Wenslus Murape
Tawanda Musarurwa and Theseus Shambare
ACROSS downtown areas in Zimbabwe’s towns and cities, a hidden empire hums with activity.
A 2018 International Monetary Fund (IMF) study titled “Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?” highlighted that Zimbabwe had one of the biggest shadow economies (informal sector economy) in the world, at 60,6 percent.
In these downtown areas, typified by makeshift stalls and bustling pavements, the informal sector continues to defy the odds.
However, some small businesses are even more obscure, as they exclusively operate on digital platforms, while others have taken up space in malls sprouting across the country.
This “shadow economy”, vibrant yet opaque, has long been both a boon and bane for Zimbabwe.
It cushions families by employing millions who might otherwise go jobless, but it also robs the Government of vital revenue.
The taxman is now eyeing this shadowy market with an audacious new plan recently announced by Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube in the 2025 National Budget. Although the informal economy accounts for over 60 percent of the country’s gross domestic product (GDP), according to estimates, it operates almost entirely off the books. Taxes help the Government to raise resources to deliver essential public services, so it is a significant misalignment that MSMEs, which are arguably the biggest single economic segment in the country are benefiting from public services at no cost.
There is a general feeling among some informal traders that formalising their businesses could mean paying taxes on thin margins. But all Government and private sector employees, whose incomes are less than those of many small businesses, are taxed through the Pay As You Earn (PAYE) system.
Zimbabwe has made previous, albeit unsuccessful, attempts to ensure that its tax system is equitable.
The fiscal authorities initially introduced presumptive tax in 2005, which was modified in 2011, to broaden the revenue base in view of the increasing informal business activities.
Increased formalisation can help the Government to effectively regulate operations of these small players, some of whose operations border on criminality.
Most goods in outlets operating in this shadowy economy seem to be smuggled into the country. To evade the watchful eye of the Zimbabwe Revenue Authority (Zimra), the businesses reportedly resort to a labyrinth of smuggling routes, bribing officials along the way.
“Munhu wese anoda mari bhudhi (Everybody loves money, brother),” said a shop attendant of a business that operates in downtown Harare.
He spoke on condition of anonymity.
“Per day, I cash in at least US$7 000, but on good days, like we expect this coming festive season, we are talking of not less than US$15 000 a day.”
In the area around Rezende Street, some of these shops have wholesale sections, where tuckshop owners based in high-density suburbs buy.
They seem to operate exclusively in cash.
This untraceable wealth allows them to sidestep the taxman and maintain a level of financial independence that would be the envy of many formal businesses.
Official numbers back this up.
According to the Finscope Micro, Small and Medium Enterprises Survey Zimbabwe (2022), the wholesale and retail sector accounted for 37 percent of the total of 1 639 807 micro, small and medium enterprises (MSMEs) in the country, only behind agriculture and farming at 39 percent.
Of the total number of MSMEs, only 40 percent were banked. Obviously, this denies Treasury billions of dollars in revenue each year.
The vast and complex network of small-scale traders, hawkers and informal businesses has grown exponentially in recent years.
Elusive sector
The country’s implementation of presumptive tax has been an uphill task due to a combination of poor enforcement, corruption and the lack of fiscalisation in the informal sector.
A presumptive tax is typically levied on unregistered enterprises, which leaves various gaps in terms of enforcement.
There have been claims that some Zimra officials, who are supposed to enforce presumptive tax compliance, are taking bribes from some small businesses.
An automated system could have been beneficial in enhancing compliance, but Zimra’s fiscalisation programme that was introduced in 2010 failed to take hold, especially among SMEs.
The programme, meant to minimise revenue leakages in retail sales, required that all value-added tax (VAT)-registered operators acquire, instal and connect fiscal gadgets to the Zimra server to facilitate real-time monitoring of transactions. But the uptake of the electronic fiscal devices was poor.
In the 2024 National Budget, Minister Ncube tried to cover most of the small enterprises under presumptive tax.
But, after the tax failed to gain traction during the first few months of 2024, Treasury proposed some changes through the 2024 Mid-term Budget and Economic Review, which included a downward review to enhance compliance.
For example, the presumptive tax for informal traders was reduced from the initially set $3 250 (local currency) plus 10 percent monthly rental to just 10 percent monthly rental. The taxes could also be paid in the local currency.
Changing tack
Overall, attempts to ensure formalisation have resulted in limited success, as many informal traders are reluctant to give up the advantages of operating outside the system.
Now, the new system proposes to tax fabric merchandisers; clothing merchandisers and boutiques; spare parts dealers; car dealers; grocery and kitchenware merchandisers; hardware operators and lodges.
“A survey into the operations of selected enterprises from the emerging sector shows that a number of operators are engaged in significant economic activities, hence qualify to contribute to the fiscus through personal and corporate income taxes, as opposed to presumptive tax,” said Prof Ncube while presenting the 2025 National Budget.
“Notwithstanding that the beneficial owners or directors of such companies can maintain books of accounts, operators deliberately conceal records from the tax administrator, under the pretext that such operators do not have capacity to keep records, which is tantamount to tax avoidance and evasion. In order to provide an opportunity for the emerging sector to contribute to the fiscus, I propose to enhance the provisions of the aforementioned legislation and prescribe for the mandatory registration for corporate and personal income tax.”
To operationalise the proposed tax system, the businesses are required to register with Zimra, transact through point-of-sale machines and maintain records of all transactions by the start of the new year.
And to avoid the pitfalls of the previous presumptive tax, Zimra has been given “teeth”, and can now temporarily close down non-compliant entities.
In addition to that, non-compliant operators will now be required to pay set quarterly taxes that are hefty.
The set quarterly taxes for non-compliant players have been proposed as follows: spare parts dealers (US$9 000), car dealers (US$15 000), grocery and kitchenware merchandisers (US$9 000), fabric merchandisers (US$12 000), clothing merchandisers and boutiques (US$12 000), hardware operators (US$15 000) and lodges (US$5 000).
Zimra might also need to revisit the failed fiscalisation programme, especially given that the wholesale and retail sector accounts for 37 percent of the country’s MSMEs.
Beyond the proposed hefty fines, there was no incentive for small businesses to “maintain records of all transactions”.
Sharing the tax burden
Industry experts say the move could promote industrial growth, generate employment opportunities and create a ripple effect of benefits for associated industries.
Confederation of Zimbabwe Retailers president Mr Denford Mutashu welcomed the budget as “a balanced approach to addressing critical economic and environmental challenges”.
“Taxing the informal sector ensures equity and helps boost Government coffers, as it seeks to implement a number of key infrastructure and developmental projects,” said Mr Mutashu.
Harare entrepreneur Mr Taurai Tafirei of CET Computers said taxation equity and the formalisation of MSMEs are key for the economy to realise its full potential.
“You will realise that taxation was only weighing on the formal sector, yet a huge chunk of money is being circulated within the informal sector,” he said.
“This is a good move by the Government. I foresee huge growth and if the money is used well, more infrastructure development is imminent and, most importantly, the attainment of an upper middle-income
economy.”
Small unregistered tuckshops, he said, were avoiding tax while making huge profits, while at the same time subjecting formal businesses to unfair competition.
“This has led may players to downsize their operations, negatively impacting on the economy.”
The requirement for all small business to transact through point-of-sale machines will compel these businesses to open bank accounts, which will bump up the country’s financial inclusion goals, as indicated in the National Financial Inclusion Strategy II (2022-2026).
Mr Forbes Mabaya, an SME player in the car import business, expressed satisfaction with other proposals in the budget.
“The reduction in duty on electric vehicles (EVs) from 40 percent to 25 percent highlights the Government’s commitment to environmental sustainability and green energy adoption.
“This measure is expected to increase the affordability and accessibility of EVs, encouraging their uptake and supporting the country’s climate goals,” said Mr Mabaya.
“This, in turn, means more competitive business, as well as good pricing for our clients.”
While the new tax measures will likely bring a significant segment of the informal sector into the tax system, Treasury will still need to develop innovative ways to keep track of the ever-evolving informal sector, including new unregistered online enterprises.
daniel chigunwe
