Part 11 Of 2007 Budget
297. In this environment, it becomes necessary that Government prioritises the mobilisation of both public and private capital for national housing over the coming years in conjunction with other stakeholders, including the private sector. This will also move resources away from speculative ventures and direct investment into the real sector, thereby stimulating growth of the economy.

298. Consultations with the insurance and pension industry have identified the use of indexed financial instruments to allow pension funds to invest in prescribed assets that will facilitate investment into housing, affordable to workers.

299. I will expect our National Social Security Authority to play a significant role in the provision of affordable houses to the workers.

300. Mr Speaker Sir, in support of this innovative way to attract capital into the housing market and broaden access to property ownership, Government is reviewing the relevant legislative framework, in consultation with the Insurance and Pension Funds.

Social Protection

301. Mr Speaker Sir, stakeholder consultations also raised concern that the less vocal groups, who include the poorest, remain marginalised in the allocation of public resources, notwithstanding their level of vulnerability to the prevailing economic hardships.

302. Mr Speaker Sir, recent poverty assessments indicate increased levels of vulnerability in the country, especially among the marginalised groups who require both social protection and empowerment. In the case of children, it is estimated that there are over 1 500 000 orphaned and vulnerable children that are in need of protection.

Targeting Social Protection

303. The high incidences of poverty and vulnerability require that we strengthen and streamline our National Social Protection Safety Nets and Programmes. There is need to target the vulnerable groups, focussing transfers to the elderly, orphans, and the physically challenged. Public works programmes in both urban and rural areas will be targeted at the unemployed and able-bodied.

Social Welfare

304. Mr Speaker Sir, in order to cushion the elderly and physically challenged members of our society against rising inflation, I am proposing to review upwards the protection rates currently ranging between $60 and $250 per month.

305. I therefore propose in the 2007 Budget to increase the allocation to support Social Protection Programmes. This allocation also allows for the review of the current protection rates, ranging from $60 to $250 per month, taking account of the changes in inflation.

306. I further propose to allocate $18.7 billion towards the administration of social protection programmes, including provision of transport to facilitate mobility.

Basic Education Assistance Module

307. Mr Speaker Sir, over and above other social protection requirements, orphaned and vulnerable children of school-going age also require social protection through such programmes as the Basic Education Assistance Module (BEAM). I therefore propose to allocate $5.5 billion. for education assistance programmes.

308. It will also be critical that the Department of Social Services undertakes the necessary awareness campaigns of such protection programmes as BEAM, especially in rural areas.

People Living with HIV/AIDS

309. Mr Speaker Sir, the estimated over 600 000 people living with HIV/AIDS also face many challenges. These include financial difficulties to purchase anti-retro viral drugs (ARVs) which remain beyond the reach of many.

310. This is in spite of efforts to make them more affordable through support for local production initiatives by some of our pharmaceutical companies. Those able to access ARVs face the added challenge of sustaining the commensurate nutritional requirements.

311. Government has therefore, targeted resources under the 3% AIDS levy towards supporting our people living with HIV/AIDS under the coordination of the National AIDS Council.

312. I therefore propose to maintain the 3% AIDS levy in support of members of our society living with HIV/AIDS.

313. While concerns that a disproportionate share of these resources is being spent on administration, rather than supporting people living with HIV/AIDS, are being addressed by the Ministry of Health and Child Welfare, I propose that, with immediate effect, at least 70% of the collections under the AIDS Levy be earmarked for the purchase of Anti-retroviral drugs.

Public Works Programmes

314. Mr Speaker Sir, I have already made reference to the need to avoid direct cash transfer interventions, whether non-conditional or conditional, to those members of our society who remain able-bodied.

315. This stance by Government has seen us in the past support budget allocations for social protection in years of wider scale vulnerability, such as during a drought, through such public works programmes as ‘food or money for work’. Consistent with this, I propose to allocate $1.2 billion towards public works programmes during 2007.

Empowerment

316. Mr. Speaker Sir, in the prevailing environment of hyper-inflation and declining economic activity, the numbers of the unemployed groups continues to swell.

317. This, over and above social alleviation interventions, necessitates further Government support for income and employment generating programmes targeted at empowering the youth, women, and the poor, among others. These empowerment programmes should also mainstream disability, through support for the physically challenged.

318. The need to support empowerment programmes is also in recognition of communities as hubs of employment creation and income generation through various community based programmes and projects. Hence, these require continued support in line with the poverty reduction thrust of the Millennium Development Goals.

Youth Fund

319. Youths constitute 67% of our population, with around 400 000 leaving schools every year. The formal sector absorbs only 10% of these school leavers, resulting in a large number being unemployed.

320. Having realised the employment creation and income generating potential, Government through the Infrastructure Development Bank has set up a Youth Development Fund to avail capital to those projects that have been identified as highly productive.

321. I therefore propose to allocate $10 million as an additional capital injection into the Youth Development Fund administered by the Ministry of Youth Development and Employment Creation through the Infrastructure Development Bank.

Mainstreaming Disability in Budgeting

322. Mr Speaker Sir, I have already alluded to the need for an all embracive empowerment strategy, with programmes also targeted at the physically challenged members of our communities. This is in recognition of the fact that disability should never be viewed as inability, and hence the need for charity. This results in the marginalisation of the physically challenged.

323. Empowering the physically challenged remains a socio-economic development challenge in our economy. As such, our development programmes should mainstream disability, and also target at empowering this group.

324. I therefore propose to allocate $1.0 billion towards supporting income and employment generating projects of the physically challenged.

Small & Medium Enterprises

325. Mr Speaker Sir, the role of Small to Medium Enterprises (SMEs) in inculcating entrepreneurship skills, employment creation and poverty alleviation, as well as foreign currency generation, is recognised worldwide. SMEs have played a significant role in sustaining India’s high growth rates.

326. Supporting the development of SMEs is part of our economic development strategy. SMEs play a critical role in the beneficiation of local raw materials, and are an important tool for our empowerment and indigenisation programmes. They also play a significant role in ensuring the participation of women in the mainstream of our economy.

327. The graduation of many informal businesses into formal SMEs provides greater scope for access to formal banking lending programmes. In this regard, allow me to recognise the efforts of the Reserve Bank in coordinating the overall banking and financial sector to support initiatives targeted at the development of SMEs.

328. Already, many of our banking institutions have established dedicated units that offer financial support to SMEs. Financial support to SMEs is receiving a boost from resources being availed under the recently launched concessionary $16 billion Reserve Bank facility for on-lending by banks to SMEs.

329. Mr Speaker Sir, urban based SMEs have taken greater advantage of this financial sector support, necessitating Budget intervention largely targeted at the rural areas as well. Already, through the 2006 Budget, I provided $200 million in support of SMEs in rural areas through SEDCO under our Growth Points Resuscitation Programme (GPRP).

330. Mr Speaker Sir, notwithstanding that the Small Enterprise Development Corporation (SEDCO) was established by Government to spearhead the development of SMEs through provision of business loans and business development services, it has been failing to fulfil this mandate partly as a result of under-capitalisation.

331. While the corporation has supported some SMEs across all sectors of the economy in both rural and urban centres with 80% recovery rates, critical micro lending programmes have remained under-funded. I, therefore, propose to provide $54.3 billion towards the recapitalisation of SEDCO.

332. These resources will support the following programmes:

Table 2: SEDCO Support Facilities and Programmes
Programme/Facility Amount
Lending $40 billion
Business Infrastructure Development $8 billion
Capacity Building $0.8 million
Integrated Skills Outreach Programme $3 billion
Capital Expenditure $1.5 billion
Work Related Programme $1 billion

333. Successful utilisation of these resources through ventures in agro-based and other manufacturing activities should reduce the prevailing rural-urban migration pressure, as formal job market opportunities also arise at growth points and rural service centres. Surveys undertaken so far indicate successful inroads into milling, soap production, fence making, hardware supplies, furniture making and other activities.

334. Mr Speaker Sir, the provision of resources to rural based SMEs will contribute to increased economic activity in rural areas. This also enhances the scope for upgrading the existing infrastructure such as rural road networks, electricity, water, housing, schools and health care facilities.

Accountability over Public Resources

335. Mr Speaker Sir, limited Budget resources warrant strengthening systems of accountability over the efficient and effective use of public funds and property.

336. Honourable Members will be aware that Ministries and Departments, as well as our Local Authorities and Public Enterprises are often vocal in their references to inadequate provision and access to budgetary and other scarce public resources.

337. Mr Speaker Sir, we all aware that our economy is under siege. This calls for the efficient use of the scarce domestic and foreign resources. We also need to fully account for the use of these resources in a transparent manner and to avoid the abuse of such resources. This is critical to our economic survival as a Nation under sanctions.

338. Mr Speaker Sir, we cannot therefore continue operating in our ‘business as usual’ manner, tolerating wasteful use of resources, and imprudence in the utilisation of the scarce public resources. This, Honourable Members, can only worsen our economic situation and exacerbate inflation.

339. Dealing with inefficiencies in the utilisation of public resources and assets, requires the review of the financial management legal framework, and the introduction of penalties for non-compliance. I will, Mr Speaker Sir, therefore be proposing a new Public Finance Management Bill for the consideration of Honourable Members.

Public Finance Management

340. The proposed Public Finance Management legislation, once approved and assented to, will compel Ministries to take charge of their own accounts and produce their own reports, which would be tabled in Parliament. Furthermore, this will require them to produce financial reports for their respective Parastatals at the end of each financial period. This will improve accountability and enhance efficiency in the use of public resources.

Audit

341. It has also been observed that Government has not been producing audited financial statements, as line Ministries are failing to produce final accounts for the Comptroller & Auditor General's report.

342. I therefore also propose the introduction of the Audit Bill which seeks to improve accountability in the audit process, and eliminate the operational limitations inherent in the existing Audit & Exchequer Act.

Institutions of Government

343. Mr Speaker Sir, the successful formulation and implementation of Budget programmes critically depends on ensuring that Government institutions are operating efficiently and effectively.

344. The many instances where Memorandum of Understandings (M.O.Us) are entered into and concluded by Ministries in the absence of proper coordination and due regard to established institutional processes are not conducive to the effective operations of Government.

345. Mr Speaker Sir, such behaviour by line Ministries which do not fully comply and recognise established institutional processes will not be tolerated anymore.

Operations & Maintenance

346. Mr Speaker Sir, the 2007 Budget will also have to contend with the deteriorating public infrastructure, both in rural and urban areas. Major pressure areas relate to the rehabilitation of roads, bridges, dip tanks, schools, and health facilities, among others.

347. To sustain operations and maintenance requirements of Ministries and improve capacity to deliver essential services necessary for economic recovery, I propose to allocate a total amount of $736.5 billion for operations and maintenance.

Maintenance

348. Mr Speaker Sir, timely and adequate maintenance will be necessary if we are to benefit longer usage of the assets and infrastructure already acquired. To this end, there is need to ensure that funds are set aside for the maintenance of Government buildings, plant and equipment. I therefore propose the provision of $69.3 billion for this purpose. The Ministries of Local Government, Public Works and Urban Development and that of Rural Housing and Social Amenities are jointly driving the maintenance programme.

Grants and Transfers

349. I have made provision of $329 billion for employment costs with respect to Grant Aided Institutions in line with adjustments assumed across the Civil Service.

350. Furthermore, I have also made provision of $308 billion for operational expenses for these institutions.

Street Children Fund

351. Mr Speaker Sir, recognising the plight of children living on the streets, Government took the initiative to establish a Fund to act as a vehicle towards such children’s rehabilitation and development.

352. I am happy to advise Honourable Members that all the steps necessary for the setting up of the Fund have been fulfilled. To this end, I propose to set aside an amount of $1 billion as initial injection into the Fund. The Minister of Public Service, Labour and Social Welfare whose Ministry is charged with managing the Fund will lead further steps into the realisation of the objectives of the Fund.

Capital Budget

353. Mr Speaker Sir, stakeholders raised concern over the current structure of public expenditures, where infrastructure development is not sufficiently resourced to facilitate positive supply response. They cited the poor state of public infrastructure such as roads, incomplete dam projects, and other facilities.

354. Observations that the low Budget allocations for infrastructure projects have often been affected by the accommodation of previously unbudgeted recurrent expenditures were also made during these consultations. The little resources left for capital development are spread too thinly to make meaningful impact. This results in most Ministries being incapacitated to complete projects on time, undermining capital formation for economic growth and development.

355. This poses the challenge of increasing the capital budget and tightening controls on containing unplanned recurrent expenditure demands, some of which are not always related to emergencies and are often deferrable.

356. Mr Speaker Sir, in rationalising Ministries’ expenditure bids, I indicated my proposal to avail $1.5 trillion in support of the capital budget. This represents 24.4% of the overall expenditure level, in line with the Cabinet recommendation.

357. To avoid situations where allocations may not correspond to requirements to enable full project implementation, I have prioritised the completion of some on-going projects. This entails that some of the on-going projects will have to be postponed in order to redirect resources to those projects that are likely to be completed in 2007.

358. I have also availed $8 billion to the Infrastructure Development Bank as part of its capitalisation.

Road & Bridges Infrastructure

359. Mr Speaker Sir, Government shares in the concerns of our people over the poor state of our road infrastructure. The deterioration in the roads infrastructure to a state where most is in need of rehabilitation is explained by the limited availability of equipment and the critical human resource skills coupled with the high cost of construction.

360. The unit costs for road maintenance activities range from $2.255 million per kilometre to $10.249 million for periodic resealing maintenance. In the case of road construction to surfaced standard, we need $80 million per kilometre of road.

Road Maintenance & Rehabilitation

361. The funding requirement for our 2007 annual road maintenance programme is, therefore, estimated by the Zimbabwe National Road Administration (ZINARA) at $24.1 billion. Programmed works include resealing a total of 385 kilometres at a cost of $4 billion, re-gravelling 965 kilometres at a cost of $10.3 billion and 385 kilometres of pothole patching at a cost of $868 million. The balance of $8 billion and $1.1 billion relates to motorised grading routine maintenance, and grass cutting, respectively.

362. Honourable Members will be aware of the role of ZINARA in supporting the maintenance of both our trunk roads and recently, some of the major arteries into our towns and cities. ZINARA, which funds the Department of Roads, also finances roads for 59 Rural District Councils, 30 Urban Councils and the DDF network, thereby facilitating local authorities’ road maintenance programmes through financial support.

363. Mr Speaker Sir, local authorities have at times failed to expeditiously utilise ZINARA road maintenance resources on account of lack of capacity to prepare programme of works documents as well as failure to account for prior disbursements.

364. In doing all this, ZINARA is currently funded through the 5% fuel levy collected on the landed import price of fuel. This, however, is now inadequate to support the extensive road maintenance programme facing us both for the trunk roads and the major arteries into the urban centres.

365. Through the 2007 Budget, Government would want all roads authorities to register some tangible progress in rehabilitation and development of the roads infrastructure.

366. I propose to allocate $10 billion specifically targeted at pothole patching and resealing of some of the major roads in the residential areas of our cities and towns. This will also cover the main entry and exit access into our growth points.

367. With regards to the rural roads, I propose to allocate $4 billion through the District Development Fund.

368. These budgetary resources will compliment the contributions coming through ZINARA.

Rural Electrification

369. Mr Speaker Sir, Honourable Members are aware of Government’s establishment of the Rural Electrification Agency (REA) to spearhead rapid and equitable electrification of our rural areas through extending the electricity grid and promoting productive use of electricity in irrigation and cottage industries, thereby empowering rural communities.

370. While this was to be funded primarily through the 6% levy on all electricity consumers, the income from the levy has, however, remained inadequate for grid expansion. For 2007, the levy would raise only $13.9 billion, against a requirement of $128 billion to complete the targeted 1 000 projects. The overall backlog is 1 300 projects.

371. Furthermore, for the electricity end-use infrastructure development programme, four pilot schools milling projects carried out so far confirm that rural schools can engage in viable projects. Hence the Agency intends to develop 24 schools irrigation schemes and 58 schools milling projects at a cost $5 billion during 2007.

372. I propose to allocate $100.billion directly to village communities that want to take advantage of the electricity end-use infrastructure development by venturing into irrigation projects.

373. Given the huge resources required for the rural electrification programme and the projected deficit in domestic power generation, Government together with the private sector will vigorously promote the development of solar energy in the rural areas. The local manufacture of solar panels will be promoted through the provision of fiscal and monetary incentives.

Telecommunications

374. Mr Speaker Sir, increasing investment in mobile telecommunication across our urban, as well as expansion being made into our outlying rural areas, are enhancing access to communication and information throughout the country.

375. Further expansion in the next few years by the mobile networks should progressively raise the penetration rate of mobile phones to regional best practices of close to 50% of the population. New developments are set to see more base stations being put up, as the industry embraces the introduction of wireless and broadband internet access technology.

376. It is therefore critical that Government and cooperating partners support these expansion initiatives by the telecommunication industry, including the provision of foreign currency to import modern equipment and technology.

Water Projects

377. Mr Speaker Sir, notwithstanding the fact that in per capita terms, we are among those countries with the largest water bodies, there are still many areas where we need to construct more dams, especially in light of the challenges over irrigation.

378. In this regard, ZINWA has approved the construction of new dams in support of irrigation.

379. However, owing to resource and other capacity constraints, it remains necessary that we prioritise the completion of ongoing dam construction projects before undertaking new ones.

380. I therefore propose to allocate $127.1 billion for the following dams:

Public Private Partnerships

381. Mr Speaker Sir, Government cannot finance the maintenance and development of all public infrastructure from its own resources. There is therefore need to involve the private sector in the development of infrastructure.

382. Embracing broader stakeholder participation in infrastructure development projects requires the finalisation of the legal and institutional framework for Public Private Partnerships (PPPs), as well as incentives and special dispensations for the private sector.

383. Government has already put in place operational guidelines which are meant to promote and facilitate the implementation of PPPs in infrastructure development. While a number of projects are under consideration, the overall implementation progress has been slow owing to the absence of effective institutional and legal arrangements among other factors.

384. The finalisation of the institutional and legal arrangements will facilitate quicker approvals, effective co-ordination, implementation and monitoring of all PPPs.

Called Up Guaranteed Loans

385. Providing resources for non-performing called up guaranteed loans of Parastatals can only undermine the availability of resources for other critical budget requirements. With immediate effect, Parastatals will, therefore, be called upon to honour their loan obligations from their revenue.

2007 Budget Management

386. Mr Speaker Sir, the Budget Estimates I am presenting are fairly large. It is therefore critical that Accounting Officers exercise due diligence in the management of resources placed under their stewardship.

387. In order to ensure that execution of this Budget is in a manner consistent with revenue inflows, budget releases by Treasury will adhere to the available cashflows. Where accountability is not demonstrated, budget releases will be withheld.

388. In the case of funds budgeted for acquisition of furniture, vehicles and equipment, releases shall be subject to recording of assets under the Public Finance Management system and production of reports thereof.

389. Line Ministries will also be expected not to embark on any expansion, but limit spending levels within budget provisions.

Public Procurement

390. Timely completion of projects also requires tighter monitoring of programmes of Ministries in line with the principles of Results Based Budgeting. Delays in procurement and project implementation in an environment of high inflation ultimately leads to higher risks of increased costs and non-implementation.

391. Hence, ensuring that Government institutions are operating effectively, will require that we improve on the current delays related to our existing procurement systems and procedures.

392. In the interim, the tender value limits have been reviewed upwards as follows:

• For Competitive Quotations, from $1 million to $4 million;

• For Informal Tenders, from between $1 - $6 million to $4 - $20 million; and that

• Formal Tender procedures now only apply to all tenders above $20 million.

Domestic Debt Restructuring

393. The high budget deficits which have been financed mainly from domestic sources, have resulted in the accumulation of a huge and unsustainable public domestic debt overhang, which is currently close to $153 billion or about 15% of GDP.

394. Over 98.5% of this is in the form of very short term Treasury Bill borrowings of less than one year maturity.

395. Such a debt structure calls for the restructuring of domestic debt and the adoption of Budget financing strategies which limit the rapid expansion of the debt.

396. In this regard, a programme to restructure domestic public debt is being put in place in order to minimise the debt service burden on the fiscus. This includes the restructuring of debt with a view to transforming the bulk of existing debt into medium to long term tenors. A critical requirement for this restructuring process would be the introduction of adequate instruments with prescribed asset status.

397. This will allow players in the Insurance and Pension Fund industry to meaningfully contribute to the debt restructuring programme.

Savings & Investment

398. Savings are important for growth and prosperity because they provide a pool of investment capital for new and growing businesses. For the past six years, our savings and investment growth rates have remained below 10%. Such low levels cannot support the desired economic growth of between 5 – 7% consistent with the Millennium Development Goals.

399. Government has therefore prioritised the promotion of investment to sustain the above growth targets. However, the Zimbabwe Investment Centre and the Export Processing Zones Authority, which are mandated to promote investment are undergoing institutional re-organisation to enhance their capacity and focus.

400. Therefore the ongoing reforms that seek to amalgamate these institutions into a one stop centre, need to be buttressed together with a review of all inward investment approval procedures, so as to remove the administrative burden on applicants. The formation of the Zimbabwe Investment Authority will result in much more efficient approval processes and systems for inward investments.

401. Furthermore, in order to attract and give confidence to foreign investors, Government is fully committed to honouring all its international obligations under various protocols and international agreements including the Bilateral Investment Promotion & Protection Agreements (BIPPAs).



VIII. REVENUE PROPOSALS

402. Mr Speaker Sir, I have already made reference to the need for us to relate the 2007 Budget expenditure allocations that I have announced to the capacity of our economy to finance them. This, Mr Speaker Sir, makes resort to new tax measures unavoidable.

403. The reliance on revenue is also in recognition of the reality that we are on our own, as foreign financing inflows have largely dried up.

404. Consistent with these submissions, the thrust of my tax proposals, Mr Speaker Sir, are broadly focused on the following:

• targeting taxation at consumptive activities, rather than on production;
• supporting the productive and export sectors;
• enhancing disposable income in the hands of the taxpayer, thereby stimulating aggregate demand;
• sharing the tax burden by widening the tax base through presumptive tax targeted at those outside the tax net and tightening tax loopholes;
• rationalisation of VAT zero-rating and exemptions, in line with regional best practices; and
• relating the level of fees and charges to the cost of delivering public services.

405. Allow me, Mr Speaker Sir, to therefore submit the proposals for the consideration of the House. The formulation of some of these proposals has benefited from the valuable input of Honourable Members, as well as those of business, labour and ordinary citizens, during the pre-Budget consultations.

406. A major input that came out from the pre-Budget consultations across the country was the need for the Budget to take account of the effect of the prevailing high inflation on the real value of incomes. In line with this, I will be proposing some relief measures, taking account of bracket creep.

Tax Relief Measures

Income Tax

Pay As You Earn (PAYE)

407. Honourable Members will recall that during the Mid-Term Fiscal Review, the tax free threshold and tax bands were reviewed in July 2006 to cushion employees from the erosion of incomes arising from high inflation.

408. Mr Speaker Sir, inflation, has remained high, thereby, making further reviews from January 2007 necessary.

409. Government is aware of the growing salary gap between management and shop floor workers. The current tax structure is however not reflecting this income disparity where, low and high incomes of $54 000 and $600 000 per month respectively, are subject to the same marginal tax rate of 35%.

410. I therefore propose to raise the tax free threshold from $20,000 to $100 000 per month and spread the tax bands to end at $1 million above which income is taxed at a rate of 35%. Accelerated rates of tax will apply on incomes above $1 million.

411. These measures take effect from January 1, 2007.

412. I have already alluded to the need for me to report to Parliament on a quarterly basis the progress with the implementation of the 2007 Budget. This, Mr Speaker Sir, will present an opportunity for me to consider any necessary reviews to the tax free thresholds.

Bonus Payments and Performance Related Awards

413. Bonus payments and performance related awards to employees are a welcome source of additional income for taxpayers, especially during the festive season and end of year for parents’ preparations for the new school term requirements.

414. I therefore, propose to increase the tax free bonus from the current $20,000 to $100,000 with effect from November 1, 2006. This measure will release about $430 million to taxpayers.

Tax Credits

415. Mr Speaker Sir, tax credits reduce the tax liability of the elderly, blind and physically challenged members of our society, thereby assisting them to meet their special needs.

416. I, therefore, propose to increase tax credits for the elderly, blind and physically challenged from $1,000 to $10,000 per month, with effect from January 1, 2007.

Rental and Investment Income Earned By Elderly Taxpayers

417. Furthermore, in support of the welfare of elderly taxpayers’ dependent on rental and investment income, I propose to review upwards the exempt portion of such income from $12,000 to $112,000 per month.

418. Furthermore, I propose to widen the definition of investments, to include fixed term investments, in line with stakeholder submissions during the pre-Budget consultations.

419. These measures take effect from January 1, 2007.

Tax Free Pension Contribution

420. Mr. Speaker Sir, pension contributions have remained a major source of domestic savings, hence, the need for tax incentives in support of pension schemes. Central to this has been the tax free pension contribution threshold, currently at $6 000 per month.

421. In the prevailing high inflation environment, this threshold has lost value, especially for those contributing to both the compulsory NSSA scheme, as well as to private schemes, whose viability is now under serious threat.

422. I therefore propose to review the tax deductible limit on pension contributions from $6 000 to $75 000 to allow workers’ contributions to both the compulsory NSSA Scheme and the voluntary private pension schemes to benefit from this pension contribution tax deduction.

423. This is with effect from January 1, 2007.

Retrenchment/ Severance Packages

424. In order to support meaningful investment by retrenchees, it is important that in the prevailing high inflation environment our Budget tax measures target to maintain the real value of the non-taxable portion of retrenchment packages.

425. With effect from December 1, 2006, I propose to increase the non-taxable portion of retrenchment package from the greater of $1 million or one third of the retrenchment package, up to $1.5 million to the greater of $25 million or one third of the retrenchment package, up to $100 million.

Capital Allowances

426. Government efforts to assist companies engaged in expansion projects continue to be hampered by the continued erosion of capital allowances due to high inflation.

427. In this respect, I propose to increase the value of capital allowances with effect from 1 January 2007, as follows:

• passenger motor vehicles from $1 million to $10 million
• staff housing from $1,500,000 to $16 million

Donations to Schools, Hospitals & Clinics and Research and Development

428. Mr. Speaker Sir, Government is facing challenges in mobilising adequate resources to support health, education and research & development facilities. Individuals and private institutions are, therefore, encouraged to donate to schools, hospitals and research and development.

429. I, therefore, propose to increase allowable donations from $500 000 to $25 million with effect from January 1, 2007.

430. I further propose to increase allowable deductions for attending conventions or trade missions from $10 000 to $1 million with effect from January 1, 2007.

Corporate Tax Payment System

431. Mr Speaker Sir, Honourable Members will be aware that corporates are now taxed under the contemporaneous arrangement wherein we tax their profits in the year in which they are earned. Hence for 2007, the current legislation requires them to make quarterly payments of 10% in March, 40% in June, 40% in September and 10% in December on the year’s estimated profit, with a 10% margin of error allowed.

432. However, in the prevailing unstable macro-economic environment, many companies continue to face a volatile business production and trading environment.

433. I therefore propose to waive penalties under circumstances where corporates fail to forecast profits within 10% margin of error. Interest on outstanding tax payable will however remain payable. ZIMRA will also support companies in improving on their estimations of corporate profits.

434. Furthermore, in order to support improved cash flow positions of corporates, I propose to review quarterly corporate tax payments on taxable income for 2007 as follows:

Table 3: 2007 Quarterly Corporate Tax Payments
From To
March 25 2007 10% 10%
June 25 2007 40% 25%
September 25 2007 40% 30%
December 20 2007 10% 35%

Small Business Enterprises

435. Government recognizes the significant contribution of Small and Medium Scale Enterprises (SMEs) to the growth of the economy. The current tax regime does not however, grant any tax incentives specific to this category of entrepreneurs.

436. In order to support the initiatives of SMEs, I propose to grant special initial allowance of 150% on the cost of any plant and machinery acquired and brought into use for the first time in the business operations.

437. This measure takes effect from January 1, 2007.

Capital Gains Tax

438. Mr. Speaker Sir, capital gains tax applies on disposal of immovable property and marketable securities not registered on the stock exchange. Capital gains on sale of assets are ascertained after adjustment for an allowance for inflation. Other deductions such as cost of improving the property are also allowed in arriving at the taxable gain.

439. The inflation indexation allowance adjusts gains for the effects of inflation by giving an allowance equal to the amount by which the cost of the asset would have risen on a monthly basis if its value had kept pace with inflation, as measured by the increase in the consumer price index since the asset was acquired.

440. Currently, the inflation allowance is calculated using the annual average consumer price index for every year the asset is held.

441. I propose that the inflation allowance be calculated using the difference between the all items consumer price index (CPI) in the month of disposal and purchase, divided by the consumer price index for the month of purchase. The inflation allowance will similarly be calculated in respect of improvements.

442. This measure takes effect from January 1, 2007.

443. The proposed method of calculation is in line with international best practices.

Roll-Over Provisions

444. A taxpayer is allowed to rollover the proceeds of a principal private residence disposed in order to acquire another principal private residence. These provisions however, do not apply where a taxpayer disposes an undeveloped residential stand in order to acquire another stand.

445. In view of the hardships currently faced by taxpayers in developing residential stands, I propose to extend the roll-over provisions currently applied on principal private residence to residential stands with effect from January 1, 2007.

446. However, this measure will not apply to taxpayers who own residential properties and can benefit from roll-over provisions of such properties, on disposal.

Tax Reserve Certificates

447. Some taxpayers use Tax Reserve Certificates in order to settle their tax debts when they are due. Interest earned on Tax Reserve Certificates deposited with the Commissioner General is fixed and also exempt from withholding tax on interest. The current interest rate of 21.75%, which was put in place many years ago, hence has lagged behind the current market rates.

448. In order to enhance the attractiveness of the Tax Reserve Certificate as an advance tax payment instrument, I propose to review the current rate of interest from 21.7% to the average monthly Treasury Bill Rate with effect from January 1, 2007.

Value Added Tax

VAT on Agricultural Equipment

449. Mr. Speaker Sir, in order to support agricultural activities and boost productivity under the Land Reform Programme, Government extended VAT exemption to agricultural equipment.

450. However, stakeholders raised concern that the VAT exemption on agricultural equipment reduced the competitiveness of locally manufactured equipment. VAT input tax incurred on inputs into the production process can not be claimed if the finished product is exempt.

451. In order to level the playing field between locally manufactured and imported agricultural equipment, whilst providing the necessary support to the agricultural sector, I propose that exempted agricultural equipment be zero-rated for VAT purposes with effect from January 1, 2007.

VAT on Pipeline Transportation Service

452. Mr. Speaker Sir, importation of fuel by road transport is causing severe damage to the road network. There is therefore need for incentives to encourage use of the pipeline.

453. In order to encourage use of the pipeline, I propose to zero rate pipeline services with effect from January 1, 2007.

VAT Exemption on Pension Fund Administration Services

454. In recognition of the role of Pension Funds as a vehicle for mobilising savings, VAT does not arise on services offered by an actuary, insurance agent or insurance broker as defined in the Insurance Act, to the extent that those services are rendered to or on behalf of an insurer or a Pension Fund registered under the Pension and Provident Act.

455. Recent developments in the financial sector are such that the business of fund administrators is no longer restricted to institutions defined in the Insurance Act. Services offered by an independent Pension Fund administrator are however, not exempt from VAT.

456. I, therefore, propose to extend VAT exemption to services offered by independent Pension Fund administrators to the extent that those services are rendered to or on behalf of a Pension Fund registered under the Pension and Provident Funds Act.

Customs Duty

Customs Duty on Raw materials

457. Mr. Speaker Sir, Government’s thrust to enhance capacity utilisation of companies necessitates a reduction of costs which include duties on raw materials and capital equipment among others.

458. In this regard, I propose to provide relief to selected items of raw materials through duty reduction, with effect from January 1, 2007.

Ports of Entry Clearance of Goods

459. Mr Speaker Sir, traders raised concern over challenges of clearing their goods, especially during weekends, and after 1200 hours, when Real Time Gross Settlement (RTGS) transactions become unavailable.

460. Requests for alternative payment methods have therefore been submitted, notwithstanding the existence of pre-clearance facilities which allow goods to be cleared before they arrive at the port of entry.

461. The Reserve Bank is aware of these concerns and is monitoring the situation in conjunction with banking institutions, ZIMRA, and freight agencies.

Estate Duty

462. Currently, the principal residential property is exempt from estate duty. Furthermore, there is a tax free estate duty of $10 million above which a maximum duty of 5% is levied on any additional property.

463. I propose to raise the tax free threshold to $100 million.

Use of Technology in Tax Collection

464. Harmonisation of standards and regulations relating to trade and tax administration is central to achievement of regional integration. The SADC model Customs Act, when adopted will fully address harmonisation issues such as electronic submission of information to tax authorities.

465. Information processing using the traditional manual system is associated with delays, thereby impacting negatively on businesses operations and revenue collection.

466. In order to embrace technological advancements in line with international best practice, I propose that the relevant provisions of the revenue Acts administered by ZIMRA be amended to facilitate the application of information technology in areas such as the filing of returns electronically, registration of taxpayers and use of digital signatures among others.

Learning Material

467. Mr Speaker Sir, Government has always gone out of its way to support the development of human resources, both through direct budgetary allocation towards education and indirectly through provision of targeted tax relief measures.

468. Currently educational material is exempt from import duties as well as VAT. Furthermore, importation of school requisites is catered for through a duty free certificate issued by the Minister responsible for education.

469. Government remains committed to providing affordable education, and in this regard, stakeholders are thus invited to advise on cases where taxes are being paid on educational material.

Registrar for the Fiscal Appeal Court

470. Mr Speaker Sir, the current practice where a Legal practitioner employed by ZIMRA can be appointed as Registrar for the Fiscal Appeal Court presents potential for conflict of interest.

471. I therefore propose that legal practitioners employed by ZIMRA be relieved of the duty to act as Registrar of the Fiscal Appeal Court.

Housing Delivery

472. Consultations with the insurance and pension industry have identified the use of indexed financial instruments to allow pension funds to invest in prescribed assets that will facilitate investment into property, affordable to workers. Indexation to wages would allow workers to make repayments that rise in line with their incomes.

473. Mr Speaker Sir, in support of this innovative way to attract capital into the housing market and broaden access to property ownership Government is reviewing the relevant legislative framework, in consultation with the Insurance and Pension Funds. Some of the proposals made will incentivise investors, while protecting the interests of prospective home owners upon implementation.

Revenue Enhancing Measures

Withholding Taxes

Director’s Fees

474. Tax on fees payable to non-executive Directors is, in most cases, only remitted after assessment, resulting in loss of value due to deferment of the payment of tax.

475. I, therefore, propose to subject fees earned by non-executive Directors to withholding tax at a rate of 20%, with effect from January 1, 2007, in line with practice elsewhere in the SADC region.

Tenders, Consultancy and Other Services

476. The Income Tax Act provides for withholding tax of 10% on the value of tenders above $5 000 awarded through the State Procurement Board. The withholding tax is also levied on consultancy and other services offered to Government and quasi-Government institutions, and on trade of goods and services between registered and unregistered businesses.

477. I therefore propose to increase this amount to $500 000 with effect from January 1, 2007.

Remittances

478. The current legislation provides that withholding tax on interest, dividends, fees and royalties collected should be remitted to ZIMRA within a period of 30 days or such longer period as the Commissioner General may allow, taking account of the manual payment mechanism in place.

479. In view of improvements in payment transfer arrangements, I propose to reduce the period within which collected tax can be remitted to ZIMRA from 30 days to 15 days with effect from January 1, 2007.

Deemed Benefits

Motoring Benefits

480. Taxation principles of equity and fairness demands that equal income be taxed at the same rate. Motoring benefits that accrue to employees increase the gross income earned which should therefore be taxed in the hands of the beneficiary.

481. In line with this principle, I propose to adjust upwards the deemed motoring benefits with effect from January 1, 2007 as follows:

Table 4: Deemed Motoring Benefits
Engine Capacity Current Proposed
Up to 1500 cc $9 000 $100 000
Over 1500cc but not exceeding 2000cc $15 000 $160 000
Over 2000cc but not exceeding 3000cc $18 000 $200 000
Over 3000cc $24 000 $260 000

Corporates

Self Assessment

482. Honourable Members will recall that, during the 2006 Budget, I announced that, prior to implementation of self assessment system, ZIMRA will undertake a consultative exercise during the course of the 2006 fiscal year.

483. ZIMRA has since embarked on comprehensive stakeholder consultations, hence is ready to implement the self assessment system. This will place greater responsibility on taxpayers for assessing tax payable, thereby allowing revenue collectors more time to focus on auditing compliance standards of the major taxpayers.

484. I, therefore, propose to introduce the Self Assessment System on income earned from January 1, 2007.

Value Added Tax

Threshold for Registration

485. Honourable Members may recall that the VAT registration threshold was reviewed during the 2006 Budget to take account of the impact of inflation.

486. In order to enhance the administration of the tax, I propose to review upwards the threshold for VAT registration from the current level of $6 million to $60 million per annum, with effect from 1 January, 2007.

487. This measure will not apply to registered VAT operators.

Rationalisation of Zero Rated & Exempt List

488. Mr. Speaker Sir, SADC Member States agreed to rationalise and harmonize VAT zero-rated and exempt goods and services under the SADC Tax Memorandum of Understanding (MOU). In pursuance to this commitment, some Member States have reduced their list of zero-rated and exempt products to less than twenty items.

489. Although progress has been made towards rationalisation of exempt and zero-rated goods and services, our list however remains long, compared to other SADC Member States.

490. In this regard, I further propose to streamline the list of zero-rated and exempt goods and services to include lamb, goat and sea food with effect from January1, 2007.

Remittance Period

491. Under the current legislation, VAT collected should be remitted to ZIMRA by the last day of the first month following the end of the tax period relating to the registered operator.

492. In order to improve the accounting process of VAT collected, I propose to change the payment date for VAT remittances to the 20th of the first month after collection, with effect from January 1, 2007.

Auditing

493. Mr. Speaker Sir, I am aware of increased cases of non-compliance whereby some operators maintain parallel sets of trading books as they seek to evade payment by understating their tax obligations. This practice has potential to impact negatively on revenue collection.

494. ZIMRA will thus intensify audit coverage in order to reduce revenue leakage.

Value for Duty Purposes

495. Mr Speaker Sir, Government remains committed to fair competition with all potential trading partners. It is in line with this spirit that we have called on our industries to adapt to the more open globalised trading arrangements.

496. Concerns were, however, raised over the impact on local textile industry of dumping and unfair pricing. Stakeholders therefore called upon Government to levy protective customs duties.

497. In order to even the playing field between local manufacturers and importers, I propose to review the basis for determining the value for duty purposes. Announcement on the applicable rates will be made in due course.

498. Furthermore, I remain ready to invoke necessary measures to protect our local industries against any identified practices of dumping into the domestic market. I will also be capacitating quality control institutions such as the Standards Association of Zimbabwe.

Value Addition

499. Honourable Members will recall that in the 2006 National Budget Statement, I announced Governments intention to introduce tax measures that discourage the export of unprocessed commodities such as black granite with potential for value addition. A committee was subsequently put in place under the National Economic Development Priority Programme (NEDPP) to look into Import Substitution and Value Addition.

500. Sectors with potential for value addition have since been identified and appropriate support has partially been availed in line with commitments. Funding for either import substitution or value addition activities has been extended to companies in fertilizer manufacturing, oil pressing, pharmaceuticals, printing services, industrial valve manufacturing, tyre manufacturing, quarry blasting, copper and copper products manufacturing and chrome processing.

501. In order to discourage exports of raw or unprocessed products, I propose to introduce a levy on the value of selected unprocessed products, once measures to curtail obstacles that hinder the processing of value addition are implemented.

Other Revenue Measures

Customs Duty on Cigarettes and Tobacco Products

502. Mr. Speaker Sir, an influx of hazardous, inferior and under priced imported cigarettes continues to impact negatively on the competitiveness of locally manufactured products despite efforts to curb the importation of these products through imposition of deterrent customs duties. The duties have however not been effective due to the disparity between the rate of inflation and the static exchange rate.

503. In order to level the playing field between locally manufactured and imported cigarettes, I propose to amend the calculation of the specific component of customs duty on imported cigarettes. Customs duty on imported cigarettes will therefore be determined as follows:

• the greater of 60% plus US$5.00 per 1000 cigarettes, exchanged at prevailing inter-bank market rate, or 60% plus Z$3300 per 1000 cigarettes to be automatically adjusted monthly for inflation as determined by the Central statistics Office published Consumer Price Index for alcoholic beverages and tobacco.

NOCZIM Debt Redemption Levy

504. The NOCZIM debt redemption levy is currently pegged at $25 per litre of petrol and diesel. This has limited NOCZIM’s capacity to liquidate its debt obligations, which continue to rise in the prevailing interest rate environment.

505. I, therefore, propose to review the levy upwards to from $25 to $60 per litre, with effect from January1, 2007.

Carbon Tax

506. Fuel consumed by local motorists is subject to carbon tax at a rate of $5 per litre of petrol or diesel. In the case of foreign registered vehicles, the tax is charged in foreign currency according to engine capacity.

507. In order to relate the current rate of carbon tax to the market price of fuel, I propose to review upwards the current rate from to $5 to $100 per litre of both petrol and diesel, with effect from January 1, 2007.

Presumptive Tax

508. Mr Speaker Sir, the current levels of Presumptive Tax need to be aligned to reflect their real value, following erosion by inflation.

509. In order to realise this, as well as complement Government efforts in the maintenance of roads, I propose to review upwards the current rates of presumptive tax as follows:

Driving Schools

• Vehicles used for class four training – from $8,000 to $120,000 per quarter; and
• Vehicles used for classes 1 and 2 training – from $12,000 to $180,000 per quarter

Haulage Trucks

• Of carrying capacity of less than 20 tonnes – from $12,000 to $180,000 per quarter; and
• Of carrying capacity of more than 20 tonnes – from $20,000 to $300,000 per quarter.

Commuter Transport Operators

• Of carrying capacity of 15 to 24 passengers – from $6,000 to $90,000 per quarter;
• Of carrying capacity of 25 to 36 passengers – from $12,000 to $180,000 per quarter; and
• Of carrying capacity of 37 passengers and above – from $18,000 to $180,000.

Taxi-Cab Operators

• From $6,000 to $90,0000 per quarter

Automated Financial Transaction Tax

510. Automated financial tax is currently charged at the rate of $10 each transaction.

511. I propose to increase the rate to $50 per transaction, with effect from January1, 2007.

Stamp Duty

512. Stamp duty on cheques is pegged at $10 per each cheque issued.

513. I propose to increase stamp duty to $100 per cheque issued, with effect from January 1, 2007.


Budget Deficit & Financing

514. Mr Speaker Sir, the projected nominal GDP of $8.5 trillion for 2007, and the anticipated revenue target of 35.3% of GDP, would entail total 2007 Budget revenues of $3.0 trillion.

515. This level of revenue, against the above proposals to rationalise the 2007 Budget expenditure allocations to $4.6 trillion, excluding interest, would imply a Budget deficit of $1.5 trillion.

516. The resultant overall expenditures of $4.5 trillion, with revenues of $3.0 trillion, leave an overall Budget deficit for 2007 of 17.6% of estimated GDP.

517. Under this scenario, all effort will be made to contain non-interest expenditure within the expected revenue inflows of $3.0 trillion. Any borrowings will be channelled towards financing the interest on existing debt.

518. In light of the fact that the country will remain under sanctions, I have not made major assumptions with regards to foreign financing of this Budget deficit. The financing of the projected 2007 Budget deficit is, therefore, largely from domestic financial savings.

IX. CONCLUSION

519. The objectives of this Budget are to stabilise prices, grow the economy, create jobs and raise the standards of living of our people. In order to achieve these objectives, we need a Shared Vision and consensus on what policies are necessary to address these challenges. It goes without saying that we are going to need complementary policies that are well synchronised. And above all, we need the will and commitment to implement these tough policies.

520. When it is all said and done, Mr Speaker Sir, I believe the Zimbabwean economy is a resilient one, and it will carry us through. We may wish to get comfort from the words of Saint Paul in his letter to the Corinthians.

521. Mr Speaker Sir, 2 Corinthians Chapter 4 Verses 16 – 17, I quote: “Therefore, we do not lose heart. Though outwardly we are wasting away, yet inwardly we are being renewed day by day. For our light and momentary troubles are achieving for us an eternal glory that far outweighs them all.”

522. Mr Speaker Sir, I now commend the 2007 annual Budget to the House and I place it on the table.

Minister of Finance
HARARE
30 November 2006