MIDLANDS STATE UNIVERSITY

Since 2000

FACULTY OF COMMERCE

DEPARTMENT OF BUSINESS MANAGEMENT

AN EVALUATION OF THE EFFECTIVENESS OF THE PRESUMPTIVE TAX SYSTEM AS

A MEANS OF REVENUE COLLECTION.

BY

R145249X

THIS DISSERTATION HAS BEEN SUBMITTED TO THE MIDLANDS STATE UNIVERSITY IN

PARTIAL FULFILMENT OF THE REQUIREMENTS FOR A MASTER OF COMMERCE
DEGREE IN STRATEGIC MANAGEMENT AND CORPORATE GOVERNANCE

GWERU, ZIMBABWE

2016

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Release Form
NAME OF STUDENT:

R145249X

DISSERTATION TITLE:

An evaluation of the effectiveness of

presumptive tax system as a means of revenue
collection

DEGREE TITLE:

Master of Commerce Degree in Strategic

Management and Corporate Governance

YEAR:

2016
Permission is hereby granted to the Midlands
State University Library to produce single
copies of this dissertation and to lend or sell
such copies for private, scholarly or scientific
research purpose only. The author reserves
other publication rights; neither the dissertation
nor extensive extracts from it may be printed
or otherwise reproduced without the authors
written permission.

SIGNED:

PERMANENT ADRESS:

7 10 Crescent
Warren Park 1
Harare
ZIMBABWE

DATE:

30 April 2016

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APPROVAL FORM
The undersigned certify that they have supervised the student R145249Xs
dissertation entitled, An evaluation of the effectiveness of presumptive tax system as a
means of revenue collection submitted in partial fulfillment of the requirements for the
Master of Commerce Degree in Strategic Management and Corporate Governance at the
Midlands State University.

...........................................
SUPERVISOR

CHAIRPERSON

EXTERNAL EXAMINER

DATE

DATE

.
DATE

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Dedication
This piece of work is devoted to my mother Marian, Brothers Shepherd, Munashe and Prince
and friends for their unwavering support and encouragement.

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Acknowledgements
First and foremost I would like to thank the Lord almighty who made it possible for me to be
where I am today. I want to thank Him for His mercy and grace in my life. Secondly would
like to thank the rest of my family members for all the motivation, inspiration and support
they have given me through and through.

Also special thanks to my mother Marian, relatives, friends and colleagues. Thank you so
much guys for your support and everything that you have done for me.

I gratefully acknowledge the support of all the various participants in my interviews without
whom I would not have had the data I needed for my research. Thank you.

I would also like to thank my academic supervisor, without her tireless and relentless efforts I
would not have been able to work on this project on my own.

Thank you all and May our good Lord bless you.

Abstract
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The study sought to evaluate the effectiveness of presumptive tax system as a means of
revenue collection. In search of answers to the research questions, the study had a set of
objectives which include to establish SMEs knowledge level of presumptive tax systems, to
evaluate the relevance of the current Presumptive tax rates, to identify systems used by
Zimra in administration of Presumptive tax and to identify challenges faced by Zimra in
administration of Presumptive tax.. Essentially the study was limited to ZIMRA and it
covered the period 2009 to date. Related literature was also reviewed in order to capture what
has been researched with regards to the topic under study. To find answers to the research
questions, data was collected using a questionnaire. The study had a high response rate which
was attributed to the strategies that were employed by the researcher during data collection
which included among other things telephone follow ups. The main finding of the study was
that the current strategies at ZIMRA were not effective in Presumptive tax collection. As such
the study recommended Zimra should go out there and educate SMEs on tax issues.

CHAPTER 1

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1.1 Background of the study

According to Thuronyi (2001) presumptive tax involves the use of indirect means to ascertain
tax liability, which differ from the usual rules based on the taxpayer's accounts. The term
"presumptive" is used to indicate that there is a legal presumption that the taxpayer's income
is no less than the amount resulting from application of the indirect method. This has
traditionally been looked at as second best or remedial approach to taxing income
Utaumire, et al (2013) assert that effective implementation of presumptive tax collection
system has the ability to increase tax revenue in Zimbabwe and Thomas (2013) confirms that
presumptive tax collection is a popular tool to increase tax revenue in countries where
compliance rates are notoriously low. Selected sectors of the economy were targeted to
ensure the participation of informal businesses. These include restaurants, bottle stores,
cottage industries, hair salons and commuter operators and informal traders.
The levying of presumptive tax on informal sector is the most recent taxation regime adopted
by Zimbabwe in 2005. This has since been enshrined in the Income Tax Act (Chapter 23:06)
to empower the Revenue Authority (ZIMRA) in the collection of presumptive tax. According
to Zimra website (January 2016) Presumptive Tax legislation was introduced to broaden the
revenue base in view of the increase in informal business activities. Selected sectors of the
economy were targeted to ensure the participation of informal businesses in tax payment in
line with experiences of other developing countries.
According to Ministry of small to medium enterprises (August 2014) the countrys SMEs
make up more than 70 percent of all businesses and they are the countrys biggest employer
and also form the backbone of its economy. This was expected to widen both the scope and
base of tax in embracing informal businesses that remained outside the tax net and also to
lessen the burden on the formal sector (ZIMRA, 2011).
Despite the attractive policy there has been a surge in the amount of tax collected from small
to medium enterprises despite sharp increases of these small to medium enterprises.

1.2 Background of the Problem

Zimbabwe depends on its capability to collect revenue from all potential sources in order to
continue functioning as a country. To do this, it exploits by-laws and tax systems. Therefore
its of great importance that there is a smooth running of any system of revenue collection so
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as to generate the needed finance. The Zimbabwean economy has been on a decline which
led to an increase in unemployment, inflation, the adoption of foreign currency as our local
currency, operational challenges in companies, crippling cash flow problems and many more
economic hardships.
Generally there has been both economic and political instability and still even today
companies are shutting, A July 2013 National Social Security Authority (NSSA) Harare
Regional Employer Closures and Registrations Report for the period July 2011 to July 2013
shows 711 companies in Harare closed down, rendering 8 336 individuals jobless. This has
dwindled the already shrunken tax base. However, the extreme harsh conditions led to
development of a new divergent group of individuals who emerged as fighters who are
managing to sustain themselves by doing various business, these business people are
classified as Small to Medium Enterprises or informal sector, According to News day of 15
November 2015 said A revenue performance report for the third quarter of 2015 by Zimra
chairperson, disclosed that Zimra missed the collection target by 8% while there was a 7%
revenue collection decline when compared to the same period in 2014. Furthermore the
statistical review indicated that the mass job losses which happened in the country from July
to October when over 20 000 workers were laid off on three months notice had an adverse
effect on revenue collection as Zimra managed to get $195,50 million against a target of $203
million, missing the target by three percent.
The Small to Medium Enterprises (SMEs) and the informal traders absorbed all the
unemployed people. The government of Zimbabwe seems to have noticed the paradigm shift
and responded in a way to counter the deviations in the economic environment. The
presumptive tax notion was introduced in Zimbabwe with the view of expanding the tax base
which would ultimately result in increased tax revenues but the tax revenue head has been
performing poorly such that its revenue is classified under other taxes. This merits a reason to
conduct an investigation on the level of awareness and compliance of the SMEs regarding
their presumptive tax obligations and the ability of this system to harness tax from this sector
to its fullest potential
In a 11th April 2014 article carried in The Independent Newspaper, it quoted the Minister of
SMEs, alluding to the fact that there is a 7.4 billion United States dollars circulating among
the SMEs and it remains unaccounted for. In the Governments plight to resuscitate the
Zimbabwean economy; focus therefore, has shifted towards this sector so as to tap into the
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market. In 2012 a survey was conducted where 5.7 million Jobs were created by the SMEs
but according to the ZIMRA statistics there is an insignificance amount contributed by the
Presumptive tax head, hence an investigated was encouraged to check if there enough
systems in place by Zimra to collect Presumptive tax. A host of studies have focused on the
significance of the informal sector in relation to the formal sector but little is known about the
informal traders decision to pay taxes (Gerxhani 1999).
According to Rev News (2nd quarter 2015) it says more than 90% of corporates in Bulawayo
closed down from the period of March 2000 to Dec 2014 and during the same period an
estimated 1.2 billion SMEs were created nationwide, but less than 150 000 companies were
registered by Zimra, it also states that majority of the people that were laid out of big
companies are working either for themselves or they have formed a small companies but this
move is not being seen in form of taxes.
According to The Herald (6 January 2014) SMEs accounts to bulk of firms outside the
agriculture sector and constitute a major source of employments and also generates a
significant domestic and export earnings,

despite having SMEs constituting the bulk of

firms this is not showing an effect on the taxes being collected since tax collected remain
insignificant since presumptive tax is classified under Other taxes..
The statistics below have shown that Presumptive tax contributions are still so insignificant
they fall under other Taxes; hence there is need to investigate why the growth in the Small
to Medium sector has not translated into growth in presumptive tax revenue collections
Type of Tax

Amount collected as a percentage (%) of

Excise
Mining Royalties
VAT on Local Sales
VAT on Imports
Carbon Tax
Paye
Customs Duty
Other taxes

total collection
21
2
28
13
1
25
4
6

1.3 Statement of the Problem

There has been a significant increase in the number of SMEs and it is estimated that there is
USD7.4 billon circulating and its unaccounted for. Majority of these SMEs do not keep their
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accounting books hence they are liable to payment of presumptive tax, however there is no
change in the percentage of presumptive tax collected; hence there is need to investigate why
the growth in the Small to Medium sector has not translated into growth in presumptive tax
revenue collections.
1.4 Research objectives

To establish SMEs knowledge level of presumptive tax systems.

To evaluate the relevance of the current Presumptive tax rates
To identify systems used by Zimra in administration of Presumptive tax.
To identify challenges faced by Zimra in administration of Presumptive tax.

1.5 Research Questions

Do SMEs have enough knowledge of Presumptive tax systems?

Are the current Presumptive tax rates favourable to SMEs?

What are the systems used by Zimra to effectively collect revenue?

To what extend is Zimra managing these challenges?

1.6 Significance of the Study

The study will enable the collecting body, the Zimbabwe Revenue Authority to re-look at the
current set Policies on Presumptive tax. It will also act as an eye opener and assist the
organization to explore other means of netting all the possible tax payers and widen the tax
base. The research will come up with the recommendation of improvements to the system of
collection of revenue from the SMEs sector so that the tax burden may be adequate.
1.7 Scope (Delimitation) of the Study

The scope of the study is based on an analysis of the Small to Medium Enterprises trading
businesses in Bulawayo mainly in the area of Transport, Clothing, Industry Workshops Food,
Saloons, Bottle stores, Furniture and Flea Market. The focus of the research will be limited to
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the period between 2008 and 2016. The period covers the era of acute economic hardships
and Tax Amnesty which is expected to boost the SMEs tax compliancy and boost Revenue
Coffers.

1.8 Limitations
Considering the coverage of the scope there are issues they limit

Time may be a constraint to conclude the research adequately.

Confidentiality is another aspect since the affected Participants may not reveal the

truth for fear of being victimized or captured into the tax system.
Cooperation due to fear of the unknown need to discuss, upfront with the respondents
about the purpose of the study, assuring them of anonymity and that the information
would exclusively be used for academic purposes

1.9 Assumptions

The researcher assumes that the economy shall remain as is at the moment.
The sample populations will effectively represent the true populations in the industry
The information gathered will be reliable and accurate.

1.10 Definition of terms

ZIMRA- Zimbabwe Revenue Authority is the body responsible for collecting taxes and other
revenue streams for the government in Zimbabwe. The Zimbabwe Revenue Authority derives
its mandate from the Revenue Authority Act, passed by the Parliament of Zimbabwe in 2002
SMEs- Small and medium-sized enterprises (SMEs) are non-subsidiary, independent firms
which employ less than a given number of employees. This number varies across countries.
Presumptive tax - a form of assessing tax liability using indirect methods such as income
reconstruction or by applying base-line taxation across the entire tax base. Presumptive
methods of taxation are thought to be effective in reducing tax avoidance as well as
equalizing

the

distribution

of

the

tax

burden.

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1.11 Summary
This chapter lightens on the background of the study, highlighting on the issues of collection
of Presumptive tax on Small to Medium Enterprises. In addition the chapter explained on the
statement of the problem bring out the reason why the study must be carried out. More so it
details on the objectives of the research and the research questions. These will help guide the
research and ensure that the relevant aspects are covered. The chapter also highlights on the
significance of the study to Zimra and SMEs, followed by the delimitations and limitations of
the study. Lastly the chapter defines the terms used in the context. The next chapter will
review the relevant literature to the study.

CHAPTER 2
LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.0 Introduction

This chapter lays out the theoretical hypotheses and practical results of taxing the Small and
Medium Enterprises (SMEs) of previous studies. This chapter is also going to identify and

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highlight important variables and document significant findings from earlier research and this
will work as a foundation on which theoretical framework for the current study can based.

2.1 Knowledge level of Presumptive Tax in SMEs.

According to Zambia Revenue Authority (2016) taxpayers do not pay tax because of Low
levels, of tax literacy, a number of the tax payers have little knowledge about tax and some of
them say they are not able to read and write so they are unable to understand taxation. They
also established that the cost of hiring professional accountants to prepare accounts and
handle tax matters is very high, professional accounting firms are available to handle all
financial and tax matters of business entities, most operators feel they cannot afford the high
fees charged by these consultants. Liquidity problems some taxpayers have expressed
difficulty in settling the assessed tax, because the amounts are to be large and they are not
able to maintain bank savings as the daily takings are quickly used to meet numerous
expenses. They also raised a very important

aspect of saying

SMEs have constant

breakdown of equipment, a common complaint from taxpayers equipments hence they

disagree with the amounts assessed on them, especially where they did not send returns and
accounts . This leads the researcher to want to know that is it the same problem being faced
by Zimbabwe or factors are different.
Thuronyi (1996)

explained that Presumptive tax is used for simplification of taxes,

particularly in relation to the compliance burden on taxpayers with very low turnover. He was
trying to explain that since SMES do not keep books and they not understand the tax concepts
its supposed to be easy for them to remit tax in the form of presumptive tax.
Weinchenreider (2007) highlighted that the problem in taxing small and medium-sized
enterprises is tax evasion. Mainly in developing countries the problems of taxing small
businesses are well-documented, but at a smaller scale, he also cited that the problems of tax
evasion of small businesses may also be inconsistent in developed economies. Tax
simplification may also be a solution here, Zimbabwe has adopted the presumptive tax in a
way to try and combat evasion but still compliance is it its lowest.
As reiterated by Burgess and Stern (2006), they highlighted that presumptive tax is general in
the tax systems of most developing countries. They added that for many small entrepreneurs
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in Africa, most firms choose to stay in the informal sector for as long as is possible. The real
benefits outweigh the real costs. This is because firms in developing countries rarely see their
tax contributions at work in the form of government services.
According to Thomas (2013), traditional income tax with a progressive structure, increasing
productivity will not subject the taxpayer to a higher tax burden. Therefore presumptive tax
gives advantages to the small scale operator who has higher production. In Zimbabwe this
effect is not seen because no matter how progressive is production in SMEs still they do not
remit taxes.

The Makerere Business Journal (1996) highlights that liquidity position, profitability levels
and efficiency are good indicators of the performance of a business. However in Zimbabwe
all things seems so good to the SMEs but they are not paying tax
Aaron and Slemrod (2009) asserts that presumptive income tax system is appropriate in a
country with a sizeable illiterate population and a very large number of small enterprises
which is typical of many developing countries. One of the principal challenges in adopting a
presumptive tax is the threshold issue. The threshold issue has to deal with setting the upper
and lower bounds of a presumptive tax method basically determining who will be taxed at
all. The challenge for any tax administration lies in setting these thresholds for a presumptive
tax regime, which in most developing countries is in lieu of the income tax and VAT.
Graham (2005) states that profitability is the organizations ability to generate more income
than its expenses. Therefore, profitability must reflect in the Statement of Profit or Loss and
other comprehensive income to certify that the income generated is greater than the input
costs.

The growth of SMEs has been negatively affected by lack of knowledge on taxes. In a study
on behalf of the United Nations, Mitra (1997) found out that most enterprises in Uganda were
struggling after paying presumptive tax, yet they would not have paid it if they were to be
assessed using the normal income tax route. This was due to the fact that most Small
Business Enterprises did not keep proper books of accounts. Presumptive taxation therefore
greatly reduced their profits thereby preventing them from expanding.
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A study by Mitra and Pradeep (2002) in Uganda, revealed that high taxes hinder business
expansions, with a big proportion of business profits ending up being paid as taxes. Therefore
profits of Small Business Enterprises were greatly reduced because of the taxes paid by them.

According to Mugulusi (2001), SMEs depend entirely on internally generated funds for their
growth and survival since they can hardly access loan capital from financial institutions due
to the high borrowing rates and requirements for collateral security. Therefore over taxation
of their profits means depleting their major source of funds for expansion.

The term presumptive taxation covers a number of procedures under which the 'desired' base
for taxation (direct or indirect) is not itself measured but is inferred from some simple
indicators which are more easily measured than the base itself. Presumptive income taxation
is employed primarily in economies where 'hard-to-tax' taxpayers comprise the majority of
the population and administrative resources are scarce. In these countries, most taxpayers
lack the financial transparency that allows for effective taxation by the government. The
result is that governments estimate or presume the appropriate income on which taxes should
be levied. In developed countries, the transition from presumptive to actual income-based
taxation paralleled the shift from agricultural to industrial economies. Economic
advancements replaced self-employment in farming and small-scale trade with concentrated
employment in fewer and larger entities such as governments and large corporations.
Whereas tax liability was formerly derived from indices such as estimated crop yield of
agricultural lands, it gradually became a factor of actual income received from salary and
wages. Movements towards more 'modern' forms of tax administration emerged as businesses
became more sophisticated and financial transparency increased. As accounting practices
became more prevalent, self-assessment of tax liability and withholding tax at source
inevitably followed. However, in developing countries, presumptive taxation may still be the
most appropriate method of tax administration for specific groups of taxpayers. The
economic transition from agriculture to industry has not occurred to the same degree as in
industrialized nations. Nonetheless, most tax laws are written as if they had, assuming the tax
is assessed on well-defined measures of income and well documented in transparent
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accounting records. Already operational in some developing economies like Ghana,

Zimbabwe and a few others, the proposed regime is administered based on presumed, not
actual, income of the taxpayer in a structured way that ensures fairness. It seeks to remove the
challenges confronting the revenue agencies in their efforts to achieve a more effective
administration of taxes for individual and corporate entities in the sector. Embuka (2014)

The Researcher has confirmed that the reality is that most taxpayers do not possess the
administrative resources to maintain accurate books or navigate complex tax codes. Other
costs incurred by the SMEs also mentioned in table 1.1 discourage complacency. As a result,
tax evasion is rampant and authorities exert considerable effort locating and taxing small and
medium enterprises (SMEs). This point then confirms the main reason for the Research; the
lack of adequate books has allowed revenue to leak and only minute amounts are collected as
presumptive tax. There is a need to refine further the method of collecting this form of tax.

2.1.1 Table 1.1: subdivision of compliance costs

Monetary costs
fees paid to

Time costs

Psychological costs

tax advisors, time spent by the tax payer stress and anxiety arising

lawyers, accountants

on studying laws a filing from complying

salary on staff working on

preparation of returns

returns

and time spent to prepare and

tax accounting

support a tax audit

tax literature and software

time spent to prepare appeals

with a

specific tax or from a tax

related activity
frustration as a result of
taxpayer harassment

Dalton (1991) noted that taxes reduce the efficiency of the small taxpayers, affects their
ability to work and hence affects the profitability of their investments. Firms that enjoy high
growth are not affected by presumptive income tax but low growth small enterprises.
Cross (1997) who found out that small business enterprises perceive taxes as most
burdensome and caused higher costs of growth.

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Reinikka and Svenson (1998), while comparing investment and profitability rates among
firms in Africa, found that Ugandas investment rates are similar to those in other African
countries but profit rates are 56 percentage points lower than in other African countries. They
argued that, high taxes contributed to a greater extent to this disparity.
2.2 Relevance of the current Presumptive tax rates.
Presumptive methods are often encouraged in the taxation of SMEs with the aim of reducing
the cost of compliance, and to educate taxpayers to deal with the tax system, in the hope that
this may reduce the incentive to operate in the underground economy. In this case they are
usually enforced as simplified tax systems, that is, they replace a number of taxes normally
levied on business. Bird and Wallace (2004) and Araujo- Bonjean and Chambas (2004) show
that simplified systems are widely used for SMEs in developing countries.
Thomas (2013) assumes that taxpayers are rational actors who make the decision whether to
comply with their tax obligations by comparing the expected cost of compliance that is
the tax, to the expected cost of evasion. The expected cost of evasion depends on the
expected penalty if the evasion is detected, which is equal to the nominal penalty discounted
by the probability of detection.
Presumptive tax is based on potential income, its a rough estimate of what an asset or a
business could have earned assuming regular circumstances, However, in a risky world, the
potential income is a random variable which also depends on the risk aversion of the owner.
(Thuronyi 1996). This is a problem in Zimbabwe because the business trends changes all the
time to the extent that the estimates for this month are totally different from next month.
Presumptive taxation uses indirect means of ascertaining tax liability, which is different from
the normal rules based on the tax payers verifiable accounts according to Thuronyi (1996).
Slemrod, et al (1994) echoed that presumptive tax is used where the otherwise targeted tax
base is difficult for the tax authorities to assess.
Thomas (2013) says that unlike income tax with a progressive structure, increasing
productivity will not subject the taxpayer to pay higher tax. Therefore presumptive tax gives
advantages to the small scale operator who has higher production. However this is not being
seen in Zimbabwe the small scale operators are not remitting taxes even if their production
level changes.

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The ZIMSTATS 5 year Labour Force report (2011) indicates that 84% of Zimbabweans were
employed in the informal sector (most of which constitute SMEs) and therefore the
profitability of SMEs is critical to the economy, however this is not echoed by the taxman,
despite the increase in the employment of people in SMEs this is not changing the taxes
collected.
On the other hand Presumptive Tax is discouraged by many scholars. Provisional tax payers
are tax payers who pay tax on income earned from operations through the Quarterly Payment
Dates, they have the advantage of paying tax after deducting business operating expenses
from gross income, and in other words they pay tax on net profit. A Presumptive tax payer
pays tax based on the rates stipulated by the ministry, which means even if the business
makes a loss the tax payable still remains payable as per stipulated rates (Mhlanga
:MSAAA).
The methods that can be used to determine presumptive tax, as explained by Ayyagari et al
(2005), can be classified into four categories:

Methods that guess the taxpayer's income based on the nature of the business ,

staffing , assets and location;

Methods that use a computed return on business assets;
Methods that consider gross turnover such as the French Forfait.
Methods that assess the taxpayer's income on the basis of indicators such as personal
expenditure or wealth.

There are two approaches that have been implemented in developing countries namely the
Israelian Tachsiv and the French Forfait (Bird and Wallace, 2004 and Thuronyi, 1996).
The Forfait, on the other hand, is used in France and parts of francophone Africa. It applies to
farms, enterprises and professionals whose gross receipts are below certain amounts. For
farmers, the Forfait uses an estimate of land productivity by region and crop type to impute a
taxable income. For other activities, the tax collector has regional or national monographs
describing in detail the gross profit margins and other relevant characteristics of each trade.
Based on this information, the tax collector assigns a tax liability to the taxpayer, who can
accept or contest it. If accepted, the tax payment remains fixed for two years. The accounting
requirements are not completely absent in either of these systems, as the taxpayer must be
able to prove that she qualifies for the presumptive regime. This is likely to be true for any
presumptive tax: the compliance burden on the taxpayer is reduced but not eliminated. Also,
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both the Tachsiv and the Forfait allow the taxpayer to contest the assessed tax liability. Bird
emphasizes the necessity of this feature,
Without which the system may appear too inflexible and the taxpayer has no power against
potential abuses of authority by the tax collector.

The French forfeit (Thuronyi, 2004; Longobardi, 1990) is a method of presumptive taxation
applicable only to SMEs with an annual turnover below a specified amount. Its most
important feature is that it is a contractual method, i.e. it is used to help the Tax Agency and
the taxpayer to reach a consensus on the amount of taxes. The first step in the procedure is the
furnishing by the taxpayer of a number of pieces of information concerning amounts of sales,
purchases, inventories, number of employees in previous years, etc. The Tax Agency uses this
information and some statistical information concerning general business expenses to
formulate a forfeit or proposal based on "income that a firm would normally produce" under
the same economic condition, this is how it works:

The Tax Authority and the taxpayer mutually agree to use estimate of income as a

basis of assessing tax liability.

The taxpayer then submits business information for a particular year about sales,

purchases inventories, number of workers and wages paid.

The taxman uses the submitted information for the previous year to come up with the

presumed tax.
Forfait will apply for 2 years but it can be extended.

For Forfait presumptive tax to be successful, Guevara (2008) says it requires extensive
research, proper guidelines and honest tax officers.

The Tachsiv and the Forfait also illustrate the pitfalls of a large presumptive tax system. They
both require specialized technical research and field surveys to update their respective
assessment guides, so the burden on the government is still considerable. Moreover, the
taxpayers tend to view these presumptive systems as the default for the activities covered,
even though standard income assessment is available as an option in most cases. These
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features are the result of the large range of activities covered by these two systems and the
fact that they have been in place for a long time (Taube and Tadesse). This need not be the
case for presumptive tax regimes of a more limited scope. In view of the motivation and the
examples above, it would then seem that Presumptive taxes are a second-best solution at
most. This perception is not necessarily correct. Tanzi points out the paradoxical fact that Ptaxes are viewed in the policy literature as a compromise option when actual taxable income
is not observed, while the theory of optimal taxation favours the idea of an ability-to-earn tax
as a first-best solution. Since some Presumptive taxes are arguably measures of potential
rather than actual income, they resemble ability-to-earn based taxes and may in this sense be
more efficient than the second-best taxation of actual income.

This presumptive tax system originated in Israel is called Tachsiv and is based on two steps
(Fausto, 1990). First, firm turnover (sales proceeds) is estimated on the basis of some predefined indicators, such as average sales per worker, or average ratio between the inventory
and sales. These indicators are then applied to various firm variables to obtain an estimation
of a range of values for the firm's turnover. Second, a range of plausible pre-tax gross 7
income is estimated by subtracting a presumptive amount of expenses from the estimated
turnover. Different expenses receive differential treatment depending on the difficulty
involved in auditing them, such that presumptive coefficients tend to be applied more
extensively to expenses that would be more difficult for the tax auditors to verify. The
Tachsiv is differentiated across economic sectors and, to some extent it is negotiated between
the Tax Agency and each industrys representatives. It is designed to be an instrument for the
tax auditors and, thus, an audit strategy. However, to the extent that taxpayers tend to
converge within the range of presumed income, the Tachsiv could also be interpreted as a
method of presumptive taxation (Thuronyi, 2004).

In other countries calculation of Presumptive tax is done as, An estimate is made concerning
average sales per worker, and the average ratio between inventory and turnover and the
correlation between water consumption and sales or The above indicators are then used to

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estimate total turnover, and The final stage is then to deduct presumptive/documented
expenses to estimate gross income.

Bulutoglu (1995) mentioned two possible presumptive tax rate approaches for assessment.
One of them is that the amount assessed may be a simple lump-sum tax based on the average
income of a particular trade or profession.
The second one is based on a complex calculation using information on sales, employees,
assets or location. Utaumire, et al (2013) says this approach has been used in Zimbabwe since
2006 on Tax on the earnings of small traders who may not be required to register for Income
Tax is based on estimated income and is referred to as Presumptive Tax.
The Researcher has observed that the Operators liable to this tax are not expected to submit
Income Tax returns. Examples of operators in this category of taxpayers include cross-border
traders, furniture making traders, transport operators, small-scale miners, restaurant operators,
flea market operators and small miners, to name a few. These operators are required to pay
Presumptive Tax each quarter on the 10th of the following months: January, April, July and
October. The different Presumptive Taxes payable by each business sector are available from
the ZIMRA website.
Bird et al (2005) asserts that if a tax regime makes it difficult for the entrepreneur to
accumulate and keep wealth he or she will not think it worthwhile to take the risk of starting
or expanding a business. There is need for government to balance its revenue requirements
against the need to stifle the establishment, development or growth of SMEs. The
government should not kill the goose that lays the golden eggs.
Tax administrations are quite mindful of the burden which tax compliance places on
individuals and businesses. However, non-compliance amounts to a lack of funds for the
public works and social service programs that are central to national development. As a
result, authorities spend a disproportionate amount of time tracking down non-compliant
SMEs. Thus, governments often introduce presumptive taxation as a retribution-free method
for providing incentives to citizens and businesses thereby bringing them into the tax net and
increasing the country's tax base. (Embuka : 2014)

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Heinz (1996) stated that turnover and eventual profitability is a factor that allows freedom
and flexibility to undertake more extensive financial reporting. However, when firms are
taxed on gross turnover rather on revenues generated, the tax becomes like a sales tax
(Thuronyi 1996).

Dalton (1991) noted that the effect of any specific tax upon the desire to work upon and save
depends partly on the nature of tax. Taxation creates diversion of resources that enhance the
revenue base of a firm through increased turnover.
Presumptive tax is a reference to tax levied on presumed (estimated) income. Therefore, in
the absence of a fully-fledged presumptive taxation regime this section is applied as an
alternative, Kuugongelwa-Amadhila (2015).

2.3 Challenges faced in administration of Presumptive tax.

Delaney-Thomas (2013) has been argued that presumptive taxes increase efficiency by
imposing a zero marginal tax rate on above-average earnings. The perception here is that, for
a presumptive tax that is calculated based upon a presumed average level of earnings for a
particular industry, any actual earnings above that average will not change the taxpayers
level of presumed tax. Thus, unlike in a traditional income tax with a progressive rate
structure, increasing productivity will not subject the taxpayer to a higher tax burden.

There are challenges faced by tax policy in developing countries, Kayaga (2007) expressed
the lack of efficient tax administration.

She said administrations face major problems

because majority of the economy is at a subsistence level, many taxpayers dont keep records
and even where records are kept they are not necessarily reliable. Taxpayer cooperation is
also low because of shortages of trained officials, corruption, and lack of visible
improvements in government services. As a result countries often develop tax systems that
exploit whatever obvious revenue-generating options they have rather than develop modern
and efficient tax systems that create wide tax bases from which to draw revenue. Hence many
developing countries often end up with too many small tax sources, too heavy a reliance on
foreign trade taxes, and a relatively small use of personal income taxes.
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She went on to say political and social factors create additional challenges in devising tax
policies for developing countries. Lack of political will to support tax reforms has oftentimes
led to unsuccessful reforms. Lessons learned from successful reform programs suggest that
the key factor is strong political will, demonstrated by a commitment from leaders at all
levels of government. Moreover, most developing countries suffer from military
corruption,deep poverty dictatorships, civil wars, underdevelopment, disease, and famine. All
these challenges have inevitably led to low tax revenue yields in developing countries.
Many authors state that it is difficult to come up with a universally agreed definition of
SMEs. This is a result of the perception of SMEs in different countries at different
developmental stages. (Maseko: 2011) said Compared to developed-country standards, SA
thresholds are low. Many businesses which Americans or Europeans regard as SMEs would
be regarded as large enterprises in South Africa. Moreover, the fact that the NSB Act
distinguishes between enterprises in the different economic sectors and further uses different
thresholds for the different sectors is an acknowledgement that what is considered small in
the different economic sectors will vary depending on the nature of the activity undertaken
Moreover, the qualification in the DTIs Annual Review of Small Business in South Africa
2005 2007 (2008: 4) that the report will embrace as comprehensive a definition of small
businesses as possible, provided that the economic activity remains below the thresholds for a
large enterprise is indicative of the fact that there is no common understanding and/or
definition. The DTI report goes on to state that the terms small business and SMME are
used as synonyms, whereas the term enterprise refers specifically to entities (especially
close corporations, cooperatives but does not include a stokvel and registered companies
with CIPRO (DTI: 2008) emphasising the fact that there are different concepts of
businesses. For statistical purposes, it would make a great deal of sense for the various datagathering bodies in the public and private sectors to arrive at, and use, agreed categories
covering the SME sector (SBP, 2000)

SMEs can be defined as small or medium sized business ventures in any sector of the
economy. These include small and medium companies, co-operatives, sole traders and
informal traders. Activities include retail, informal traders, service provision, manufacturing
and mining, among others (ZIMRA, 2015)

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In Zimbabwe, the definition of SMEs is based on number of employees and asset base. The
Ministry of Small to Medium enterprises defines SMEs by reference to number of employees,
total assets and legal structure.
Small business tax systems generally do not generate much revenue. Their true value lies in
their ability to create or enhance a taxpaying culture and facilitate the movement of
businesses from the small business tax regime to the standard regime. Well-designed small
business tax systems can give taxpayers experience in recordkeeping that will benefit them
in the sense that they will have records sufficient to enter the formal capital market, obtain
financing via transparent methods and become more integrated into the formal economy.
Greater access to transparent financing and integration into the formal economy can allow
small businesses to become medium-sized businesses and potentially large businesses. As
these businesses grow they will pay more in taxes; thus an effective small business tax regime
can increase tax revenue in the future by facilitating flow into the standard tax regime.

According to Bird and Wallace (2005) the strategy is that presumptive tax methods should
effectively bring in firms into the formal economy and then gradually graduate into the
normal tax system, without encouraging firms to move from the normal tax regime into the
presumptive tax regime. Araujo-Bonjean and Chambas, (2004) say that the aims of
presumptive tax should provide for taxation that is higher than that based on the normal tax
rules. This encourages firms to move into the normal tax regime and discourage firms that
were in the formal sector to move to the presumptive regime, resulting in loss of revenue to
the tax authority. One solution to this conundrum might be a periodical revision of the
threshold for eligibility for the simplified regime.

According to Keith (1994), Taxes affect performance of SMEs in two ways. Firstly by
influencing the aggregate supply of the main factors of production by lowering net (after tax)
returns or profits and secondly by influencing the efficiency of resources utilization.

This view was supported by Keith (1994), who suggests that taxes affect growth in turnover
and eventually overall revenues by influencing the aggregate supply of the main factors of
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production by raising or lowering net return and secondary by influencing the efficiency of
the resources utilization. There is some evidence from more fluent societies, Eckstein (1980)
that people will work more if incomes taxes fall.
Lindibeak (1999) collaborated this view by noting that high tax rate can foster an
underground economy where revenues and incomes are not reported to all the tax authorities.
Misgrave (1998) observed some effects of taxation on the capacity output of the firms.

2.4 Solution to challenges faced in administration of Presumptive Tax

Presumptive taxation is used primarily in economies where there is specific groups of
taxpayers that are hard to tax and administrative resources are scarce. The taxpayers lack
financial transparency which allows effective taxation by the government. The result is that
the government assesses the appropriate income on which taxes should be charged.
Presumptive income taxation is taken as an optimal method of fighting widespread noncompliance without employing excessive government resources. And it also provides
taxpayers with a simplified option for payment of tax without requiring full financial
transparency (IPM Research Centre: 2011), with the assumption of the simplified taxation
income collected for presumptive taxes should be increasing but there are no significant
changes which gives the researcher the question as to: is none compliance the fault of the
administrators?
Thuronyi (1996) gives the advantage of Presumptive tax as that it fights tax avoidance or
evasion because its easy to collect it does not need a lot of book work and it also can
encourage taxpayers to keep proper accounts, because they subject taxpayers to a higher tax
burden in the absence of such accounts. However its advantageous to a taxpayer who earns
more income will not have to pay more tax.
Conferring to an article by the Zimbabwe Independent in the article Zimbabwe: presumptive
tax is dead! dated 25 July 2014; the government is not telling the truth on unemployment,
this country is premised on the fact that the informal sector has become the main employer,
contributing almost 60% to the GDP. The shift of the economy from traditional business
models to the informal sector was expected to also see the informal sector contributing
25 | P a g e

meaningfully to tax revenue. And the answer was the introduction of presumptive tax to bring
in revenue from small-scale traders including cross-border traders, furniture-making traders,
transport operators, small-scale miners, restaurant operators, flea market and hair salon
operators, among others; yet ZIMRA was found wanting with a negative Variance in meeting
the proposed National Target and presumptive tax is classified under other taxes to show its
insignificance.
The Researcher has observed that the informal sector, comprising of the SMEs is largely
occupied by business owners who fall into the Presumptive Tax category hence in Zimbabwe
it has become a mainstream of revenue contribution towards the economy. ZIMRA is
currently accepting this method of remitting tax. However, in comparison with the large
numbers of SMEs it seems Presumptive taxis not contributing much to the target. The
researcher has also noted a need for new Policies that need to be created by ZIMRA to collect
more revenue.
Shlomo Yitzhaki (2003) said by implementing presumptive taxes on small businesses,
another choice variable is added; pay a given amount of taxes and run your business without
intervention from taxman. And also presumptive tax reduces burden of administrative cost,
on top of reducing the compliance cost,
According to Bongwa (2013) there some advantages and disadvantages of presumptive tax
systems , he said

that it lower compliance costs

and its a motivation to improve

bookkeeping, it will also help the taxpayer because it makes tax liability more predictable ,
however there is no relief when making losses
The Extensive Research has proven that a well-designed small business tax may draw small
businesses into the formal sector by lowering the cost of compliance. Compliance costs
include monetary and non-monetary elements. Small businesses in Zimbabwe may face a
variety of compliance costs, including: the costs of acquiring sufficient knowledge to meet
legal requirements; of compiling the necessary receipts and other data; making the relevant
calculations and completing tax returns; paying professional advisors for tax advice; paying
incidental costs of postage, telephone, and travel to communicate with tax advisors or the tax
office; collecting, remitting, and accounting for tax on the profits of the business, and on the
wages of employees. By simplifying recordkeeping requirements, small business taxes can
significantly lower compliance costs which may entice more small businesses to enter into
the tax system and broaden the tax base. A broader tax base is perceived as more fair by those
26 | P a g e

who are currently in the tax system and may further increase voluntary tax compliance.
Therefore the Researcher saw it fitting that an adjustment to the Presumptive tax to allow
higher amounts to be collected.

It is difficult to design indicators that sufficiently reflect profit potential or a small business
owners ability to pay.

The profit potential of comparable businesses with identical indicators could depend on
several factors, such as location; i.e. a salon in Bulawayo City Centre and a Salon in the High
Density Suburb like Makokoba. The profit margins have a cumbersome variance.

Business owners and management are not required to keep adequate books, therefore they do
not benefit from the insights provided by proper records if such records are not kept. Tax
administrations must conduct extensive research on profit margins in various business
segments in order to have well defined indicators and avoid ongoing disputes with small
businesses.

Indicator-based systems can have undesirable incentive effects. For example, an indicatorbased system that uses the number of employees as an indicator provides an incentive for
businesses to lay off staff or not register employees.

Indicator-based systems adversely

impact start-ups and businesses making negative profit.

Wallace (2003) in a paper titled Is it really hard to tax the hard-to-tax? The Context and
Role of Presumptive Taxes claim that most countries with presumptive systems set the tax
rates lower than the normal system due to political reasons, thereby guaranteeing that those in
the presumptive system will stay there indefinitely, provided it remains the lowest cost
alternative.

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Bird and Wallace argue that any presumptive tax system needs to set the tax burden higher
than it would be under the normal system in order to provide an incentive for the taxpayer to
move into the normal system. Countries have experimented with several methods to induce
small business taxpayers to move into the normal system, including: limiting the length of
time a taxpayer is allowed in the small business tax system, requiring taxpayers to re-qualify
for the small business system periodically, and offering incentives such as depreciation
only to firms in the normal system. It is important to note that depreciation of assets is not in
and of itself an incentive, but rather a necessary step in calculating profit. The tax base of a
presumptive system will determine if depreciation of assets under the normal tax system will
lower the taxpayers liability, in which case it may be considered an incentive.
According to Bird and Wallace, Too high an exit threshold undermines the regular tax
system [same for personal exemption] and invites too many participants into the special
regime. On the other hand, an entry threshold that is too low may not serve such stated goals
of special regimes as reducing tax barriers to business entry. By business entry, Bird and
Wallace mean the lower threshold of a presumptive tax system should not be so low as to
prevent would be entrepreneurs from starting a business, although I do not know how this
threshold would be determined.
However the challenge with the presumptive income tax system is how to exclude from the
system large and medium enterprises that hide from the revenue authority. Therefore as the
small become bigger, they should graduate into the normal tax system, so the revenue
authority must also ensure that, those who are in the normal tax system already or should be
in the system do not shift into the simplified system and take on the disguise of smallness to
hide from taxation (Bird and Wallace 2005).

Kayaga (2007) says that the presumptive assessment methods are designed as administrative
expedients, but they can also be used to promote efficiency and equity goals of compliance. A
major weakness of presumptive tax regimes is that they exclude a defined plan facilitating
taxpayers to graduate into the normal tax system.

Were (2011) in a study of Nakawa Division in Uganda, found out that presumptive income
tax system has a negative effect on the profitability of small business enterprises. The study
28 | P a g e

also revealed that most small business enterprises were ignorant about the taxes they pay to
the tax body and how taxes are computed. This ignorance was attributed to poor methods of
awareness used by Uganda Revenue Authority. The study concluded that presumptive income
tax negatively affects the profitability of small business enterprises. Instead of pushing
business to grow it suppresses them

Tanzania seeks to encourage simplified recordkeeping by assessing businesses that keep

simplified records a lower tax liability than business that do not. However, experience has
shown Tanzanias simplified tax system has been unsuccessful in increasing the level of
recordkeeping among small businesses.

Kenya seeks to minimize administrative burden while at the same time encouraging
simplified recordkeeping by imposing a 3% turnover tax on all businesses that keep records
and are below the VAT threshold of 5 million Shs. and applying a rate of 3% on 5 million
Shs. if a business does not keep records in effect this serves as a minimum tax. On the other
hand some scholars oppose this school of thought on the fact that Presumptive tax creates
challenges.

As pointed out by Bird and Wallace (2004) the critical issue is whether these presumptive
methods of taxation are really effective first in bringing firms into the formal economy and
then, after few years, forcing them to move into the normal tax system, while minimizing the
number of firms that move from the normal tax regime into the simplified one. The main
problem is that these objectives are to some extent inconsistent. To be attractive for informal
firms the methods need not only to be simple and based on readily available information to
reduce compliance costs (Araujo-Bonjean and Chambas, 2004), they should also provide for
an effective taxation that will be lower than that based on the normal tax rules. However, this
would discourage firms from ever moving into the normal tax regime and attract firms that
were in the formal sector to move to the presumptive 8 regime, resulting in loss of revenue to
the Tax Authority.

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Pakistan analysed the presumptive tax regime of Pakistan, for its adequacy to control an
informal economy. This study concluded that that Pakistan presumptive tax does not adhere
well with efficiency and equity principles because it does not secure neutral tax treatment for
all types of business sector. A research by Memon (2013) revealed that Income estimation is
hard to measure activities which dont allow for an easy cross-check of self-assessed tax
liability, like self-employed doctors and lawyers.

A study by Chidoko et al (2011) stressed the need for the graduation of the informal sector
from presumptive tax to the normal taxation. The study concluded that the informal sector has
a lot of potential to supply a large share of the market that also include formal businesses and
that it can contribute to tax revenue.

Arachi and Santoro (2007) in an Italian study evaluated a tax auditing and tax enforcement
strategy called studi di settore. Roughly translated, this approach means business sector
analysis and it uses statistical methods to select tax payers to be audited and also to estimate
liability for SMEs. The study also proposed that with a few adjustments studi di settore
could be very useful to developing countries and assist them in collecting presumptive tax.
The study concluded that tax enforcement for SMEs was problematic, mainly because such
businesses operate on the margin between formal and shadowy economy.

Pashev (2006) did a study in Bulgaria on the relationship between equity and efficiency
aspects when focusing on presumptive tax .The findings of the research were that
presumptive tax should aim at enhancing collection of tax and therefore should reduce the
cost of voluntary compliance. The study concluded that presumptive taxes are better used as
license taxes on small businesses and the self-employed levied by local authorities rather than
as central taxes on small business income

Mukasa (2008) conducted a research in Central Division of Uganda to identify the link
between tax knowledge, perceived tax fairness and tax compliance of SMEs in Uganda. The

30 | P a g e

study revealed that tax knowledge and perceived tax fairness had a significant positive link
with tax compliance.

Akatuhurira (2011) in study, conducted in Wakiso Town Council of Uganda, established that
there was a strong relationship between presumptive tax administration and revenue
performance of small scale businesses and that any additional levies passed to the traders by
the authorities were passed on to final consumers.

A case study of Zimbabwes ZIMRA region 1 by Utaumire et al (2013) revealed that contrary
to perception, not all informal businesses avoid paying their taxes and that most informal
traders were not aware of presumptive tax. This study concluded that presumptive tax had not
been fully implemented and administered by the tax authority.

The Researcher has noted that Presumptive taxation addresses the basic tethering factors
faced by SMEs who are willing to be formalised but are incapacitated by offering a
streamlined method for moving from the informal to formal sector. Income is no longer
assessed from accounting records but from indicators such as the value of a farmer's land,
gross turnover of the SME, or signs of individual wealth. This approach to estimating income
on which tax is levied removes the administrative burden of financial transparency
traditionally required for compliance.

The Researcher also noted that presumptive tax regime may be desirable as it has the
potential to generate additional revenue, and also as a way to address taxation inequity. There
are also certain challenges in terms of compliance and administration. For example, one has
to carefully consider which method (as there are several of them) to adopt in order to avoid
unfair treatment of taxpayers and to also ensure that the method adopted is implementable.
As is the case globally, a presumptive taxation administration in Zimbabwe is currently
targeting small businesses across all sectors such as taxi service, beauticians, day care and
cleaning services amongst others.
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The record keeping requirements of standard profits tax often put small businesses at a
competitive disadvantage due to the fixed and variable costs of maintaining records. Fixed
costs include developing and understanding financial and record keeping systems necessary
to comply with the tax laws. Variable costs include the costs of keeping records on a current
basis, keeping appraised of changes in the rules, audit costs and maintenance of records for
significant time periods. Small business tax regimes, such as Presumptive Tax, can allow
small businesses to avoid many of the fixed and variable costs associated with standard
profits tax.
The Researcher has distinguished the need for modification in the current tax system because
of the following reasons:
Current small business tax regime creates economic distortions and fails to meet the primary
goals of small businesses taxation. As previously stated, turnover-based small business tax
regimes allow small businesses to avoid many of the fixed and variable costs associated with
standard profits tax, thereby enhancing competition. But if the government is going to require
all taxpayers to maintain proper books of account, then the Presumptive Tax or the primary
benefit of a turnover-based small business tax regime is nullified. In Zimbabwe, the
taxpayers method of accounting must conform to generally accepted accounting principles.
Furthermore, under the Income Tax Act A taxpayer carrying on business shall furnish with
the taxpayers return of income a statement of income and expenditure and a statement of
assets and liabilities. This requirement applies to all small business taxpayers. If the
government of Zimbabwe wishes to retain the current recordkeeping requirements in the
Income Tax Act, there is no point in maintaining a turnover-based small business tax.

If a small business tax regime is unlikely to entice new businesses to enter the formal tax
system than it is imperative that the regime does not incentivize taxpayers to drop from the
standard tax regime into the small business tax regime, or prevent existing small business
taxpayers from ever graduating out of the small business tax regime.

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Proponents of turnover-based small business tax regimes argue that such regimes create
incentives for small businesses to enter the formal economy and register for taxes. But what
incentive do businesses that are currently not registered and pay zero tax have to enter the
small business tax regime and pay reduced taxes? This is not to say that tax evasion is
costless. Small business taxpayers can gain experience in recordkeeping and these records
may allow them to gain access to formal capital markets and obtain standard bank financing.
Furthermore, the Researcher has also recognized that businesses may have to pay bribes or
protection money in order to evade tax. However, statistics and experience have shown that
the benefits of entering a small business tax regime fail to exceed the costs of evasion.
Presumptive tax regimes that apply a uniform amount on all taxpayers pose other problems as
well. They tend to favor businesses with high profit margins (low costs relative to revenue)
by imposing lower effective tax amounts. For instance, service industries tend to have low
costs relative to their revenue, in contrast to the manufacturing sector which tends to have
high costs relative to revenue. The Researcher also noted that Presumptive tax systems also
fail to account for different profit margins within industries. For instance, two restaurants
could be nearly identical except one is an urban area and the other in a rural area. The
restaurants could have the same value of turnover but the restaurant in the urban setting may
have to offer its employees higher wages and pay more for rent. Due to the higher level of
expenses, the urban restaurant will have lower profits but both restaurants will have the same
tax liability. In addition, a small business tax regime based on turnover provides an incentive
for individuals to become contractors instead of employees because employees must pay
standard income tax whereas contractors can be assessed under the small business tax regime.
Turnover-based regimes can also induce firms to purchase less of all inputs in order to
maximize their net of tax profits.

Presumptive taxation is undoubtedly a 'win-win' technique given that it is an optimal method

of curbing widespread non-compliance without employing excessive government resources
because it addresses the concerns of both the taxpayer and the tax authority. Presumptive
taxation provides taxpayers with a simplified option for tax compliance without requiring full
financial transparency. Without a doubt, SMEs employ the majority of taxpayers in any
developing country. Yet, many SMEs remain in the informal sector because they lack
sufficient resources, administrative infrastructure and accounting sophistication to comply
with government tax regulations. The result is that many employers are ineligible to receive
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the benefits the formal sector offers, which inescapably compromises their financial viability.
Small businesses are aware of the advantages that legitimate enterprises enjoy, and most
would be willing to pay taxes but for the complex bureaucracy involved. (Embuka: 2014)

The in-depth research conducted has confirmed that the current Presumptive tax system is not
effective, hence needs modification to adapt to the economical and sociological changes. The
researcher has also suggested a new system that would collect more Revenue and ensure
growth for both the SMEs and the Tax Base as a whole.

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CHAPTER 3: RESEARCH METHODOLOGY

3.0. Introduction

Methodology is defined by Bryman & Bell, (2007) as a broad and complex array of ideas,
concepts, frameworks and theories which surround the use of different techniques to generate
data. This section presents the research methodology adopted by the researcher. Justifications
and descriptions of research philosophy, research design, data collection techniques and
sampling tools are presented in this chapter
3.1 Research Philosophy
The term research philosophy refers to the development of knowledge and the nature of that
knowledge (Saunders et al., 2009). Two terms of importance in research philosophy are
ontology and epistemology. Ontology refers to notions of reality whilst epistemology is
the relationship between that reality and the researcher (Greener, 2009). The same author
asserts that it is the ontological and epistemological stance of the researcher which affects the
methodology and specific methods they choose for their research. Therefore, the chosen
philosophy in this research forms the basis of the research strategy and the choices made in
the strategy. The researcher attempted to bring out the reality behind the reason why there is
no growth in presumptive tax collected by Zimra and there is growth in SMEs , this will be
achieved by borrowing from the positivism approach.
Positivism
Positivism holds that an accurate and value-free knowledge of things is possible (Fisher,
2010). According to Sobh and Perry (2006), in positivism, knowledge is statistically
generalized to a population by statistical analysis of observations about an easily accessible
reality. The positivism philosophy assumes the role of an objective analyst, making detached
35 | P a g e

interpretations about those data that have been collected. Emphasis is on a highly structured
methodology to facilitate replication and on quantifiable observations that lend themselves to
statistical analysis (Saunders et al., 2009). That the research is independent of and neither
affects nor is affected by the subject of the research.

This research falls under the positivist approach in that there is a highly structured
methodology in order to facilitate replication (Saunders e al., 2009).It is mostly concerned
with testing a to see why revenue collected by the collecting authority is decreasing whilst
there is increase in the circulation of money in SME industries. The positivism concept was
deemed most appropriate in the qualitative analysis of the findings shown in chapter four.
Due to the choice of the positivist approach, the researcher had greater opportunity to control
the research process and managed to collect easily comparable data economically.
Research design.
According to Jaikumar M (2009) research design is the master plan specifying methods and
procedures for collecting and analyzing the needed information in a research study. Trochim
W.M.K. (2003) said research design provides answers for such questions such as what
techniques will be used to gain data. What kind of sampling will be used? How will
constraints be dealt with? The researcher adopted a quantitative approach research.
Quantitative research is associated with the positivist paradigm, it usually involves collecting
and converting data into numerical form so that statistical calculations can be made and
conclusions drawn (Creswell 2009).
The researcher has chosen Explanatory Research, Harvard (2010) explained that exploratory
research Explanatory studies look for explanations of the nature of certain relationships.
Hypothesis testing provides an understanding of the relationships that exist between
variables. Zikmund (1984) suggests that the degree of uncertainty about the research problem
determines the research methodology. According to Richard (2007) Probability sampling is
generally a prerequisite in explanatory research because the objective is often to generalize
the results to the population from which the sample is selected. The data are quantitative and
almost always require the use of a statistical test to establish the validity of the relationships.

36 | P a g e

Justification of the approach

The researcher has chosen explanatory research, because according to Shekhar (2012) it
explain things not just reporting it elaborate and improve a theory's explanation. It also
determine

the

best

explanation

out

of

many,

Explanatory research also decide the correctness of the theory, it also checks the theory's
predictions

.according

advances
builds

to

knowledge
and

elaborates

Richard
about
a

(2010)

states

essential
theory.

that

explanatory

process

And

lastly

and
he

said

research
it
it

extends a theory to a new topics new topics, new area, and new issues. It
provides evidence to support or disapprove an explanation or prediction.
Target Population
Target population means the entire aggregation of respondents that meet the designated set
of criteria (Burns & Grove 2007). According to Professor Fricker (2003) target population
is the group of elements to which the researcher wants to make inference. Other scholars
simplified target population by saying its everyone in the group that is going to researched on
(Martirosyan 2010). The researchers target population constitute of

Zimras employees,

and Managers and SMEs.

Description/Population Identity
Zimra Managers
Zimra employees
SMEs
Population Size

Size
5
10
15
30

Sampling
Probability Sampling
Probability sampling is based on the concept of random selection, a controlled procedure that
assures that each population element is given a known none zero chance of selection.
Probability sampling can further be subdivided into Simple random, systematic, cluster and
stratified sampling techniques (Cooper and Schindler, 2008).
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Stratified random sampling was used in the study, where items of the population were placed
in groups or strata and individuals were randomly selected from the groups.The researcher
took deliberate position to identify the number of strata in the population and categorized
them into subpopulations discussed below. The advantage of this technique is that dividing a
population into a series of relevant strata means that the sample is more likely to be
representative as each stratum is represented proportionally.

Sub-sample 1 will consist of the board of directors.

Sub-sample 2 will consist of senior management.

Sub-sample 3 will consists of middle and junior management.

Sub-sample 4 will consist of Chief Executive Officers

Sampling is described as is the act, process, technique or process of selecting a suitable

representative part of a population for the purpose of determining parameters or
characteristics of the whole population. (Mugo 2007). The definition of sampling has been
simplified to say a sample is a subgroup of a population (Frey et al. 2005). The researcher
has employed stratified and random sampling due to the fact that the SMEs sector is
manifested in various ways; it was practical that every aspect of its formation was
incorporated in this study. Stratified random sampling therefore was to be employed in this
study in choosing the observations.
Stratified Random Sampling
In a stratified sample the sampling frame was divided into groups or strata, an example by the
type of business operation. A sample was taken from each stratum, and when this sample was
taken, this system is referred to as stratified random sampling this system helped to reduce
responses that were biased such that classes (of homogenous observations) of respondents in
the SME sector were captured. Stratification was the best means of data collection because of
its potential of always achieve greater precision; provided that the strata chosen are of the
same stratum and are as similar as possible in respect of the characteristic of interest. The
bigger the differences between the strata, the greater the gain in precision It proved often
administratively convenient to stratify a sample. The results from each stratum was of
intrinsic interest and the researcher managed to analyse them separately. It also ensured the
Researcher better coverage of the population than simple random sampling. There was added
38 | P a g e

difficulty in identifying appropriate strata. It was more complex to organise and analyse
results.
Stratas
The observations was divided into strata by their type of business such restaurants, motor
spare dealers, driving schools and hair salons. Within the strata the observation was chosen
randomly since it is difficult and costly to map out all observation to employ other methods
such as systematic which require the observations to be assigned with coded numbers before
they are selected for observation.
Advantages of random sampling

Every observation within strata had an equal chance of being selected.

It is easier and less costly to administer in relative to other methods such as systematic
sampling which require their entire population to be coded.
Data sources

Primary Data

Cooper and Schindler (2008) define data as the facts presented to the researcher from the
studys environment. Data may further be verified by their abstractness, verifiability,
elusiveness, and closeness to the phenomenon.
Primary source of data refers to original works of research or raw data without interpretation
or pronouncements that represent an official opinion or position. Primary sources are the
most authoritative because the information has not been filtered or interpreted by a second
party (Cooper and Schindler, 2008). Management was interviewed in order to obtain their
views on the mergers as a way of collecting primary data which is free from adulteration,
unlike the financial results which may have been doctored.
Primary data is required to ensure that the views and input from primary sources concerning
the subject matter is incorporated. However, the challenge with primary data collection is that
it is time consuming. Regardless of the disadvantages, the researcher collected first hand
39 | P a g e

information from interviews and questionnaires. Each respondent was asked to reply to the
same set of questions and this provided an efficient way of collecting responses from a large
sample prior to quantitative analysis.
Secondary Data
Secondary data is information collected by others for the purposes which can be different
from the current researchers objectives. For instance, financial statements are prepared for
the shareholders, the regulators and the public but in this research they were used as a basis to
compare pre and post- merger performance. This use thus enabled the researcher to conclude
whether mergers and acquisitions improve shareholder wealth and operating performance.
The main sources of secondary data were annual reports, the Reserve Bank of Zimbabwe
publications, ZFN (Zimbabwe Financial News), as well as written texts on the subject matter.
The advantage of using secondary data is that it is easy to collect and readily available
(Saunders et al., 2009). It is also available from multiple modes, unlike primary data. In this
research, secondary data collection enabled the researcher to save time and it provided a
comparison instrument with which interpretation and understanding of primary data was
made easier. It was also used to capture what other authorities actually say about the subject
matter and this enabled objective conclusion of the research.

The main problem with the main form of secondary data used in this research, i.e. financial
statements is that creative accounting can be used to give a very positive picture of the
results. However, this is the main reason why he researcher used other methods and collected
primary data to compliment the secondary data.
3.1. Data Collection Technique
3.1.1 Questionnaires

The study conducted employed the primary method of data collection through conducted
questionnaire with the informal traders who are now referred to as the group of Small to
Medium Sector. The major focus was on hair salon operators, driving schools, restaurants.
A questionnaire was chosen as an instrument to collect data. A questionnaire is a printed selfreport form designed to elicit information that can be obtained through the written responses
40 | P a g e

of the subjects. The information obtained through a questionnaire is similar to that obtained
by an interview, but the questions tend to have less depth (Burns & Grove 1993:368).
The researcher has chosen questionnaires, this has ensured a high response rate as the
questionnaires were distributed to respondents to complete and were collected personally by
the researcher.
3.1.1. 1 Advantages of employing interview questionnaire in data collection.

a) They take less energy and time to administer. Large amounts of information can be
collected from a large number of people in a short period of time and in a cheaper
and effective way
b) They offered an option of anonymity because subjects names were not required on
c)

the completed questionnaires.

There was less opportunity for bias because they with other means like face to face
interview interviews the respondents might present wrong information because of fear

or other reasons
d) Most of the items in the questionnaires were closed, which made it easier to compare
the responses to each item
3.1.1. 2 Disadvantages

Beside the advantages of questionnaires have their weaknesses; for instance, there is the
question of validity and accuracy (Burns & Grove 1993:368). The subjects might not reflect
their true opinions but might answer what they think will please the researcher, and valuable
information may be lost as answers are usually brief. Popper (2004) said there is level of
imposition by the researcher. When developing the questionnaires the researcher is making
their own decisions and assumptions as to what is to and what is not important, this may be
missing somethings that are important. He also established that there is no way of telling how
much and how truthful the responded has put in respondents may read differently into the
questions this therefore may bring bias based on their own interpretation of the question, so
their answers are subjective to their taste and background and also their encounters.( Ackroyd
1981).

He also said questionnaires maybe in inadequate to interpret some forms of

information such as behaviours and feelings and also its affected by the level of education,

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3.2 Validity and Reliability

Validity can be internal and external. Coldwell and Herbst (2004) pointed out that internal
validity looks at general inferences that can be made regarding the cause and effect
relationship. They also argued that internal validity can be affected by the following:

History the events that may occur between the start of a study and the end. In the
study there were no material changes that took place to the environment during the
time of the study.

Maturation This causes changes in respondents. The research did not take a lot of
time collecting the data hence was able control maturation.

Testing effect this results when respondents have had an opportunity to have pre
and post tests which affect responses. The questionnaire was distributed
anonymously thus discouraging the respondents from discussing their responses.

External validity refers to the quality of being able to generalize beyond the data of the
experiment to other situations. The research ensured that validity was controlled through the
selection of a representative sample and personally conducting the interviews.
Data reliability was also ensured by correct identification of respondents to be included in the
study, dealing with subject error (knowing the time to carry the surveys and interviews) and
subject bias (taking elaborate steps to ensure anonymity of respondents to questionnaires.
The researcher also used methodology triangulation, which is a combination of the different
methods to strengthen the study since each method has its own strengths and weaknesses.
Using more than one technique therefore offsets possible weaknesses of using one method.
Questionnaires were thus complimented with in-depth interviews and secondary data
collection as well.
3.3 Ethical Considerations
Saunders et al (2009) refers ethics to the appropriateness of the researchers behavior in
relation to the rights of those who become the subject of your work or are affected by it. The
general issues of ethical concerns were addressed through notification of the intention to

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conduct the study; seeking consent from all participants; and non-disclosure of identities to
ensure privacy.

3.4 Data Analysis and Presentation

The process of analyzing data starts with data editing, coding, and data entry and data
analysis (Cooper and Schindler, 2008).The researcher is going to collect all the secondary
information on mergers and acquisitions and edit the data. Only the financial information and
details which are of importance to the data will be picked up and inputted on the excel
spreadsheet. This will be the main entry of data where it will be stored and analyzed for
further use.

SPSS will be used to compare means before and after the merger. Collected data will be
presented and analyzed through the use of tables and graphs, accompanied by thorough
explanations about the meaning of the results. Findings will be analyzed in line with the
conceptual framework set out in the literature review and as much as possible objectivity was
sort through out the research.

Chapter summary
This chapter has presented the way in which this research was conducted and the respective
justification of the adopted methodology. The specific concepts discussed include research
design, study population, sampling, data collection and statistical data analysis and
presentation. The following chapter (chapter four) presents the research findings and the
respective discussion.

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CHAPTER 4: PRESENTATION AND ANALYSIS OF FINDINGS

4.0 Introduction
This chapter contained the findings that were obtained during the research as guided by the
research methodology outlined in the preceding chapter. The data that was collected was used
to resolve the research questions surrounding causes and forms. The chapter covers the
presentation of findings as well as data interpretation and analysis. It is an extensive use of
techniques such as graphs, tables and pie charts were applied to make the analysis more
simplified and easy to interpret. The primary data collected was analyzed in connection with
key areas of the research objectives.
4.1 Summary of Questionnaire Response Rate
Table 4.1: Questionnaire Response Rate
Category of Interviewee

Number of Respondents

% Response Rate

Target

Actual

10

10

100%

Small Scale Enterprises (SME) 10

80%

Bulawayo City Council

10

90%

Total

30

27

90%

Zimra

Source: Primary data

Table 4.1 above showed that thirty (30) copies of the questionnaires were administered to
respondents. Of the thirty copies administered twenty-seven (27) where properly completed
and returned. The study was eventually based on forth-six 27 respondents. This represented a
response rate of 90%, a figure regarded large enough to be relied upon. This number
represents the sample size in this study.

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4. 2 Knowledge on Presumptive Tax

Table 4.2: Degree of knowledge about Presumptive Tax by respondents

Source: Primary data

Frequency

Percentage

Valid Percentage Cumulative

Percentage
Excellent
3
11.0
11.0
11.0
Good
6
22.0
22.0
22.0
Poor
18
67.0
67.0
67.0
Very Poor
0
0
0
0
Not Sure
0
0
0
0
Total
27
100.0
100.0
Table 4.2 was designed to evaluate the level of understanding on Presumptive Tax. 11% of
the respondents indicated that their level of knowledge was excellent. 22% showed that they
have good knowledge to be good and 67% of the respondents clearly indicated that they have
poor knowledge about the presumptive tax. Further investigations from the respondents
through interviews indicated that, ZIMRA has not hosted enough presumptive tax workshop
to disseminate information and to compound this; the ZIMRA website has little information
to educate clients on presumptive tax. In short, the level of literacy of presumptive tax is
questionable. The noncompliance could be a result of such ignorance. There is no special
section at ZIMRA dedicated to presumptive tax affairs and debt management section only
does the dunning for formal tax payers.

4.3 Effectiveness of Presumptive Tax to the Economy

This study investigated overall effectiveness of presumptive tax to the economy. Most
respondent agreed that the tax is very critical to cater for unregistered taxpayers as shown in
Figure 4.1 below. Most of the respondents were of the opinion that taxpayers need to be
educated further so that they fully comprehend the mechanics of the system. On the other
hand the respondents pointed out that the tax authority did not have enough capacity to meet
45 | P a g e

acceptable levels of service delivery and needed to recruit and train more staff that are more
knowledgeable in the field of taxation. Some respondents said they are willing to comply in
full but are unable to do so because they are not aware of, or do not understand the extent of
their obligations.
Figure 4.1: Effectiveness of Presumptive Tax in the Economy

No; 26%

Yes; 74%

Source: Primary data

4.4 Implications of Presumptive Tax SMEs Profitability

Figure 4.2 below indicated that 70% of the respondents were of the opinion that the
presumptive tax is reducing the profitability of their businesses. The other 30% of the
respondents were not sure about the implications of presumptive tax in their businesses. This
might be the reason why many businesses are not complying with presumptive tax because it
is a major cost to their businesses.

Figure 4.2 Implications of Presumptive Tax on Profitability

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Implications of Presumptive Tax on Profits

70%
60%
50%
40%
30%
20%
10%
0%

70%
10%

5%

15%

Source: Primary data

4.5 Factors influencing noncompliance of Presumptive Tax
There were many views regarding factors that spearhead noncompliance with presumptive
tax. A couple of these f actors highlighted by participants were however in many ways related
than disjointed. The researcher then classified these perspectives into three main categories
illustrated in figure 4.3 below.

Figure 4.3 Generic-factor influences on noncompliance

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Generic -Factor Influences on noncomliance

Other Factors; 20%

Economic Factors; 36%

Behavioural Factors; 44%; 44%

Source: Primary Data

The study highlighted that not only did behavioural factors trigger non-compliance, economic
factors also bore their fair share of 36% and other socio-cultural factors accounted for 20%.
Economic factors identified by participants included the level of actual income (personal
financial constraint), tax charge, tax benefits of complying vs. not complying, probability of
detection (audits); offenses, fines and penalty among others.
Behavioral factors accounted for 44% and these were attitudes and attitudinal factors
(attitudes toward taxes), it was found that most SMREs view the Zimbabwean tax system as
unfair (Perceived fairness of tax system). In addition to perception and attitude were
personal, social and national norms regarding tax.

4.6 Specific Factors for Non-Compliance

Figure 4.4 Specific factors for non-compliance

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Specific Factors for non-Compliance

40%
35%
30%
25%
40%

20%
15%
20%

10%
5%

20%

10%

0%
Perceived Fairness of Tax Laws

10%

Costs of Compliance

Economic Factors

Source: Primary Data

Figure 4.4 above outline specific factors that participants believed bore noncompliance by
small businesses. the majority of respondents felt that main reasons why people evade taxes
were the perceived fairness of the tax laws (10%), easy of evading taxes (20%), costs of
compliance (40%), complexity of compliance (10%)

and

economic factors (20%) in

particular the fact that the majority of the players are trying to survive the economic
depression in Bulawayo. Majority of industries having relocated or closed. Some respondents
were of the view that they evade paying taxes mainly due to the fact that its easy evade
paying taxes through bribing tax officials.
A lot of them lack business skills and knowledge of tax obligations. They do not register their
business for tax purposes and often have poor recordkeeping and systems. Because the
businesses are largely cash-based, they are prone to evasion. More importantly though, there
are many who see the collection of the taxes as a form of punishment. This arises from the
system used to enforce collections where vehicles are impounded and shops shut down. Most
informal traders professed ignorance about the existence of presumptive tax head, and very
few visit the ZIMRA website.
4.7 Favorability of Presumptive Tax
Figure 4.5: Favorability of Presumptive Tax
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Favourabilitiy of Pesumptive Tax

Yes; 20%

No; 80%

Source: Primary Data

The majority of the respondents indicated that the Presumptive tax is not favourable because
it requires a lot of money to comply. As shown by Figure 4. 5 above, 80% of the respondents
had reservations on presumptive tax because many of them struggle to comply.
4.8 Strategies to enforce compliance of Presumptive Tax
The majority of respondents were of the opinion that taxpayer education has the greatest
potential to ensure future compliance hence recommends government to invest in this
potential. This is expected to further change taxpayer behaviour to comply and also helps to
get rid of ignorance as an excuse not to comply. A great number of SMES showed the desire
to be educated on all matters regarding presumptive, something ZIMRA has not done in
years. They suggested if ZIMRA could organise an outreach on major stations. A significant
number also believed that taxpayers ought to be reminded to comply from time to time. This
would assist both the authority and small businesses who do not keep books of accounts for
that matter.
Dunning should be prioritised by ZIMRA and some were of the opinion that the technique
currently being used in customs operations of recognising compliers would help foster
compliance in the domestic taxes if it is introduced. This strategy (recognition) always
motivates compliance. Severe penalties and fines, prosecutions and intensive audit did not

50 | P a g e

garner much support. Respondents believe the stick and carrot approach should be the last
resort.
It is incumbent upon the MOF and ZIMRA to come up with a system that ensures registering
for tax purposes is simplified and understood by all. At the moment it is not hence the warlike methods used in tax collection and concerted efforts to evade tax by small businesses.
Statutory Instrument 97 of 2013, Revenue Authority (civil penalty for late submission of
returns) regulation came into effect on June 28 2013, part of the notice reads.
The study also pointed out that there has not been an audit conducted on kombi operators
who are registered for presumptive tax. This has yielded remarkable results in the taxation of
formal sector, thus introduction of intensive audits is expected to be fruitful. Lastly no
taxpayer prefers prosecution. This was shown through minimal suggestions. Kombi operators
believe they are willing to cooperate and pay tax than being dragged to the court of law over
impertinent amounts. As shown in Figure 4.6 below tax payer education had 35% and
followed by incentives to tax and reminders which had 25% respectively.
Figure 4.6: Strategies to Ensure Presumptive Tax Compliance

Strategies to EnsurePresumptive Tax Compliance

35%
30%
25%
20%
15%
10%
5%
0%

35%
25%
15%

10%

25%
15%

Source: Primary Data

4.9 Effects of Presumptive Tax on National Revenue

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Blitzes to collect tax from the informal sector especially kombi operators and truckers have
taken this dimension where ZIMRA would launch operations on major highways. In
Bulawayo this has been along Plumtree road, 6th avenue extension and Gwanda road. This
mode of tax collection reflects an element of coercion in the whole exercise; that those
paying the tax are doing so grudgingly. In fact, most are only paying the tax after being netted
in blitzes. It is therefore not surprising that in the budget statement announced by Finance
Minister Patrick Chinamasa in September 2015, although presumptive tax was contribution
7% of the total revenue, government collected a mere $0.35 million in presumptive tax of the
projected total of $736.5 million from tax on income and profits. Figure 4.7 below shows the
contribution of presumptive tax for the total revenue inflows.
Figure 4.7: Contribution of Major Total Revenue

Source: Ministry of Finance and Economic Development (2015)

It is anomalous as it reflects the failure of the taxman to collect revenue from small
businesses and the small-scale sector which have been touted as the panacea to economic
recovery. What makes the presumptive tax contribution to the fiscus scandalous is the fact
that our economy has moved from being a formal one to one where the informal sector now
dominates economic activities. Economists have said that 60% of the economy is now in the
52 | P a g e

informal sector and the rest is formal. But this ratio is not reflected in any way in the tax
contribution from the informal sector. The state of affairs therefore calls for a rethink in the
strategy to collect tax from the informal sector. Zimra has to change its approach in tax
collection since blitzes and other operations of coercion do not work. There is still lot
groundwork to do to ensure the informal sector players start to run their enterprises
professionally.

4.10 Challenges encountered in Administering Presumptive Tax

Respondents indicated that Zimra face a number of challenges to collect and administer
presumptive tax. The challenges include inadequate financial resources, few motor vehicles,
less enforcement rights, no strong partnerships and few employees. As shown in Figure 4.9
below the major challenge is inadequate financial resources with 40%, followed by less
enforcement rights and lack of partnerships with other government departments.

Figure 4.9: Challenges encountered in Administering Presumptive Tax

Challenges in Administering Presumptive Tax

40%
35%
30%
25%
20%
15%
10%
5%
0%

40%
10%

20%

10%

20%

Source: Primary Data

4. 11 Discussion of Findings
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4.11.1 Knowledge on Presumptive Tax

The respondents indicated that they do not have hood knowledge about the presumptive tax.
Further investigations from the respondents through interviews indicated that, ZIMRA has
not hosted any presumptive tax workshop to disseminate information and to compound this;
the ZIMRA website has little information to educate clients on presumptive tax. In short, the
level of literacy of presumptive tax is questionable. The noncompliance could be a result of
such ignorance. There is no special section at ZIMRA dedicated to presumptive tax affairs
and debt management section only does the dunning for formal tax payers.
4.11.2 Effectiveness of Presumptive Tax to the Economy
Most respondent agreed that the tax is very critical to cater for unregistered taxpayers.
However taxpayers need to be educated further so that they fully comprehend the mechanics
of the system. On the other hand the respondents pointed out that the tax authority did not
have enough capacity to meet acceptable levels of service delivery and needed to recruit and
train more staff who are more knowledgeable in the field of taxation.
4.11.3 Implications of Presumptive Tax SMEs Profitability
Respondents were of the opinion that the presumptive tax is reducing the profitability of their
businesses. This might be the reason why many businesses are not complying with
presumptive tax because it is a major cost to their businesses.
4.11.4 Factors influencing noncompliance of Presumptive Tax
The majority of respondents felt that main reasons why people evade taxes were the
perceived fairness of the tax laws (10%), easy of evading taxes (20%), costs of compliance
(40%), complexity of compliance (10%) and economic factors (20%) in particular the fact
that the majority of the players are trying to survive the economic depression in Bulawayo.
Most respondents were of the view that they evade paying taxes mainly due to the fact costs
of compliance are high.
4.11.5 Strategies to enforce compliance of Presumptive Tax
The majority of respondents said that, the taxpayer education has the greatest potential to
ensure future compliance hence recommends government to invest in this. This is expected to
further change taxpayer behaviour to comply and also helps to They suggested if ZIMRA
could organise an outreach on major stations. A significant number also believed that
54 | P a g e

taxpayers ought to be reminded to comply from time to time. This would assist both the
authority and small businesses who do not keep books of accounts. A great number of SMES
showed the desire to be educated on all matters regarding presumptive tax.
4.11. 6 Effects of Presumptive Tax on National Revenue
The current mode of tax collection currently used by ZIMRA reflects an element of coercion
in the whole exercise and those paying the tax are doing so grudgingly. In fact, most are only
paying the tax after being netted in blitzes. It is therefore not surprising that in the budget
statement announced by Finance Minister Patrick Chinamasa in September 2015, although
presumptive tax was contribution 7% of the total revenue, government collected a mere
$0.35 million in presumptive tax of the projected total of $736.5 million.

4.12 Chapter Summary

This chapter gave a thorough analysis of the area of study with a clear view to answering the
research questions and linked with literature review. It is interesting how respondents pointed
out whether the presumptive tax system is effective in revenue collection. The chapter further
looked at the vulnerability of the current tax systems and how it is being manipulated. The
next chapter is to look at the research findings and come up with plausible recommendations.
These recommendations are believed to help control and monitor factors identified in this
chapter as drivers of noncompliance by kombi operator.

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CHAPTER 5
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.0 Introduction
This chapter presented the summary, conclusions and recommendations on the research
findings. The main focus is to establish the extent to which the research questions were
answered and whether the findings answer the study hypotheses. In drawing the conclusions,
the study explores the implications of the findings regarding effectiveness of the presumptive
tax system as a means of revenue selection. Furthermore the chapter highlighted areas of
further research in this area of study.
5.1 Summary of findings
Various conclusions can be drawn from the effectiveness of presumptive tax as a means of
revenue collection. Most of the tools and strategies used to have an analysis are similar to
those mentioned by other authors as reflected in the literature review. The researcher used
both and primary and secondary data to answer the research questions.
5.1.1 Knowledge of Presumptive Tax
Table 4.2 was designed to evaluate the level of understanding on Presumptive Tax. 11% of
the respondents indicated that their level of knowledge was excellent. 22% showed that they
have good knowledge to be good and 67% of the respondents clearly indicated that they have
poor knowledge about the presumptive tax. Further investigations from the respondents
through interviews indicated that, ZIMRA has not hosted any presumptive tax workshop to
disseminate information and to compound this; the ZIMRA website has little information to
educate clients on presumptive tax. In short, the level of literacy of presumptive tax is
56 | P a g e

questionable. The noncompliance could be a result of such ignorance. There is no special

section at ZIMRA dedicated to presumptive tax affairs and debt management section only
does the dunning for formal tax payers
5.1.2 Effectiveness of Presumptive Tax to the Economy
This study investigated overall effectiveness of presumptive tax to the economy. Most
respondent agreed that the tax is very critical to cater for unregistered taxpayers. Most of the
respondents were of the opinion that taxpayers need to be educated further so that they fully
comprehend the mechanics of the system. On the other hand the respondents pointed out that
the tax authority did not have enough capacity to meet acceptable levels of service delivery
and needed to recruit and train more staff who are more knowledgeable in the field of
taxation.

5.1.3 Implications of Presumptive Tax SMEs Profitability

70% of the respondents indicated that the presumptive tax is reducing the profitability of their
businesses. The other 30% of the respondents were not sure about the implications of
presumptive tax in their businesses. This might be the reason why many businesses are not
complying with presumptive tax because it is a major cost to their businesses.
5.1.4 Factors influencing noncompliance of Presumptive Tax
The majority of respondents felt that main reasons why people evade taxes were the
perceived fairness of the tax laws (10%), easy of evading taxes (20%), costs of compliance
(40%), complexity of compliance (10%) and economic factors (20%) in particular the fact
that the majority of the players are trying to survive the economic depression in Bulawayo.
5.1.5 Favorability of Presumptive Tax
The majority of the respondents indicated that the Presumptive tax is not favorable because it
requires a lot of money to comply. 80% of the respondents had reservations on presumptive
tax because many of them struggle to comply.
5.1.6 Strategies to enforce compliance of Presumptive Tax
The majority of respondents indicate that taxpayer education has the greatest potential to
ensure future compliance hence recommends government to invest in this potential. This is
57 | P a g e

expected to further change taxpayer behaviour to comply and also helps to get rid of
ignorance as an excuse not to comply. A great number of SMES showed the desire to be
educated on all matters regarding presumptive, something ZIMRA has not done in years.
5.1. 7 Effectiveness of Presumptive Tax System on Revenue
Although presumptive tax was contribution 7% of the total revenue, government collected a
mere $0.35 million in presumptive tax of the projected total of $736.5 million in 2015. This
shows ZIMRA is struggling to collect tax from small scale enterprises.

5.1.8 Challenges encountered in Administering Presumptive Tax

Respondents indicated that Zimra face a number of challenges to collect and administer
presumptive tax. The challenges include inadequate financial resources, few motor vehicles,
less enforcement rights, no strong partnerships and few employees. The major challenge is
inadequate financial resources with 40%, followed by less enforcement rights and lack of
partnerships with other government departments which have 20% each.
5.2 Conclusions
A discussion on the conclusions of the research study has been done below.
ZIMRA has not hosted enough presumptive tax workshop to disseminate information and to
compound this; the ZIMRA website has little information to educate clients on presumptive
tax. In short, the level of literacy of presumptive tax is questionable. The noncompliance
could be a result of such ignorance. There is no special section at ZIMRA dedicated to
presumptive tax affairs and debt management section only does the dunning for formal tax
payers. There is need to educate all the small scale enterprises.
Respondents agreed that the tax is very critical to cater for unregistered taxpayers since the
informal sector is estimated to be 60%. Most of the respondents were of the opinion that
taxpayers need to be educated further so that they fully comprehend the mechanics of the

58 | P a g e

system. Presumptive tax system can be very effective in collective revenue if proper
education program is put in place.
The majority of respondents felt that main reasons why people evade taxes were the
perceived fairness of the tax laws (10%), easy of evading taxes (20%), costs of compliance
(40%), complexity of compliance (10%) and economic factors (20%) in particular the fact
that the majority of the players are trying to survive the economic depression in Bulawayo.
The major problem highlighted is the cost of compliance. There is need to reduce the
compliance costs for small scale enterprises to comply.
The majority of respondents were of the opinion that taxpayer education has the greatest
potential to ensure future compliance hence recommends government to invest in this
potential. This is expected to further change taxpayer behaviour to comply and also helps to
get rid of ignorance as an excuse not to comply. A great number of SMES showed the desire
to be educated on all matters regarding presumptive, something ZIMRA has not done in
years.
The presumptive tax system can be very effective if the proper method to collect it is adopted.
The current mode of tax collection reflects an element of coercion in the whole exercise and
most tax payers are not happy with that method.
ZIMRA face a number of challenges to collect and administer presumptive tax. The
challenges include inadequate financial resources, few motor vehicles, less enforcement
rights, no strong partnerships and few employees. .
5.3 Recommendations
The results of the study have shown that presumptive tax system has a major positive impact
on revenue collections, however more education is needed to make tax payers aware of their
obligations to pay and comply. Based on the findings from the questionnaires, the following
recommendations are made:

ZIMRA should champion its literacy campaigns to improve the taxpayers ability to
understand presumptive tax laws, that is, rates of tax, filing and paying dates.
Workshops and outreach should intensify to educate taxpayers . This will ensure they
know the benefits of complying and have knowledge of the role of ZIMRA. The role
of taxpayer education needs not be underestimated is it also contributes negatively
towards voluntary compliance in cases where the taxpayer does not have the relevant
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information to run its tax affairs professionally. As in all walks of life, education and
information play an important role in the achievement of goals and objectives of tax
authorities all over the world.

The study also established that an audit department exclusively for presumptive tax
was not in place resulting in many potential taxpayers escaping tax. Follow up on
taxpayers will make the presumptive tax system effective. Substantial controls should
be put in place so that every informal trader pays presumptive tax and those who do
not pay are penalized just as defaulters for any other tax heads are penalized. ZIMRA
to set up an audit department exclusively for presumptive tax.

The Authority must try and post reminders of due dates and the penalties a late
payment might attract at the beginning of every month or towards a due date for a
certain tax head on the website or in national papers as a means of motivating
compliance.

Fairness and leniency acts a role in ensuring clients comply. There may be certain
cases where a clients non-compliance was inevitable due to the circumstances that
prevailed at a particulate time for example sickness, death. This should be given
unique treatment rather than a one-size fits all approach. Though Officers discretion
should be moderated, special circumstances surrounding tax noncompliance should be
considered and an appropriate action adopted.

The researcher recommends that tax authorities stand their ground and ensure
meaningful impact on the informal sector so as to maximize revenue collection and
establish a culture of compliance. They ought to stamp their authority lest tax payers
continue acting negligently.

ZIMRA should device credible enforcement and punishment for those who choose not
to comply. This is about making it as difficult as possible for people to get away with
non-compliance. It also means having a credible threat of detection and punishment
for those who fail to meet their obligation.

5.4 Areas of further research

Areas of further research that were identified include a study on the concepts of taxpayers
attitudes towards tax systems, the factors which influence taxpayers attitudes, strategies to
foster voluntary tax compliance and the relationship between attitudes and tax compliance
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behaviour among informal sector businesses which has encountered a lot of debate in every
economy and regional subdivisions.
The researcher recommends a study to be conducted, which will evaluate the above concepts
in the other regions in Zimbabwe to improve on the revenue collection so as to build our
developing economy.
5.5 Chapter summary
The focus of this research was to analyses the effectiveness of presumptive tax as a means of
revenue collection. Data was collected through questionnaires that were administered to
companies registered for presumptive tax. The key findings in this research were that, tax
payers need good education and presumptive tax audits should be put in place to make
presumptive tax system effective.

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APPENDIX 1
Presumptive tax obligations
Presumptive Tax legislation was introduced to broaden the revenue base in view of the increase in informal business
activities. Selected sectors of the economy were targeted to ensure the participation of informal businesses in tax payment in
line with experiences of other developing countries.
Details relating to the current rates and due dates of the various categories are shown below.
1. Transport Operators Presumptive Tax
Operators of:

Description

Presumptive Tax (US$ per quarter for each vehicle)

8 to 14 passengers

150

15 to 24 passengers

175

25 to 36 passengers

300

From 37 passengers and above

450

Taxi-Cabs

All

100

Driving Schools

Class 4 vehicles

500

Class 1 and 2 vehicles

600

More than 10 tonnes but less than 20 tonnes

1000

More than 20 tonnes

2500

Omnibuses

Goods Vehicles

10 tonnes or less but with combination of

truck and trailers of more than 15 but less
than 20 tonnes

2500

Taxicab and omnibus operators are required to carry a tax clearance certificate in the respective vehicle. Failure to carry or
produce the tax clearance certificate renders the person in charge of the vehicle liable to a fine of 100% of the amount due or,
if in default of payment, imprisonment for a period not exceeding six months. Failure to pay the Presumptive Taxes in time
also renders the operators liable to interest charges.
With effect from 1 January 2015 Zinara was appointed as an agent of Zimra for the collection of presumptive taxes in respect
of transport operators, taxi cabs and driving schools.
2. Hairdressing Salon Operators Presumptive Tax
Every operator of a hair dressing salon is required to pay Presumptive Tax amounting to US$1 500.00 per quarter. Amounts
not paid by the due date are subject to interest charges.
3.

Informal Traders Presumptive Tax

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All persons in receipt of rental income from an informal trader in respect of residential accommodation, premises or a place
on which trade is carried on are required to recover an additional amount by way of Presumptive Tax equal to 10% of the
rental and remit it to ZIMRA. This also includes local authorities.
The amount should be remitted within 30 days from the date the amount is recovered. Failure to recover or remit the
Presumptive Tax renders the lessor personally liable for the payment of the Presumptive Tax and a penalty of 100% of the
amount due. Failure or refusal on the part of the informal trader to pay the Presumptive Tax constitutes a breach of the lease
and allows the lessor to terminate the lease without notice.
4.

Small-Scale Miners Presumptive Tax

With effect from 1st October 2014 Small Scale Miners Presumptive tax was reduced from 2% of the gross amount payable to
0%, therefore no Presumptive tax will be collected from Small Scale Miners.
5.

Cross-Border Traders Presumptive Tax

Cross border traders who import commercial goods into Zimbabwe are required to pay a Presumptive Tax equal to 10% of
the value for duty purposes (VDP) of the commercial goods. The only exception is cases where the trader is registered
with ZIMRA for Income Tax purposes and is up to date with submission of tax returns and payment of all taxes due.
6.

Operators of Restaurants or bottle-stores

Every operator of a restaurant or bottle store is required to pay Presumptive Tax amounting to US$300 per quarter. Interest is
chargeable on all amounts not paid by the due date.
7.

Cottage Industry Operators

Every person who owns or is in charge of a cottage industry regardless of it being licensed or not is required to pay
Presumptive Tax amounting to US$300 per quarter. Cottage industry operators include those in the furniture-making or
upholstery trade, metal fabrication and any other cottage industry that the Minister may, by notice in a statutory instrument,
prescribe. Interest is chargeable where the amounts due are not paid by the due date.

8. Commercial Waterborne vessels

With effect from 1st January 2012, Presumptive Tax is charged to operators of commercial waterborne vessels used for the
carriage of passengers for profit and fishing rigs.
Operator of:

Carrying capacity inclusive of cabin

Presumptive tax per quarter per vessel in US$ with

crew/description

effect from
1 January 2012

Waterborne Vessel

Up to 5 passengers

250

6 to 15 passengers

500

16 to 25 passengers

1 000

26 to 49 passengers

1 500

50 passengers and above

2 000

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Waterborne Vessel

Fishing rigs

350

9. Due Dates for Presumptive Tax (Excluding Informal Traders Tax)

Period of each year

Due Date

1st Quarter (Jan to March)

10th April

2nd Quarter (April to June)

10th July

3rd Quarter (July to September)

10th October

4th Quarter (October to December)

10th January of the following year

Local Authorities wishing to act as agents for the collection of the above Presumptive Taxes shall make a written application
to the Commissioner General of ZIMRA. One of the conditions to be considered before being appointed as an agent is that
the applicant should be compliant with PAYE and VAT statutory obligations.
Successful applicants may enter into a contract with the Authority to collect and remit Presumptive Taxes on behalf of the
Authority and retain a fee of not more than 10% of the collected Presumptive Taxes. All such collection contracts shall be
processed and ratified by the ZIMRAs Legal and Corporate Services Division.
Please note that the Authority is still obliged to collect all the Presumptive Taxes in the absence of the proposed arrangement
with Local Authorities.
The payment of Presumptive Taxes does not exempt the presumptive taxpayer from the obligation to render Income Tax
returns. ZIMRA normally carries out routine checks to ensure that all operators comply with these requirements.

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APPENDIX 2
Questionnaire
You are kindly requested to respond to the following questions at your earliest convenience.
This questionnaire was designed by Memory Machekanyanga .Your assistance and time is
truly appreciated.
Research topic: Evaluation of the effectiveness of the presumptive tax system as a means of
revenue collection

Information
a) If you are not Zimra Staff answer question 1 to 9, if you are Zimra Staff question 10
to 17 as accurately as possible.
b) The information provided shall be used only for this study.
c) Do not write your name.
d) The responses you shall give are confidential, so please be objective

Instructions on responding to questions

i.

Do not write your name on the questionnaire.

ii.

Show response by ticking the respective answer box or fill out in the respective
response space

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Questions
Tax knowledge
1. Have you ever received Tax Education?
Yes

No

2. How do you rate your tax knowledge with regards to Presumptive Tax?
Excellent

Good

Poor

Very Poor

Not Sure

3. In your view, do you think Presumptive tax rates are effective in our Zimbabwean
economy?
..........................................................................................................................................
..........................................................................................................................................
.....................................................
Relevance of Current tax Rates
4. Annual Income 2014
Below USD5000

USD5001-10000

Over USD10000
Annual income 2015
Below USD 5000

USD 5001-10000

Over USD 10000

5. Does the amount you remit as your Presumptive Tax obligation reflect your actual
turnover? Yes

6.

No

I Dont remit at all

What are the implications of Presumptive Tax on your entity?

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..............................................................................................................................
..............................................................................................................................
................................................................

7. Besides compliance costs what other factors (list) hinder your entity in regards to
payment of Presumptive Tax, if any?
..........................................................................................................................................
...

............................................................................................................................

..........................................................................................................................................
..........................................................................................................................................
.....................................................................................................................
8. How would you want to make your payments?
....................................................................................................................................
....................................................................................................................................
....................................................................................................................................
9.

.....................................................
How much are u willing to pay?
....................................................................................................................................
....................................................................................................................................
....................................................................................................................................
...........................................................................

Systems in place
10. What Source documents do you need when collecting Presumptive tax?
....................................................................................................................................
...................................................................................................................

11. What system is available to assist the clients in submission of

tax?

............................................................................................................................

..........................................................................................................................................
......................................................
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12. How do you make sure that presumptive tax is collected

...........................................................................................................................................
...........................................................................................
13. Are there any follow up measures in place to make sure tax is remitted?
...........................................................................................................................................
...........................................................................................
Challenges faced by Zimra
14. Do you have enough resources needed in presumptive tax collection?
Yes

No

If you dont have, what would you want to have?

...........................................................................................................................................
...........................................................................................

15. How would you explain your relationship with your clients?

16 What other factors affecting revenue collection?

..
17 Additional Comment you want to add

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