Tax Law and Practice 1:

AC405
Bachelor of Accountancy honours Degree
University of Zimbabwe
Lecturer: Mr T. Kapesa
Contacts: +263 772614 943
tonykap09@gmail.com
 Some quotable quotes…

‘There are only two things which are certain in life; death and
taxes’ (Albert Einstein)

‘People often say death and taxes are the same, but this is
wrong. Death is a taxable event, but taxes never die’
 Introduction to taxation
Learning outcomes
After completing this chapter you should be able to:
• Define tax and explain the importance of taxation to the
Zimbabwean economy and the standard of living in
Zimbabwe.
• Explain the difference between source based and resident
based tax systems
• Discuss the three main ways of classifying taxes.
• Outline the general framework for the levy and
administration of taxes in Zimbabwe
 Introduction to taxation
Learning outcomes
After completing this chapter you should be able
to:
• Explain the three sources of tax law in Zimbabwe
• Define a person, an associate and ordinary
residence
• Discuss the main principles of a good tax system
• Outline the general framework for
determination/calculation of tax payable.
 Introduction to Taxation
1.1 What is tax?
• Tax is an involuntary/compulsory amount paid by a person to the government to which the person is
under its governance.
• Tax is collected for the benefit of the government fund, which in Zimbabwe is called the Consolidated
Revenue Fund.
1.2 Why are taxes levied?
(a) Raising of revenue for the government
• The major source of income for the government is from levying taxes.
• Government spending/expenditure is financed by taxpayers.
(b) To regulate the economy
• Government may use taxation as an instrument to drive economic objectives of a country. e.g to
promote economic activities in certain sectors.
(c) To discourage/control the consumption of demerit goods
• Demerit goods are goods that poses health problems to consumers e.g tobacco.
• As such the government would want to reduce the consumption of such goods by imposing some
taxes on such goods.
 Why are taxes levied?...continues
(d) To control international trade
• The aim of every government is to maintain a favourable balance of payments.
• A healthy balance of payment is achieved when a country exports more than it imports.
• Therefore, a country may seek to reduce imports by imposing taxes on imports (custom
duties/ tariffs).
(e) To promote economic growth
• Where imports are reduced, demand for domestic goods will increase thereby promoting the
growth of local companies which in turn lead to reduction of unemployment levels.
(f) To prevent dumping of goods
• Dumping is a situation where cheaper, substandard goods are produced in other countries
and exported into the country thereby reducing significantly the demand for local goods.
• Dumping is a big challenge to the economy as it destroys local industries as their output
become uncompetitive.
• Government may seek to protect local industries by introducing tariffs so as to make the
foreign goods expensive compared to local goods.
 Introduction to taxation
1.3 Basis of Taxation
• A country can adopt either a source basis (territorial) or a residence basis tax
approach.

• A country that adopts source based tax system levy taxes only on income,
capital, property etc. that comes from within the boundaries of its borders.

• A residence based tax approach is adopted by a country that seeks to levy tax
on income, capital; property etc. accruing to its residents regardless of its
source.

• Zimbabwe primarily uses a source based tax system, but sometimes

incorporates some traits of the residence basis.
 Introduction to taxation
1.4 Classification of taxes
(a) Direct or Indirect taxes
•Direct taxes are paid by individuals/organisations on which tax is charged,
e.g. income tax.
•Whilst Indirect taxes are charged on one person but actually paid by
someone else.
•The tax is often included in the price of a commodity.
•Indirect tax simply means that the taxpayer indirectly pays tax to the
authority when they pay for a commodity., e.g. Value Added Tax(VAT).
(b) Progressive, Regressive, and proportional taxes
•A progressive tax is a levy in a tax system where the tax rate increases as
the taxable base increases e.g $100 to $200=20%, $201- $500=25%, e.g.
PAYE(Pay As You Earn).
•It places a heavy tax burden on the rich because it takes into account their
ability to pay.
•Whilst a regressive tax is a levy in a tax system where the tax rate does not
change based on the level of income.
 Classification of taxes continues….
Regressive tax continues ….
•The tax is usually charged as a % of the value of the asset
the taxpayer purchases or owns. e.g 15% of the price of
the goods bought, e.g. VAT.
•It places a heavy burden on the poor because it ignores
their ability to pay.
•A proportional tax is a levy in the tax system where the
taxpayer pays tax in direct proportion to their income e.g
25 % of income, such as corporate tax
•Each taxpayer contributes fairly to the tax net, it therefore
places the same burden of tax on all taxpayers.
 Classification of taxes continues….
(c) Administrative classification of tax
• Taxes can be classified according to their relevant
laws meant to collect the taxes from different
sources, e.g.:
• Income tax-tax on incomes
• Capital gain tax-tax on capital gains
• Customs duty- tax on imported goods, etc.
• Value Added Tax (VAT)-tax on the sale of goods and
services
 Introduction to taxation….
• 1.5 Levy of tax
• The authority to levy and collect tax comes from legislation.
• Acts of parliament are issued to provide guidelines on how to tax certain amounts.
• Zimbabwe Revenue Authority (ZIMRA) is a statutory body established by the Revenue Authority
Act (Chapter 23:16) with a mandate of enforcing the provisions of the tax statutes/Acts.
• ZIMRA is responsible for assessing, collecting and accounting for revenue on behalf of the state
through the Ministry of Finance.
• The following are the revenue heads which are administered by ZIMRA:
• Customs Duty- levied on imported goods in terms of the Customs and Excise Act (Chapter 23:
02)
• Excise Duty- levied on specified locally manufactured goods.
• Income Tax- levied on income earned from trade and investment.
• Pay As You Earn (PAYE) – levied on income earned from employment.
• Presumptive taxes- income tax is based on presumed average income instead of actual income.
 Levy of tax continues….
• Value Added Tax- levied on consumption of goods and services.
• Capital Gains Tax (CGT) – levied on sale of immovable properties and
marketable securities.
• Surtax- levied on imported vehicles older than five years. 
• ZIMRA is headed by a Commissioner General who has the
responsibility of interpreting and administering the Income Tax Act
and other tax statutes.
• Various Acts of parliament in respect to tax were enacted as basis for
the collection of such tax.
• Besides Acts of Parliament, Statutory Instruments are passed which
work in the same way as Acts of Parliament.
 Levy of tax continues….
• The following acts will particularly be covered when studying tax law:
• Income Tax Act [Chapter 23:06]
• Capital Gains Tax Act [Chapter 23:01]
• Finance Act [Chapter 23:04]
• Value Added Tax Act [Chapter 23:12]- not covered in this module
• The Finance Act (FA) is referred to as the charging act, in other tax legislation.
• Rates of tax and revisions thereto are gazetted by the Honourable Minister of
Finance and are stipulated in the FA.
• At the end of every year the Minister of Finance pronounces the national
budget in which new amendments to the acts are made.
• All amendments to the Acts are compiled in the FA.
 Introduction to taxation
1.6 SOURCES OF TAX LAW
• Tax law comes firstly from legislation, secondly from case law and thirdly from ZIMRA
departmental practices.
• Besides the codified Acts of parliament(legislation) decided tax cases(case law) set a
judicial precedence in the determination of tax liability of a taxpayer and are taken as law in
their respect.
• Legislation alone can never cover a wide variety of circumstances which arise; hence the
courts rely significantly on decided court cases.
• Court rulings from Zimbabwean courts are binding while those from foreign lands have
persuasive value.
• In addition to case law, ZIMRA also has its codes on how certain transactions are taxed
(Departmental practices).
• Legislation takes precedence over case law while case law takes precedence over
departmental practices.
 Introduction to taxation
1.7 Some important definitions
(a) A person
• Covered by section 2 of the ITA
• Includes; and individual, a company, a local authority, a deceased
or insolvent estate, and a trust to which no specified beneficiary is
entitled.
• It excludes a partnership.
(b) Associate
(c) Ordinary residence
 Introduction to taxation
1.8 Principles of a good tax system
• The following tax principles should govern, a good tax system:
a) Vertical equity principle – every member of state should contribute towards the burden of tax in
accordance with his ability.
b) Horizontal equity principle- taxpayers in the same economic circumstances should receive equivalent
tax treatments.
c) Certainty- the tax which an individual is bound to pay ought to be exact, and not arbitrary. The amount,
timing and manner of payment should be known.
d) Simplicity – the tax legislation must be in simple language and easily understood by the subjects.
e) Tax neutrality or efficiency principle – tax should act as resource allocation by assuring that economic
decisions are diverted to best location.
f) Flexibility – tax system should be able to accommodate changes in business, technology and markets.
g) Effectiveness – is essentially the capacity of the tax system to achieve its objectives. Thus a tax system
should be able to generate revenue.
h) Consistence and coherence – transactions with the same commercial results should have the same tax
result.
 Introduction to taxation
Discussion point: Activity
Discuss the extent to which Value
Added Tax (VAT) satisfies the qualities
of a good tax system.
 Introduction to taxation
1.8 General framework for determination/calculation of tax
payable
• Section 7 of the ITA provides a basis for the calculation of tax
liability of a taxpayer.
• Appropriate rates of taxes as fixed by the charging act, i.e. the
Finance should be used.
• Before applying the rates, one should compute what is termed as
the taxable income.
• The provisions of the tax statutes and case law give guidance in
arriving at the taxable income.
 General framework continues….
• Framework for calculation of tax payable:
Gross Income [Sect 8; Sect 10 & Sect 12 of ITA] xxx
Less: Exempt Income [Sect 14 as read with 3rd Schedule, ITA] (xxx)
Income xxx
Less: Allowable deductions [Sect 15] (xxx)
Taxable Income xxx
Apply tax rates (FA)
Gross tax xxx
Less: Tax Credits (FA) (xxx)
Net tax xxx
Add: Aids Levy (at 3% of net tax) xxx
Tax liability xxx
Less: Tax paid in advance / Provisional tax (xxx)
Tax Payable or Refundable xxx/ (xxx)
 General framework continues….
• The subsequent topics will be
structured in line with the above
framework.
•The components of the above
framework will be explained in the
lectures which follow: