Zimbabwe’s value chain withholding tax addresses a real problem. Formal businesses pay tax, file returns and carry the cost of regulation. Informal traders frequently do not, and they compete with the shops that do.
Section 81A of the Value Added Tax Act responds by requiring every manufacturer and wholesaler to withhold 5 per cent from buyers not registered for VAT.
The objective is sound. The design is not, and the reason is arithmetic rather than ideology.
The Small Buyer Already Pays More
The policy overlooks one fundamental commercial reality every manufacturer knows. Manufacturers do not sell to everyone on the same terms, and the differences run well beyond price.
A wholesaler buys at a discount—commonly 10 to 15 per cent. It has the goods delivered to its door at the manufacturer’s cost. And it buys on 30, 60 or 90-day interest-free terms, funding its stock with the manufacturer’s working capital.
The small buyer gets none of that. It pays list price, collects the goods itself on a load too small to be efficient, and pays cash.
For example, on a US$100 list price against a US$90 wholesale price, with production at US$70, bulk delivery at 2 per cent of value and 60 days of credit costing 20 per cent a year, the manufacturer earns US$30.00 on the direct sale and US$15.24 on the wholesale sale.
The direct sale therefore generates US$3.81 more corporate tax at 25.75 per cent, and US$1.55 more VAT that an unregistered buyer can never reclaim—US$5.36 of additional tax in total.
The withholding tax on that transaction is US$5.00. The manufacturer’s own commercial terms already generate more tax on the direct sale than the withholding tax collects from it—automatically, from a registered taxpayer, requiring no verification, no certificate and no penalty regime.
On that sale, the authorities are not missing revenue. They are collecting more than they would have collected through the wholesale channel.
The same advantages appear in reverse on the buyer’s side. With its own collection cost added, the small buyer’s landed cost is US$119.50; the wholesaler’s effective cost, delivered and financed, is US$87.04. The small buyer pays 37 per cent more for identical goods.
And it cannot charge much more than it paid, because the manufacturer sells at retail too, through its own outlets, at the same list price. A customer who dislikes the trader’s price simply buys from the factory shop.
In commodity trade, the realistic mark-up is nil to 20 per cent—and across that whole range, the authorities are already ahead before the withholding takes a cent.
The measure only begins to under-collect above a 21 per cent mark-up—in high-margin discretionary trade, not in maize meal, cement or stockfeed. It is calibrated upside down: heaviest where margins are thinnest, lightest where they are widest.
The small buyer carries five disadvantages, of which the tax system creates two: a higher price, no VAT recovery, its own transport, its own working capital, and now a 5 per cent deduction.
The formal wholesaler pays less, recovers its tax, has the goods delivered, and uses the manufacturer’s money for two months free. It is fair to ask what competitive advantage is being corrected.
Producers of Exempt Goods Pay Twice
For manufacturers of VAT-exempt products—animal feed, and a lengthening list of agricultural goods—the position is worse.
Exemption sounds like relief. For the producer, it is the opposite. Because it makes no taxable supplies, an exempt manufacturer cannot reclaim the VAT on its electricity, packaging, spares, haulage and professional fees.
That tax is not relieved—it is buried in the cost of production, around 4 per cent of the cost base on a typical feed structure. January’s rise to 15.5 per cent added to it, an increase that was neutral for every business able to claim input tax.
The same exemption creates a second problem. A trader dealing only in exempt goods cannot register for VAT. Section 81A labels it non-compliant and takes 5 per cent—for a status the law itself imposed.
Parliament has offered a certificate to prove the point, but a seller of exempt goods should not be interrogating its customer’s VAT registration at all.
Nor does the buried tax stay put. Where exempt feed becomes taxable chicken, it is marked up through the chain and then taxed again at the till: US$4.03 of unrecoverable input tax reaches the household as US$6.14 of price.
The exemption granted to make feed cheaper makes food dearer.
The incoherence is written into the statute. Withholding does not apply to supplies of milk and bread. It does apply to the feed from which milk is produced.
A Structural Advantage for Imports
A final defect is structural. The obligation falls on a manufacturer, defined as a person who transforms inputs into finished products. An importer of finished goods transforms nothing, and is not a manufacturer.
So an informal trader buying from a Zimbabwean factory loses 5 per cent. Buying identical imported goods from an importer, it loses nothing.
A measure written to protect the domestic value chain operates, in the very channel it was meant to formalise, as a 5 per cent preference for imports.
A Better Design, Already in the Act
None of this requires abandoning the objective. Three changes would address most of it.
1. Appoint Selected Withholding Agents
First, stop imposing the duty on every manufacturer in the country. ZIMRA already appoints selected companies as VAT withholding agents.
The same approach should apply here: appoint manufacturers and importers of taxable goods in the sectors where informal resale actually occurs, on published criteria.
A producer that is not appointed withholds nothing and never needs to ask a customer about its VAT status. The certificate problem disappears rather than being documented around, and the burden sits with businesses that have the systems to carry it.
2. Zero-Rate Producer Goods
Second, zero-rate producer goods instead of exempting them. Zero-rating relieves the consumer, preserves input recovery, and keeps the chain inside the registration net. Exemption achieves only the first, and badly.
Fuel and feed premixes are already relieved as inputs, so the principle is accepted; it has simply not been carried through to the finished product.
Exemption belongs where the buyer is a household—health and education—not where the buyer is a farmer producing something taxable.
3. Make the Withholding Tax Creditable
Third, make the 5 per cent creditable against the buyer’s own tax.
An advance recoverable on registration is a reason to formalise. A permanent surcharge is a reason to buy through undocumented channels instead.
Address Unpaid Invoices and Returned Goods
Two smaller fixes are overdue: a manufacturer should not remit tax on an invoice it has not been paid, nor lose it when a customer fails or the goods come back. Neither is provided for.
The Test of an Effective Value Chain Tax
A value chain tax should not be judged by how much it collects. It should be judged by whether it brings traders into the system without shrinking local production, restricting access to essential goods, or raising the price of food.
On the present design, it does not pass that test. The changes required are modest, and the machinery for most of them is already sitting in the same Act.
Charles Trust Dhewa is an independent writer and Tax Consultant writing in his personal capacity. This article draws on a longer technical paper, available on request.
