In his last budget statement, Finance minister Mthuli Ncube boldly declared the government’s intention to mainstream the informal sector, aiming to broaden Zimbabwe’s tax base. This is hardly surprising, given that the informal sector, which has ballooned in the post-land reform era, now makes up an estimated 65% of Zimbabwe’s economy. Naturally, the government sees this as a treasure trove of untapped revenue. But the million-dollar question remains: How?
Quest for formalisation
A glance at Zimbabwean tax policy reveals a clear strategy — conversion. The government seeks to formalise the informal sector, thereby bringing it under the tax net. This is not a new endeavour.
In 2005, presumptive taxes were introduced as a simplified method for informal traders to contribute to the national purse without getting entangled in complex accounting procedures. Yet, two decades later, the informal sector has morphed into a behemoth, dwarfing the formal sector while making a meagre contribution to state revenue.
A peek at Zimra revenue reports confirms this: presumptive taxes have yielded disappointing results. This begs the question: What next? The government’s answer appears to be a renewed call for formalisation, echoing the sermons of old, albeit with a modern twist.
Preaching gospel of formalisation
One of the more recent sermons comes in the form of an amendment to Section 81A of the Value Added Tax Act. Dubbed the “route to market” provision, it dictates that only registered entities with valid tax clearance certificates can procure goods from manufacturers and wholesalers. Those without such credentials face restricted access to supplies or inflated purchase costs.
This policy reflects the government’s mindset: punish them to formalisation. Yet, it also exposes a glaring disconnect between tax policy and the lived realities of millions of Zimbabweans who rely on informal trading to survive.
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Forced conversions: A risky gamble
Coercing the informal sector into the formal economy through punitive measures might seem like a clever revenue raising strategy, but history warns us otherwise. Forced conversions often yield resentment or even revolt.
Indeed, Tony Milne’s book, Tax Man: How Homo Sapiens Took 10% of Everything to Conquer the World, reminds us that effective taxation hinges on public acquiescence. Without willing compliance, tax authorities face an uphill battle.
Humans, by nature, resist compulsion. Adults do not appreciate being dictated to, and self-preservation remains a powerful motivator. To compel compliance, tax policies must consider these human truths.
Why do people prefer to operate informally? Why are formal companies increasingly selling to the informal sector? These are not mere academic questions — they are the key to understanding how to effectively tax the informal economy.
Realities on the ground
Imagine a street vendor selling secondhand clothes. This vendor is not out to defy tax laws but is simply trying to make a living. Registering a company and obtaining a tax clearance certificate does not help him achieve his goal of feeding his family.
In fact, it imposes costs and bureaucratic hurdles he cannot afford. The government’s expectation for him to formalise is, therefore, unrealistic.
Or consider another example: a laid-off worker who only decides to sell used clothes to support his family. His immediate concern is survival — not registration formalities. It is no wonder, then, that formalisation initiatives continue to flounder.
Incentives matter
Converting people is difficult. It requires offering a better alternative than their current status quo. For example, under Section 81A, a street trader who currently procures goods from local manufacturers would have to formalise to continue doing so. This will only happen if the perceived benefits of formalisation outweigh the costs and inconveniences. If not, the trader will either find alternative supply routes — possibly through smuggling — or switch trades altogether.
The government needs to align tax policies with incentives that genuinely improve the livelihoods of those in the informal sector. A compelling case study is Zimbabwe’s age old burial societies.
These informal social safety nets have thrived for over a century because contributors clearly see the benefits of participation.
Similarly, in some communities, residents willingly contribute to garbage collection and neighbourhood security because they experience tangible benefits.
New paradigm for tax policy
To truly unlock revenue from the informal sector, Zimbabwe must rethink its approach. Coercion and punishment are not the answer. Instead, the government should create incentives that make formalisation appealing. This could include simplified registration processes, access to credit for formalised businesses, or reduced tax rates for startups.
The solution lies not in forceful conversion but in voluntary participation. As Milne pointed out, effective taxation requires consent. If Zimbabwe’s informal sector sees formalisation as a pathway to a better livelihood, they will willingly come on board. Until then, the government's sermons on formalisation will continue to fall on deaf ears.
Call for pragmatism
Zimbabwe stands at a crossroads. The informal sector is too vast to ignore, but too complex to be tamed by brute force. To tap into this gold mine, the government must craft smart, empathetic tax policies that resonate with the everyday realities of its people.
Punitive measures only alienate and drive informal traders further underground. The key to broadening the tax base lies in creating incentives that inspire voluntary compliance. If the government can master this delicate balancing act, it will not only unlock substantial revenue but also foster a more inclusive and resilient economy.
- Chibanda is a finance officer at the Zimbabwe Institute of Tax Accountants. He Is interested in taxation, public infrastructure funding and public finance in general. He writes in his personal capacity and views expressed in this article do not reflect those of the organisation he works for. These weekly New Perspectives articles are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zim). — [email protected] or mobile: +263 772 382 852.
