Fiscal and Distributional Implications of VAT Reforms in Zimbabwe

Improving domestic revenue mobilization extremely important for Zimbabwe to create the fiscal space to absorb quasi-fiscal expenditures and support macroeconomic stability. In November 2023, Zimbabwe announced measures to raise additional tax revenue. This included limiting value-added tax (VAT) zero ratings to exports only, and VAT exemptions to a small number of essential items. This paper carries out a VAT tax gap analysis and uses a partial fiscal incidence analysis framework to analyze the welfare and distributional consequences of the reforms. The change announced in the 2024 budget is expected to increase the VAT revenue by 0.88 percent of gross domestic product (GDP). But it also increases the poverty headcount by 1.4 percentage points and inequality by 0.14 points. This pattern is consistent with international evidence. Therefore, any VAT reform must be accompanied by a compensation mechanism with horizontal expansion, i.e., a broader coverage of less well-off households. Focusing only on the current beneficiaries of the cash transfer program is ineffective in restoring the welfare level because of its minimal coverage level of the total population and the poor. This can be done with a fraction of the new VAT collections from the proposed changes. Zimbabwe does not have a unified social registry and a criterion to target the least well-off households. Thus, instituting a compensation mechanism requires significant investments in establishing a nationwide social registry and developing a targeting mechanism to target social cash transfers effectively