The benefits of formalising business in Zimbabwe

The benefits of formalising business in Zimbabwe

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By Calvin Manika

MOST of the Central Business Districts (CBDs) in Zimbabwean towns are gradually infiltrated by small to medium enterprises (SMEs) selling groceries, second hand clothing and kitchen utensils. The same pattern is increasing in the high-density suburbs with tuck shops, barbers, and restaurants mushrooming in most streets.Even though most of these businesses are not registered, such development shows that Zimbabweans possess an entrepreneurial mind.The Entrepreneurial Magazine had an interview with Tinashe Majoni, a second-hand clothing wholesaler in Harare CBD. He said on an average day he pockets between US$1000 to US$1700 with a profit margin of about US$400.The money is not taxed and banked his expenses are on rentals and wages of his three employees.“I have never attempted to register a company or my business. I am a busy person and I think it will take much of my time. We hear that government processes are slow and very long. Another issue is ZIMRA taxes can be too high. But I don’t know,” Majoni said.Majoni joins thousands of Zimbabweans who are evading tax and profiteering at the expense of the state and the public in general. Through rentals and licenses the city councils nationwide pocket a share of the larger chunk of these unregistered businesses which are not audited and accounted for by the responsible authorities.Daniel Muza, a second-hand clothing shop owner in Harare noted that, it is not about lack of knowledge only. But, second hand clothes in Zimbabwe are not allowed as most of them are smuggled through porous borders or bribing the immigration officers.“Maybe other small business can approach the authorities for registration. But, as for us, it’s a different story altogether. Most of our stuff is smuggled bales and we end up being arrested. So, it is better to play away from the fire,” Muza remarked.Since 2007, Zimbabwe is increasingly becoming an informal economy with the majority of people being self-employed. Most of the small to medium enterprises (SMEs) remain unregistered and not captured in the Zimbabwe Revenue Authority (ZIMRA) data base. Informal businesses are invading legal routes with the ignorant few not intentionally avoiding them, a situation which is harmful to the economy.Unaware to the majority of the businesses which are unregistered and operating illegally, the formalisation of a company or business comes with advantages. Remaining unregistered, impact the operation of these businesses resulting in them not able to secure the much needed investment capital from the banks and other benefits which come through tax compliance.In the view of the fact that sole traders are prone to debts and losses, an expert in banking and academic, Leornard Chibamu said registering a business comes with a control advantage as one can use a company structure to effectively separate the management and ownership aspects of the business.”For example, the managers of the business can be appointed directors of the business. The owners of the business are its shareholders. Becoming a registered company is also important for engaging other businesses. Many businesses will only hire or engage registered companies because they are legitimate,” Chibamu said.Economic experts are of the view that operating as a registered company helps to expand business and ensure continued success. Lower tax rates mean that a company can focus on turning its business into the lucrative venture.Chibamu added that it is important for small and medium business to have the paper work in order, including the vendor number from the Ministry of Finance and Economic Development.”This Ministry through the Public Finance Management System located in the old Central Payments Offices requires an application letter typed from one of the company’s directors and on the company’s letterhead with a processing fee. The following information must be included in the application letter, registered name of company, physical address of company, postal address of company, name of company’s bank, branch and account number, contact person from the company, position of the contact person in the company. This is business now,” Chibamu said.In 2018 the Minister of Finance and Economic Development Professor Mthuli Ncube expressed his worry on unregistered businesses.“Over 4 000 businesses in Zimbabwe are not registered with the Zimbabwe Revenue Authority (ZIMRA) for tax purposes,” said Ncube.One of the best ways of ensuring success and continuity in any business is to ensure that all statutory obligations are met in time. According to ZIMRA, the requirements for new businesses include Income Tax.”All clients, including individuals, companies, partnerships and cooperatives who want to venture into any business are required to register with ZIMRA online and comply with all obligations as stipulated in the legislation. To register, clients are required to have a bank account among other requirements. Detailed guidelines on how to do the registration process are found on the ZIMRA E-services portal under how to do guide,” says ZIMRA in a statement.Once completed with all the required attachments, the client is issued with a Business Partner Number (BPN), which acts as the business’ identification number and is used for all transactions with ZIMRA, including remittances of tax. After commencing operations, clients are required to keep records of all their business operations and pay Provisional Tax on the stipulated dates.The dates are referred to as Quarterly Payment Dates (QPDs). The Provisional Tax payable is based on the respective percentage of estimated annual tax due.Some business, operators are required to pay Presumptive Taxes and this includes operators of omnibuses, taxi-cabs, driving schools, goods vehicles, hairdressing salons, informal traders, operators of restaurants or bottle stores, small scale miners, cottage industry operators, operators of commercial waterborne vessels used for the carriage of passengers for profit and fishing rigs.”Every registered client is required to submit a tax return after the end of each tax year. The tax year runs from 1 January to 31 December of each year. All the clients are now on Self-Assessment and are required to furnish Self-Assessment Returns in duplicate by 30 April of the following year,” ZIMRA noted.In addition, research indicates that a registered business has a tax advantage, a company pays less tax than sole traders. Depending on how much they earn, sole traders are liable for tax up to 45% of their income whereas companies only pay a flat tax return of 14.5% income tax. It is easier also to raise capital as a registered company than as a sole trader.Tambudzai Mujana, a tuck shop owner in Kuwadzana, Harare, acknowledged that she is making profits and thinks to register her business when she turns into a big shop.“Of course, I just built my tuckshop on my standand I work for myself, so basically I have a profit out of this venture unlike those renting at the business centre with employees. Given that change of growing and relocating to the business centre, I think it will be proper to register the business and comply with the law. It helps in building the economy and gives a sense of business,” she said.

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