Home Business Mid-term Budget: Low-income earners exempted from paying tax

Mid-term Budget: Low-income earners exempted from paying tax


Mid-term Budget: Low-income earners exempted from paying tax. Presenting the 2020 Mid-Term National Budget Review yesterday, Minister Ncube also widened the rest of the tax bands under the top rate of 40 per cent so only that portion of a monthly income over $100 000 is now taxed at this top rate.

People earning under $5 000 a month will no longer pay income tax from next month after Finance and Economic Development Minister Professor Mthuli Ncube yesterday more than doubled the tax-free threshold from $2 000 to $5 000 so disposable incomes of the lowest-paid remain untaxed.

The minister made it clear in his budget overview that spending was being contained within the budget, with the Government running a small budget surplus in the first six months despite the pressures, and that therefore he was not presenting a supplementary budget and had the leeway to make the tax-band changes to help the lower paid.

Crisis spending, including a lot more social spending, was being funded through setting new spending priorities, not by drifting into fiscal indiscipline or having to redraft the whole budget.

“In an effort to cushion workers from bracket creep, a phenomenon whereby previously untaxed employees become liable to tax due to inflation-induced wage and salary adjustments, Government reviewed upwards the tax-free threshold to $2 000 per month and accordingly adjusted the tax brackets.

“However, prevailing market conditions have necessitated a further review of employee salaries and wages. In order to minimise the tax burden, and also enhance disposable income, particularly during this period when a sizeable number of households are yet to recover from the effects of the Covid-19 lockdown, I propose to review the tax-free threshold from $2 000 to $5 000 per month,” said Professor Mthuli.

“I further propose to adjust the tax bands to begin at $5 001 and end at $ 100 000, above which the highest marginal tax rate of 40 percent will apply, with effect from August 1, 2020.”

The country’s annual inflation rate currently stands, he noted in his speech, at 737,26 as at the end of June 2020, largely driven by speculative activity on the parallel foreign currency market. But he expected that to have fallen to 300 per cent by year-end after six months of far more stable prices following monetary reforms.

The Finance Minister gave and took a bit with the transaction tax that everyone pays on electronic money transfers. On the giving side, he moved the tax-free threshold for local currency transactions from $100 to $300, so the small transactions that dominate in mobile money will not be taxed.

On the taking side, he ended the exemption from this tax on payments in and out of Nostro foreign currency accounts. But he tempered this with a tax threshold of US$5 on foreign currency transactions, so small payments remain untaxed.

Corporates saw their transfer taxes rising on really large payments. The maximum transfer tax payable on a single transaction has been $25 000. The minister is raising this to $50 000, which will be paid by corporates on all transactions exceeding $2 500 000.

For foreign currency payments, the maximum tax was set at US$ 2 000, payable on all transactions over US$100 000. The transaction tax measures are also effective from next month.

Although the tax-free threshold adjustments were largely expected due to recent inflation developments, the Mid-Term Budget Review largely consolidated the framework set by the 2020 National Budget, which was announced last November.

On the major fundamentals, Minister Ncube said he was containing spending within the budget, despite the extra spending needed to alleviate the effects of drought, Covid-19 and the resulting lockdown. He was confident that he could continue to do so, and said there would be no financing from the Reserve Bank of Zimbabwe and no spending outside the total budget.

This fiscal stability, introduced in the Second Republic after the decades of deficit spending, is seen as the first critical foundation of moving Zimbabwe into sustained growth.

The 2020 Budget, at $63,6 billion, was underpinned by anticipated revenues of $58,6 billion and a financing gap of $5 billion (which is approximately 1,5 percent of gross domestic product. The 2020 National Budget was premised on “fiscal consolidation,” with ministries’ first expenditure showing a high level of compliance.

“Ministries have on average utilised 46 percent of their votes as at June 2020. This also implies that 54 percent of the original 2020 Budget remains unutilised.

“This enables us to operate to the end of the year as we reallocate to cover the critical needs, especially those related to Covid-19 and social protection. This position enables us to avoid tabling a Supplementary Budget, given our current levels of spending,” said the Treasury boss.

“Treasury will be dealing with arising expenditure pressures as we consolidate our fiscal position during the remainder of the year, taking account of revenue performance against inescapable reprioritised expenditures.”

Zimbabwe, like most economies, is grappling with the Covid-19 pandemic, and expectations were that the Treasury boss would announce supplementary expenditure in the long term fight against the health pandemic.

But Government will operate according to the framework set in the 2020 National Budget, even with respect to the Covid-19 response; which means the $18 billion Stimulus Package will remain as the linchpin funding mechanism for the response.

Earlier this year, Government unveiled a $18,2 billion Stimulus Package —amounting to 28,6 per cent of the 2020 Budget. The impact of the Covid-19 pandemic will be felt as the economy is expected to contract by -4,5 per cent this year. But Professor Ncube said longer-term projections will be more positive.

“A combination of Government intervention and external development support in mitigation of the Covid-19 pandemic is expected to alleviate deeper contraction of the economy to a projected -4,5 per cent in 2020, against the initial budget projection of 3 per cent growth,” he said.

“In the absence of the above stimulus package and assuming prolonged and severe impact of the crisis, the economy would contract severely. Beyond 2020, and in line with the upcoming National Development Strategy framework, the economy is, however, anticipated to recover to record gross domestic product (GDP) growth of about 7,4 percent in 2021 before moderating to around 5 per cent thereafter.”

The minister also noted that foreign currency was now becoming more available, despite the economic pressures, and this had allowed the introduction of the auction system to allow markets to set exchange rates. In the first five months, inflows brought in US$2,35 billion while importers spend only US$1,55 billion. The minister predicted this to continue with a positive current account balance of US$1,2 billion by year-end.

Source – The Herald

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