THE Treasury has announced an upward review of the tax-free threshold to $500 000 per month from $91 000 effective this month with the highest marginal tax rate of 40 percent now applicable on income above $15 million per month.
A huge relief to workers, the alignment of the income tax structure with the prevailing macro-economic environment is expected to restore the purchasing power of the working class and boost aggregate demand for businesses, analysts have said.
Until recently when the Government restored macro-economic stability, there has been an outcry over the erosion of incomes by inflationary pressures experienced early this year, which were attributed to speculative exchange rate movement and indiscipline by some market players.
In a letter to the Zimbabwe Revenue Authority (Zimra) Commissioner General, Ms Regina Chinamasa, Finance and Economic Development Ministry’s secretary, Mr George Guvamatanga, said the new measures are effective from 1 August. He noted that the local currency PAYE tax table, which comprises a tax-free threshold of $91,666 per month, with the highest marginal tax rate of 40 percent on incomes above $1 million per month was last reviewed on 1 January 2023.
Ms Regina Chinamasa
“Due to recent macro-economic changes that necessitated salary reviews, a significant number of employees are caught up in a bracket creep, consequently, some salaries and wages are subject to higher rates of tax,” said Mr Guvamatanga.
“In order to provide relief to taxpayers and also boost aggregate demand for goods and services, Treasury has approved a review of the local currency tax tables with effect from 1 August 2023.”
According to the newly approved tax bands, workers earning between $1,5 million and $5 million fall under the 25 percent tax rate.
The tax relief, which coincides with the firming of the local currency and reduction of prices of goods and services is in sync with several fiscal measures introduced by the Government geared at stabilising the economy. Over the past few weeks, prices of basic commodities have been dropping and seem to be continuing on that trajectory in response to the firming of the Zimbabwe dollar.
The Government has been introducing a cocktail of measures to stabilise the exchange rate while promoting demand and wider use of the domestic currency as well as encouraging foreign currency deposits in the banking sector.
The measures have paid off with the stability of the exchange rate in turn anchoring price stability and driving demand for local currency in domestic transactions unlike in the past when businesses shunned the local currency due to its volatility.
Other measures introduced included increasing the foreign currency retention threshold on domestic foreign currency sales to 100 percent, transferring of all external loan obligations to the Treasury and allowing duty-free importation of basic goods.
The Treasury also took charge of collecting foreign currency surrendered by exporters, with the proceeds used to service RBZ external loan obligations.
Commenting on the new measures, economist Dr Prosper Chitambara said the tax review will cushion workers adding that the stability in the exchange rate had a bearing on the review.
Dr Prosper Chitambara
“That is an important measure that will see workers remaining with meaningful disposable income, which should help spur aggregate demand in the economy. I am sure the workers unions would have hoped for a bigger review probably to one million dollars in terms of tax-free but still, it’s a positive development in that it helps to promote aggregate demand, which is critical in terms of economic development,” he said.
“The stability that we have seen on the exchange rate front motivated or inspired such a review and we hope it will be sustained going forward.”
Economic experts and consumer watchdog bodies have long been calling for a review and benchmarking of tax-free thresholds and salaries in United States dollars saying the move will cushion workers and increase spending power.
In view of rapid economic changes and inflation rates, there have been growing calls by workers across all sectors for an upward review of the thresholds as they no longer reflected the real economic situation.
When the 2023 National Budget was announced in November last year, the parallel markets exchange rate had somewhat stabilised around $750-850/US$1 and almost converged with the official exchange rates (interbank and auction rates).