In a significant move aimed at bolstering economic growth and improving the affordability of essential goods, Zimbabwe has announced substantial reforms to its Value Added Tax (VAT) system, exempting certain products from VAT effective 1 August 2024. This article explores the details of this shift, explaining the intricacies of moving from standard-rated to exempt goods, the motivations behind the change, and its anticipated economic impacts.
Zimbabwe’s VAT system categorizes goods into three types: standard-rated, zero-rated, and exempt. Standard-rated supplies carry a VAT rate of 15%, allowing businesses to claim VAT on their inputs. Zero-rated supplies are taxed at 0%, enabling businesses to reclaim VAT on their inputs. This category traditionally includes essential goods like basic food items and necessities for disabled persons. Exempt supplies do not attract VAT, and businesses are not required to register for VAT or claim input tax, often resulting in higher final prices for consumers as the costs are passed on.
Minister of Finance, Economic Development, and Investment Promotion, Professor Mthuli Ncube, has proposed VAT exemptions for live animals (cattle, pigs, goats, and sheep), bovine semen, poultry meat, and kapenta starting 1 August 2024. Previously, the supply of live animals was zero-rated until 1 January 2024, when it became standard-rated under Statutory Instrument 15 of 2024. This SI also moved day-old chicks, sheep, and goat meats from exempt to standard-rated. It also exempted most farming inputs like animal feed, remedies, fertilizers, and pesticides. With the new proposal, inputs and live animal sales will be VAT exempt, while meat products will remain standard-rated.
The primary objective of exempting these livestock products from VAT is to make meat more affordable for consumers and promote formal business practices. The change addresses the mismatch created by SI 15 of 2024, which exempted agricultural inputs from VAT while standard-rating the final products. By exempting the output of livestock farmers, the direct tax burden on consumers is removed, potentially reducing prices if businesses adjust their pricing strategies accordingly. Additionally, this shift eliminates the compliance and administrative burdens associated with standard-rating, such as VAT registration and tax return submissions, which can be costly and cumbersome for small and medium-sized enterprises.
The proposed VAT exemptions may lead to a short-term decrease in government revenue from these items. However, the government anticipates that economic stimulation and increased consumption resulting from lower prices will offset this loss over time. Reduced costs of essential goods can drive growth in related sectors, creating a multiplier effect throughout the economy.
From a business perspective, capital goods used in producing the newly exempt products will no longer be deemed used in trade, altering their VAT status. This change would typically trigger output VAT to recoup previously claimed input tax, but such adjustment is not required when driven by government policy. Businesses that cease to produce taxable supplies may need to deregister for VAT, creating an involuntary supply and resulting in VAT due on fixed assets previously used in taxable supplies.
The Minister’s proposal lightens the VAT burden on consumers and aims to restore order within the formal livestock value chain. However, inequalities persist, such as the omission of eggs from the exempt product list, creating disparities and VAT administration issues for farmers producing both chickens and eggs. With eggs remaining standard-rated while poultry meat is exempt, the government should consider extending the same VAT exemption to egg sales to mitigate these complications and further reduce the tax burden on consumers.