1% to 2% on USD transactions will reduce incentive for formal transactions, at a time confidence in the formal banking channels is already alarmingly curtailed by past experiences.
Zimbabwe has been suffering from high informalisation lately, which has been an effect of two main factors, which are low productivity and confidence in formal banking. The latter has led to viability of a parallel currency market as most people fear depositing their foreign currency in formal banks due to potential monetary losses.
At a time the government is supposed to redeem the confidence through lucrative policies, an increase in IMTT will further drive away financial transactions onto the informal market, leading to a worse off informalisation risk.
Individuals and businesses will turn to informal channels to avoid the tax burden. The impact of this is a further reduction in liquidity on foreign currency denominated financial markets, which renders the country less lucrative for investments, while simultaneously leading to reduced transparency and hinder efforts to formalise the economy.
As transaction charges rise with the increment in IMTT, the cost of doing business in Zimbabwe will also surge. It is important to note that Zimbabwe is a net importer, and, therefore, most products are sourced in foreign currency.
Previously, the cost of goods sold was 1% lower in USD terms, and with the increased IMTT, companies will preserve their GP margins by passing the increased cost effect to consumers. In this light, increased cost of sales will be offset by increased revenues through price adjustments.
Previously, the currency mix of 80:20 between USD and local currency transactions meant the higher IMTT on the local currency component was immaterial in affecting profitability.
Now firms are faced with the task of assessing whether the benefits of conducting USD transactions outweigh the costs. In this light, the IMTT increase may indirectly influence the exchange rate dynamics. As the tax burden rises, currency traders will demand a cushion to offset potential transfer costs.
The decision to raise the IMTT from 1% to 2% on USD transactions has both short-term and long-term negative consequences. While it aims to generate revenue for the government, policymakers must carefully balance revenue needs with economic growth and financial stability. Likewise, businesses and individuals ought to also evaluate their strategies in light of these changes.
Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — twdumah@gmail.com or tinashed@equityaxis.com, Twitter: TWDuma_