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Treasury in a fix as High Court outlaws 2% tax

High Court judge, Justice Happias Zhou yesterday set aside Statutory Instrument 205/2018 which gave legal effect to the Intermediated Money Transfer Tax which is commonly known as the 2 percent tax on all electronic transactions.

Last October Treasury introduced the tax to widen revenue streams and narrow fiscal deficits. Years of fiscal indiscipline left government walking on a tight fiscal rope. With no budgetary support government has struggled to finance capital expenditure and fund social spending. Official figures show that as of January this year, government was collecting nearly $100 million a month from this tax.

The introduction of the tax immediately attracted public outrage after prices of basic goods and services shot up the roof. Authorities said revenue collected from the tax would be vital in upgrading the country’s infrastructure. There were few takers on this narrative.

Pro-democracy activist, Mfundo Mlilo through his lawyer Tendai Biti challenged the lawfulness of the statutory instrument, which was also widely criticised for being inflationary.  Before this latest development the High Court in February reserved ruling in an application by pro-democracy activist Mfundo Mlilo, who is seeking an order to suspend the imposition of the two percent electronic transactions tax introduced by Finance minister Mthuli Ncube last year. Law experts argued that the statutory instrument should have been debated in Parliament.

Zimbabwe annual inflation for June this year reached 175.66 percent this year, the highest in 10 years and this has piled pressure on authorities to tame the soaring prices. As prices soared so did political temperatures. Government, which introduced austerity measures in its 2019 National Budget was left with limited fiscal space when civil servants pushed for a salary hike.

The High Court ruling comes nearly a week after the Reserve Bank of Zimbabwe governor John Mangudya last week announced his Monetary Policy Statement.

The policy statement came at a time the economy is facing inflationary pressures emanating from a litany of factors such as the lagged effects of monetisation of past fiscal deficits, market correction, spiralling parallel exchange rate premiums and speculative pricing.

Premiums on the exchange rate on bank notes and electronic money have been widening reflecting on increased demand for the notes. The central bank said it would drip-feed new notes into the economy to ease cash shortages on the market.

To arrest rising inflation the RBZ, among other measures introduced high interest rates which will curtail speculative borrowing to buy foreign exchange on the parallel market and a flexible exchange rate will assist in absorbing external shocks and ensuring that the external position is sustainable.

While these measures are key in containing inflation, Zimbabwe’s economy continues to face structural deficiencies and headwinds which stifle domestic production. As bureaucrats at the Finance ministry burn the midnight oil, crafting the 2020 National Budget, we anticipate that government will increase taxes to offset losses resulting from the High Court order.

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