WHAT IS TAXATION?

You might have some questions already. Your questions

might, or might not include the following:
• What is taxation?
• Why is it necessary to study taxation?
• What does the study of taxation involve?
TAX AND TAXATION
• To define taxation, you have to define tax first.
• Tax may be defined as compulsory contributions by the
private sector to the government that do not leave the
government with a liability.
• This means after a tax has been collected, the government
is not obliged to offer any goods or services to the tax payer
in return.
• Taxation is the process of tax collection by the taxing
authority. It involves among other things:
• determining the amount of tax owing (tax liability);
• paying over the amount owing to the taxing authority; and
• in the case of any resistance to pay, enforcing the
payment.
 WHY IS IT NECESARY TO STUDY TAXATION?
• It is necessary to study taxation because tax laws are
complicated. In many cases, it takes years of study to be able to
be able to calculate tax with some degree of certainty.
• Yet in most cases, the law imposes the burden upon individuals
and businesses to determine their tax liability.
• In some instances (such as with pay as you earn), the burden of
calculation is placed upon an agent (in this case, the employer).
• The tax authorities themselves (in our case, mostly ZIMRA), need
to be able to make tax assessments determine if the correct
amounts of taxes have been paid.
 WHY IS IT NECESARY TO STUDY TAXATION?
• Since both the businesses and the tax authorities are in most
cases corporate bodies or legal personas, the burden of
determining the tax liability is passed on to certain employees
who eventually need to learn the tax laws.
• Students in certain areas of commerce and law therefore need to
know how taxes are calculated, so that they can be able to
calculate the taxes at their place of work or business.
WHY THE GOVERNMENT LEVIES TAXIES

• The reasons why the government levies taxies is

traditionally explained using the four Rs.
• Revenue collection;
• Redistribution of wealth;
• Re-pricing of goods and services to encourage and
discourage consumption of certain goods and
services, control international trade, promote
economic growth; and
• Representation.
PRINCIPLES OF A GOOD TAX SYSTEM

A good tax system relies on certain principles.

Among other principles, a good tax system must be:
 equitable,
 certain,
 convenient,
 economic and
 neutral.
We discuss these principles below.
 EQUITY

• Equity means that a tax system should be fair. The tax system
should treat X and Y in a similar manner. There are two types of
equity – horizontal equity and vertical equity.
• Horizontal equity means that two individuals who are in a
similar financial position should be treated in a similar manner
for tax purposes. Therefore, if X and Y earn the same amount of
money, then they should be taxed the same amount of tax.
• Vertical equity refers to progression of taxes. If X earns more
than Y, then a greater amount of tax should be exacted upon X
than on Y.
CERTAIN

• Any citizen should know the exact amount of tax that

they are supposed to pay.
• This principle calls for putting in place laws to ensure
that anyone can determine the amount of tax that
they should pay.
CONVENIENT

• The payment of taxes should not cause unnecessary

hardship upon the citizens in paying their taxes.
• Therefore a tax system would be convenient if it
charges tax only upon someone who has earned the
income, (and part of that income will then be used to
pay tax).
ECONOMIC

• The cost of collecting taxes should be less than the

amount of tax paid.
• This cost includes what the tax authorities suffer as
cost and what the taxpayer also suffers, put together.
NEUTRAL

• The imposition of taxes should not cause economic

agents to change their economic decisions.
• Therefore, if X wanted to buy biscuits, the imposition
of taxes should not cause X to buy sweets instead.
TAX BASES AND TAX HEADS

• Taxes may be based on any one or more of the

following three tax bases.
• These are:
Income;
Wealth; and
Consumption.

• These bases have corresponding tax heads.

TAX HEADS
• In Zimbabwe, the key tax heads are:
• Income tax and Pay As You Earn (PAYE);
• Capital gains tax;
• Value Added Tax; and
• Customs and excise duties.

• The above are mentioned as the key tax heads because government
collects most of its revenue through them, but there are other tax
heads such as:.
• deceased estates duty;
• stamp duty;
• Presumptive taxes;
• Road tolls; and
• Surtax.
TAX HEADS

• Additionally, Zimbabwe used to also have other tax heads such

as :
• sales tax;
• import tax; and
• betting tax.
• Sale tax has now been replaced by value added tax in most
economies in the world. In the case of Zimbabwe, the switchover
occurred in 2004,
TAX BASES AND THEIR CORRESPONDING TAX HEADS
• A tax base is the source or root cause (basis) why a tax head exists.
• Income tax is based on the income tax base.
• Capital gains tax and deceased estates duty are examples of tax
heads that are based on the wealth tax base.
• Value added tax and sales tax, customs and excise duties are based
on the consumption tax base.
• Most jurisdictions have a tax system which is based on all three
bases. This maximises their tax collections with minimal tax rates on
individual tax heads.
• Zimbabwe did not have capital gains tax until 1981. South Africa did
not have capital gains taxes until 2001. This meant that capital
gains were not taxed.
SOURCE AND RESIDENCE-BASED TAX SYSTEMS
• Tax systems are either source-based or residence based.
• If a tax system is source-based, the tax authorities look for the
geographic origin of the income. If they determine that the
amount was generated in their country, they tax it.
• In the case of a residence based system, the tax authorities look
at the person who received the amount. If the person is resident
in their country, they tax the amount received.
• Where a countries exhibits traits of both, one of them is likely to
be dominant.
• Zimbabwe has a source-based tax system. There have been
discussions around switching over to a residence-based system.
TRENDS IN TAX SYSTEMS
• Trends help us to see the big picture, prepare us for the
future and thus plan appropriately and in advance.
• Tax systems in the world have been moving in certain
directions over the years. Can you think of any?
• In recent years, most countries have been trying to widen
their tax bases to allow them to collect more taxes without
increasing tax rates.
• Most countries have also been striving to lower their tax
rates, although a few others have experienced an increase
in tax rates.
TRENDS IN TAX SYSTEMS

• There has been a general move away from sales tax

towards value added tax, because it has proved to be
a more efficient way of collecting consumption taxes.
• Various jurisdictions have also been entering into
double taxation agreements to avoid a situation were
the same income is taxed more than once by different
jurisdictions, negatively affecting the taxpayer and
thus hindering the development of international trade
and commerce.
TRENDS IN TAX SYSTEMS

• In the last decade, the world has experienced a wave of

movement from assessment-based systems, to final deduction
systems, especially for employee taxes and from submission of
paper-based tax returns to internet-based submission.
• Tax systems have also been moving towards risk-based tax
audits.
• These trends have generally resulted in a great deal of
improvement in the efficiency and economy of tax collection.
• These trends are expected to continue and new trends are
expected to emerge in the future.
A BRIEF COMPARISON BETWEEN SALES TAX AND VAT

• Surbhi (2015) lists the following as some of the major differences

between Sales Tax and VAT:
• Sales Tax is a tax on sales. Value Added Tax is a tax on value
addition done by each party of the supply chain like supplier,
producer, wholesaler, distributor or retailer.
• Sales Tax is a single-stage tax, but VAT is a multi-stage tax. That
is, VAT is applied at the various stages of production while sales
tax is applied on the total value of the purchase.
• In VAT, the chances of tax evasion are lesser as compared to
Sales Tax.
A BRIEF COMPARISON BETWEEN SALES TAX AND VAT

• Double taxation is always there in case of Sales tax, whereas VAT

is totally free from the cascading effect.
• The sales tax is levied on total value, but in VAT tax is charged only
on the value added to the commodity.
• Sales Tax is easy to calculate while VAT calculation requires time
and effort.
• VAT requires comprehensive handling of accounts whilst sales tax
involves simpler accounting.
• Input Tax Credit (ITC) is available in VAT but not in Sales Tax.
TAX AVOIDANCE AND TAX EVASION
• What is the difference between tax avoidance and tax evasion?
• The simplest distinction between tax avoidance and tax evasion
is that:
• tax avoidance is legal, while tax evasion is illegal.
• Tax avoidance involves use of the tax regime to one‟s advantage
for the purpose of minimising the amount of tax that is payable.
• Tax avoidance is a key component of an area of taxation referred
to as tax planning.
• More recently, the law in many countries has generally been
moving in the direction of anti-avoidance provisions, thus
reducing tax planning opportunities and making the distinction
between avoidance and evasion less clear.
TAX AVOIDANCE AND TAX EVASION

• Section 98 of the Act outlines certain avoidance schemes in which

the Commissioner may still levy tax, if the main purpose of such a
scheme had been set out for the purpose of avoidance.
• An example of tax avoidance is claiming the maximum deductions
from income allowed by the law, thus reducing taxable income.
• Tax evasion on the other hand involves taking steps not to pay tax
despite being obliged by the law to pay. It has an element of being
dishonest.
• Evasion includes such practices as falsifying accounting records,
transfer pricing and other schemes of wilful failure to comply with
the provisions of the tax laws.
SOURCES OF TAX LAW
• Sources of tax law should not be confused with sources of
taxable amounts.
• Since tax involves the law, the general sources of law apply.
• By the time you take a course on taxation, it is expected that you
have already covered a course on commercial law, business law,
or some other course that introduces the law in general.
• You should therefore be familiar with the fact that the most
authoritative sources of law in Zimbabwe are legislation,
common law, and case law.
• There are also other sources of law such as persuasive sources
of law and the practices of the tax authorities.
 LEGISLATION
• The primary (and most authoritative) source of tax law is legislation.
Legislation is composed of Acts passed by Parliament, statutory
instruments and regulations. It overrides all the other sources.
• An Act often empowers the Minister to issue regulations within the
confines of the empowering Act.
• Is such cases, the Regulations are subsidiary to (and can never be
ultra vires) the Act itself.
• The primary pieces of legislations with regard to tax law are:
 the Income Tax Act Chapter 23:06,
 the Capital Gains Tax Act Chapter 23:01,
 the Value Added Tax Act, Chapter 23:12, and
 the Finance Act Chapter 23:04.
 LEGISLATION
• The names of the Acts are self explanatory in terms of
identifying the subject matter with which they deal,
except (of course) for the Finance Act.
• The Finance Act (referred to as the Charging Act by the
other Acts) is amended each year to take into account
any budget proposals and along with it, any changes to
any of the specific tax legislation (such as the Income
Tax Act) proposed to be passed during that year.
• It is an ingenious method of amending all the other Acts
that deal with finance and tax matters, thus avoiding the
need to amend each Act individually and directly.
LEGISLATION
• The Finance Act therefore needs to be read together with the
other Acts, as it normally touches on matters which affect the
other three pieces of legislation mentioned above, and often
amends them.
• The Finance Act, just like any other Act, comes to the Parliament
in the form of a Bill (in this case the Finance Bill) when the
national budget is proposed in Parliament.
• Once the Finance Bill has been passed by both houses of
parliament, it then becomes the Finance Act.
• You will need to have access to these Acts to make your learning
meaningful and also, to gain appreciation of the structure of the
Acts, just in case you will need to refer to the Acts in the course of
your professional life.
COMMON LAW

• Common law is the unwritten law of the land

which is derived from custom, principles, rules,
and legal opinions of immemorial antiquity, which
has over time been refined by judgements.
• The first Constitution of Zimbabwe adopted the
law of the country to be the law as it stood at the
Cape of Good Hope on the 10th June 1891.
• This essentially means that the legal system in
Zimbabwe is based on Roman Dutch law.
CASE LAW

• Case law (or Judicial law, as it is sometimes called), refers to

the rulings of the court.
• These rulings are important in tax law because they assist in
interpreting the law.
• In some instances, legislation may use a term, without
defining it, yet the meaning of the term may not be clear. In
other instances, legislation may go ahead and define the
term, but the definition may still raise more questions than
the answers it provides.
• For example, the Act uses the term “capital nature” many
times, but it does not even attempt to define what the term
means.
CASE LAW

• Again, as you will see when we look at the definition of gross

income, the Act extensively uses, and defines the term “received
by or accrued to”. But the definition in section 2 of the Act is that:
• “‟accrued‟, „paid‟, „received‟ or any cognate expression shall, in
so far as it applies to an amount … be construed in a sense
correlative with that in which it is construed when it applies to
money”.
• In such unclear cases, if a dispute arises as to the interpretation
of the term, the court may be called upon to decide. Its ruling
then becomes authoritative.
CASE LAW

• In these two examples given above, you will be able to

see that disputes have actually arisen as to what the
terms “capital nature” and “received by or accrued to”
actually mean.
• To get the full meaning, many of the disagreements
have ended up in court, leaving it to the courts to
decide what the terms mean.
• Case law is easily identified by the names of the
parties that are normally mentioned in the case.
Consider the following example:
CASE LAW

• CIR v People‟s Stores (Walvis Bay) (Pty) Ltd (52 SATC 9)

• In this case it is apparent that:
• the parties that were in dispute are the Commissioner of
Inland Revenue (CIR) and a company called People‟s Store.
• it is the CIR who took the case to court complaining
against the company because the CIR is the party who is
mentioned first in the case;
• the case brought before the courts in South Africa because
the South African Tax Court (SATC) is mentioned.
 PERSUASIVE SOURCES
• While decisions of the courts in other countries do not
bind Zimbabwe, they are persuasive sources of tax law,
in the sense that our courts are often persuaded to
adopt the rulings of courts in other countries that have
a similar tax and law system as ours.
• This means that we use judicial precedent from other
countries which use the Roman Dutch law system,
such as South Africa, Namibia, Botswana, Lesotho and
Swaziland if they have passed a decision on a matter
on which our own courts have not passed a decision.
PERSUASIVE SOURCES

• Of course, because Zimbabwe was colonised by

England, our law, especially on the legislative side, but
to a certain extent, on judicial precedent as well, has
significantly been influenced by English law.
• Our first Income Tax Act, for example was based on
the English Income Tax Act. This makes Zimbabwe‟s
tax system, to some extend, similar to the English one.
• Since Australia also has a tax system that is based on
English law, court decisions in that country also
influences our tax laws.
 AGENCY INTERPRETATION

• Interpretation of Acts is sometimes difficult and in some

instances, disagreement arises on an area of the law
that has never been brought before the courts, either in
Zimbabwe or in other countries with similar tax systems.
• Without any external guidance to look up to, often the
tax authorities will adopt their own interpretation of the
law which has developed into accepted custom over the
years.
• Examples of agency interpretation include Practice
Notes and Advance Tax Rulings (ATRs) issued by the
Commissioner General.
 AGENCY INTERPRETATION
Practice Notes
• These were issued by the Commissioner at his instance,
to the authority‟s employees and the public in general
outlining how the Authority handled particular tax
matters.
• While they were superseded by ATRs in 2007, many of
the concepts are still in application today.
• The key disadvantage compared to ATRs was that,
because they were issued at the instance of the
Commissioner, they could also be withdrawn by the
Commissioner at any point in time, and without notice.
 AGENCY INTERPRETATION
Advance Tax Rulings (ATR)
• They are also issued by the Commissioner, but at the
instance of a party external to the tax authority, normally a
taxpayer who will be seeking the view of the Commissioner
on how the tax authorities will handle any particular tax
matter if it were to come before him.
• The external party may, or may not authorise the
Commissioner to publish his ruling. Published rulings are
beneficial to all public at large as they give an indication of
how the Commissioner is inclined to handle a particular tax
matter.
• The key advantage is that, because they are not issued
unilaterally, they cannot be withdrawn unilaterally, which
helps enforce the principle of certainty.
 AGENCY INTERPRETATION
• Although agency interpretation does not carry the force
of law, in the absence of a more authoritative source, it
is prudent to then rely on them because, that is how the
tax authorities will apply the law anyway when a tax
matter with similar circumstances comes before them.
• Because they represent the custom of the tax
authorities, when a matter with similar circumstances is
brought before the courts, in the absence of a more
intuitive rationale, the courts are likely to incline towards
agency interpretation the same manner that they incline
towards customary law.
SOME IMPORTANT DEFINITIONS
• It will be necessary to define the following terms
because we will meet them constantly throughout our
adventure in this course.
THE ACT
• Since we will consistently be referring to the Income
Tax Act, and since we will refer to it more than any
other Act, any reference to the term Act will be in
reference to the Income Tax Act, unless otherwise
specified in a particular lecture.
 SOME IMPORTANT DEFINITIONS

THE COMMISSIONER
• The Act refers to the term “Commissioner”. This term was established when
there was one commissioner who was the overall head of the then Tax
Department.
• The Tax Department together with the Customs Department, have since been
merged to form the Zimbabwe Revenue Authority (ZIMRA).
• The head of ZIMRA, has since adopted the title of Commissioner General,
with various commissioners in charge of various aspects under him.
• Therefore, whenever the term “Commissioner” is used, it is in reference to
the Commissioner General of ZIMRA. Of course the same title will bind on any
of the Commissioner's subordinates to whom he may delegate any functions.
SOME IMPORTANT DEFINITIONS

THE MINISTER
• Any reference to the term “Minister” refers to the
Minister of Finance.
• If reference is being made to any other Minister, then
their full title will be given.
PRACTICE QUESTION 1

1. An example of a neutral tax system is

that ............
a) it must not cause economic agent to make decisions.
b) it must cause economic agents to make decisions.
c) if an economic agent was working, he/she should continue to
work even if tax has increased.
d) if an economic agent was a smoker, he/she should give up
smoking.
e) excise tax.
PRACTICE QUESTION 2

2. A taxpayer claimed deductions which he was not

entitled to and created fictitious receipts. Fort the
purposes of tax law, this is an example of .............
a) being innovative
b) tax avoidance
c) a new tax trend
d) tax evasion
e) None of the above
PRACTICE QUESTION 3

3. A persuasive source of Zimbabwean tax law is:

..............
a) Company law
b) Commercial law
c) Legislation
d) English law
e) Judicial precedence
PRACTICE QUESTION 5

4. The simplest distinction between tax avoidance and

tax evasion is that: ..............
a) both are illegal.
b) both are legal.
c) avoidance is legal, while evasion is illegal.
d) evasion is legal, while avoidance is illegal.
e) None of the above.
ADDITIONAL PRACTICE QUESTIONS

4. What is taxation?
5. Distinguish between authoritative and persuasive sources
of tax law.
6. Identify and rank Zimbabwe‟s sources of tax law , and
rank them in order, beginning with the most authoritative.
7. Outline the relevance of precedence in tax law.
8. Define the concept of equity in tax.
9. Identify three key tax heads and three other tax heads
that apply in Zimbabwe‟s tax system.
10. Under what circumstances is it important to apply agency
interpretation?
11. Distinguish between source-based and residence based
tax systems.