Parliament asks government to scrap 15 percent VAT on foreign tourists with immediate effect

Parliament has asked the government to suspend the 15 percent valued added tax on foreign tourists with effect from 1 August 2015 until 2019 to allow the sector to recover and potential dividends from the United Nations World Tourism Organisation summit held at Victoria Falls two years ago to pay off.

This was one of the recommendations by the Parliamentary Portfolio Committee on Environment, Water, Tourism and Hospitality Industry on the 15 percent VAT on hotel accommodation for foreign tourists that was introduced by the government at the beginning of the year.

 Tourism Minister Walter Mzembi and the industry have complained that the tax prices Zimbabwe out of the market.

It is not clear whether Finance Minister Patrick Chinamasa will address the issue when he presents his mid-term review tomorrow.

Mzembi is aiming for a $5 billion tourism industry by 2020 and says it is possible if Zimbabwe cuts the tax and opens its skies.

Presenting her report to Parliament yesterday legislator Anastancia Ndhlovu said the 15 percent tax had dampened average hotel room and bed occupancies. Some products were also now 35 percent more expensive than some regional markets.

The committee recommended the government “to introduce creative and intelligent taxation that moves the whole value chain”.

“It must be emphasised, at this juncture, that an insistence on tax compromise would grow the sector and avoid the consequences of cancellations of already made commitments. If a zero rating, in terms of section 10 of the Value Added Tax Act (Chapter 23:12), cannot be continued on the tourism sector, VAT on foreign tourists can either be introduced on an incremental basis as in phases of 3%, 5% and 7% beginning in 2016. Economically, it is destructive to introduce a 15% tax all at once. There is severe damage pending if this continues. Uganda and Tanzania have experienced the impact of added cost through VAT and have since retracted,” the committee said.

The committee also recommended that the duty rebate introduced by the government covers all tourism products required by the tourism players to operate with immediate effect.

“Currently, some sectors in tourism such as the car hire and tour operators are totally left out, thereby exposing tourists to unwanted poor service in those areas. Airlines are excluded from the schemes extended yet they have a lot to offer the destination by way of a conducive and appealing destination,” it said.

Full motion:

MOTION

FIRST REPORT OF THE PORTFOLIO COMMITTEE ON ENVIRONMENT, WATER, TOURISM AND HOSPITALITY INDUSTRY ON FIFTEEN PER CENT VAT ON HOTEL ACCOMMODATION FOR FOREIGN TOURISTS

MS. ANASTANCIA NDHLOVU: Mr. Speaker, I move the motion standing in my name that this House takes note of the First Report on the Portfolio Committee on Environment, Water, Tourism and Hospitality Industry on 15% VAT on Hotel Accommodation for Foreign Tourists (S.C. 18, 2015).

MR. MHONA: I second.

MS. ANASTANCIA NDHLOVU: I thank you Mr. Speaker Sir. I am here to present the Report of the Portfolio Committee on Environment, Water, Tourism and Hospitality Industry on the 15% VAT on Hotel Accommodation for Foreign Tourists.

1.0 Introduction

The Portfolio Committee on Environment, Water, Tourism and Hospitality Industry resolved to inquire into the impact of the 15% VAT introduced on hotel accommodation for foreign tourists with effect from January 2015 by the Ministry of Finance and Economic Development as announced in the 2014 Budget presentation.

2.0 Objectives of the Enquiry

The broad objective of the enquiry was to enable Committee Members to understand how the tourism sector was performing considering the projected growth target of 4.7% by the end of 2015. In more specific terms, the Committee sought to;-

i. Understand the economic effects, on the tourism sector, of the introduction of 15% VAT on hotel accommodation services for foreign tourists.

ii. Appreciate the measures that are being taken to address the challenges emanating from the introduction of 15% VAT on foreign tourists.

iii. To engage tourist operators pursuant to the need to understand their concerns in respect of the introduced 15% VAT on foreign tourists.

The last objective is consistent with section 141 of the Constitution of Zimbabwe, as read together with Standing Order No. 167 (b), which compels Parliament to facilitate public involvement in its legislative and other processes and in the processes of its committees and gives select committees the power to receive representations from interested parties. In addition, it is instructive from the onset to note that representations made were from both the private and public sector. Therefore, the Committee was of the opinion that the cross sectional perspective presentations made constituted a good representation and measure of the challenges that may be prevalent in both the public and the private stakeholders.

3.0 Methodology

To get a technical insight into the tourism value chain components, oral evidence was first delivered to the Committee by the Zimbabwe Council for Tourism. The Committee was apprised of the implications of the value chain costs as they relate to the destination. These included, inter alia, levies, advertising costs, travel insurance and vaccinations and health costs. It was highlighted that the tourism operators faced imminent loss of business as sales agents are out competed by their contemporaries from other destination markets in luring volumes from the oversees tourist. Oral evidence was also received from The Minister of Tourism and Hospitality Industry representing the public sector perception. Over and above these two representations, the Committee further sought the fiscus point of view from the Permanent Secretary for Finance and Economic Development. Suffice at this juncture to highlight that the Committee was concerned about the sorry state of the tourism sector.

4.0 Committee’s Findings

4.1 Zero Rated Value Added Tax

The Tourism Industry was regarded as an exporter and used to be accorded a zero rated Value Added Tax for its export receipts. The Ministry calls for the exemption of tax on hotel accommodation to be continued as was done in 1988 and 2003 when the sector was regarded as an exporter to grow effective Foreign Direct Investment into Zimbabwe.

The Committee took note of the application of the 15% VAT on tourist accommodation services in line with the destination principle which stipulates that VAT is collected by the country where the product is consumed and on offshore accommodation bookings. It further noted that the collection of VAT is in line with the SADC Protocol on Finance and Investment that urges Member States to harmonise the VAT regime and adopt international best practice and that the 15% VAT figure was a statutory requirement as is legislated in the country.

4.2 Employment Creation

World statistics show that one in twelve people are employed in the Tourism sector, meaning that one tourist creates twelve jobs. The obtaining situation depicts that tourists visiting Zimbabwe are currently creating employment for only six people. New employment opportunities can only be created within the industry when new hotels open up, products and activities are taking place. Thirty to forty percent of jobs of companies in the sector are dependent on oversees tourists. Therefore, the introduced 15% VAT would create challenges on employment opportunities

4.3 Destination Competitiveness

The Cost of Doing Business is prohibitive, that is, licences, cost of funding business and musical rights, make it difficult for tourism operators to find ways of keeping their prices competitive and lower. The fixed costs in Zimbabwe are too high for operators for a tourist to stay in a hotel, camp or lodge. This might have been caused by the transition from the Zimbabwean to the US dollar that was not handled well. The Tourism sector is currently giving away between 30 to 35% of their turn over on commissions to the supply chain to get business to Zimbabwe.

The VAT and certain components in the value chain impact negatively on destination competitiveness. It becomes difficult for sales agents in the various markets to compete with other destination markets and lure volumes into Zimbabwe. International tourists would content with the high costs incurred by the operators relating to advertising their products on the international website, cost of travel, visa cost, travel insurance, vaccinations and health costs as well as the Zimbabwe Tourism Authority levy. The introduction of 15% VAT has the effect of increasing companies' losses. Investors are likely to consider our industry as non- profitable and one that does not give returns to investors.

4.4 Timing

The Zimbabwe Council for Tourism submitted that the industry works two years in advance and it is impossible to pass on a tax such as this to the final consumer of the tourism product given that contracts for 2015 were signed in February and March of 2014 by the industry. Prices for the year were in brochures already in travel agencies in every feeder market following trade across the globe. Bookings that are already in the system, based on contractual obligations with tour operators, airlines and agents, will not accept that clients that have been booked to pay an additional 15% for their trip. The industry will be forced to absorb that cost, refusing to do so will result in cancellation and relocation of the booking to a competitor country. This effectively means the operators within the sector absorbed the two year 15% loss on their balance sheets. The implication of all the value chain cost is that the cost is borne by the consumer. However, oversees tourists consider the final outcome of their journey in order to compare the best deals and select destinations. Trade in source markets can only accept small price increases based on inflation usually in the source market.

4.5 Negative Image and Perception

Despite the 15% VAT, the Minister of Tourism and Hospitality Industry opined that the country suffers from negative image and perception and does not receive assistance from the European Union to embark on international tours and exhibition to market the destination.

According to the 2015 World Economic Forum Travel and Tourism Competitive Report, Zimbabwe is ranked among the worst tourism destinations in the world at 115 out of 141 countries.

4.6 Victoria Falls Investment Justification

The VAT would make the justification of the Victoria Falls investment defeated because it scares away the investors making Zimbabwe fail to realise its potential revenue from the proceeds accruing from the Victoria Falls airport. The number of foreign airlines flying directly into Harare, Bulawayo and Victoria Falls is critical to viability of Zimbabwe as a destination and competitive prices will be necessary to ensure these airlines get the required capacity to route into Zimbabwe.

4.7 Tax Compromise

It was submitted that if the revenue from the VAT is forgone, it would be recovered downstream. The tourism industry is only at the beginning of the much needed investment. A great deal more would be coming, provided the right conditions exist. The tourism industry is a fast foreign exchange generator, creator of direct and downstream employment, tax generator in so many other ways, and promises significant growth. The growth in the industry is not yet very good. Tourism room nights are still at low occupancies. It is apparent that the nation would benefit from visa fees, airport taxes and exit fees, commissions from international agencies and domestic operators, service taxes, VAT and corporate tax, air tickets fuel charges, tariffs and commuting, lodgings, room fares hotel taxes, local fees permits for National Parks and other local tours when a tourist lands in the country.

4.8 Tax Rebates and Concessions

The Government supported the tourism sector by extending tax concessions to improve its competitiveness in the region and beyond, for instance, rebate of duty on capital goods and suspension of duty on motor vehicles imported by Safari Operators. It was revealed that 55 operators have benefitted from duty concessions and the amount of forgone revenue from the rebates and concessions between January and April is over $1.7 million. The Committee was also advised that tourism operators have already started remitting the proceeds of the 15% VAT to ZIMRA and the cumulative revenue amount collected between January and April 2015 is slightly in excess of $1 650 000.

4.9 African Union Taxes on Tourism

In light of the proposed introduction of tax on tourism specifically on air tickets for all flight to and from Africa as well as on all hotel rooms in Africa by the African Union, the task to lure foreign tourists would be made more difficult. A continental levy that is also being proposed by the African Union on tourism would threaten the competitiveness of the country as a destination.

Foreign tourists’ arrivals were 27% of the total arrivals in Zimbabwe in 1999 had dropped to 13% by 2013. These arrivals fall under the high volume low value bracket hence the need to attract these high spenders from European Markets. The Committee learnt that the world's best spending countries are China, Germany, United Kingdom, Russian Federation, France, Canada, Japan Australia, Italy and the United States of America. Tourists from these countries are the ones the Ministry of Tourism and Hospitality Industry tries to lure into the country. Zimbabwe currently endures very low percentages of visitors from overseas and very high percentage of visitors from Africa.

4.10 Feasibility Studies

It appeared to the Committee that a bone of contention exists on this matter. It was submitted that the announcement of the introduction of the 15% VAT on hotel accommodation by the Minister of Finance was made before a study on its impact on the sector was concluded. Thus, the sector was then compelled to comply with the pronouncement. The Permanent Secretary refutes the allegation that the Minister of Finance and Economic Development introduced the 15% VAT on hotel accommodation before the conclusion of feasibility studies on the matter. The Permanent Secretary also argued that the current economic hardship affects all sectors of our economy, thus the request from the Tourist Operators to lower the VAT would not augur well with the rest of the sectors.

4.11 Destination Accessibility

The Minister of Tourism and Hospitality Industry reiterated that Beitbridge Border Post is hampering the arrival of foreign tourists into the country because of too much bureaucracy.

5.0 Analysis of the Key Issues

From all the three presentations and submissions, it was lucid that the Constitution of Zimbabwe Amendment (No 20) Act, 2013, the Tourism Act (Chapter 14:20), and the Value Added Tax Act (Chapter 23: 12) provide the rational basis for the Committee’s recommendations on the issues raised above as explained below.

Three issues emerged important, pivotal and critical. These can be summarised as follows; – There is need for;

1) Urgent intervention to protect the sector from regressing by incentivising international arrivals through economically viable rates;

2) Urgent need for the Government to consider scrapping off the 15% VAT on payments for accommodation and tourism services by foreign visitors; and

3) Reduce the pricing structure in the country.

5.1 Tourism Destination Promotion

Section 5 (1) (a) of the Tourism Act (Chapter 14:20), provides that “Subject to this Act, the function of the Authority shall be to promote Zimbabwe as a destination for tourists, and to promote the tourist industry in overseas, regional and domestic market;” The Zimbabwe Tourism Authority’s function to promote Zimbabwe as a destination and tourist industry is of paramount importance. The successful execution of this function is directly hinged on level playing field in both regional and international tourism sectors. The introduced 15% VAT on foreign tourist arrivals in Zimbabwe negatively affects the destination competitiveness and the growth of tourism industry in the country. Tax charges for hotel accommodation for source markets are much lower than the standard rate. If this would be implemented in Zimbabwe, tourism operators and players would compete favourably with other destination markets and allow them to operate at full capacity. Thus, the 15% VAT introduced by the Government becomes a significant cost for oversees market and would be very difficult for the local operators to absorb.

5.2 Tourism Investment Promotion

Section 7 (b) of the Zimbabwe Investment Authority Act (Chapter 14:30), also espouses that

“Subject to this Act, the functions of the Authority shall be to plan and implement investment promotion strategies for the purpose of encouraging investment by domestic and foreign investors;” Again the Zimbabwe Investment Authority is mandated to encourage foreign investment in all sectors of the economy including the tourism sector. The Authority relies mainly on potential profitability of the sector of which tourism is promising. Promotion strategies could be easily thwarted when this particular sector is viewed as non-profitable or that with dwindling returns. Therefore, a 15% price rise will unquestionably be a significant momentum stopper in the sector with regard to investment potential and can set the industry behind several years and it will be costly to recover.

5.3 Employment Creation

Pursuant to the need to uphold and adhere to the provisions of section 24 (1) and (2) (a) of the Constitution of Zimbabwe Amendment (No 20) Act, 2013, which state that,

“The State and all institutions and agencies of Government at every level must adopt reasonable policies and measures …. to provide everyone with an opportunity to work…and must endeavor to secure full employment,”

There is need to create employment opportunities within the tourism industry through new hotels opening up. As it stands, thirty to forty percent of jobs of companies in the tourism sector are dependent on oversees tourists. It goes without saying that, the introduced 15% VAT would create challenges on employment opportunities when foreign tourist and foreign investors shun Zimbabwe as a tourist destination. As has already been alluded to, it is important to attract and grow oversees tourists because they are the ones that bring employment to the nation as compared to the transit tourists.

As legislators, our obligation is to ensure that tourism is governed and managed in a manner that is in the national interest, in terms of section 119 (2) of the Constitution of Zimbabwe, and promote economic development. There is need to achieve the Zimbabwe Agenda for Sustainable Socio-economic Transformation (ZIM ASSET)'s target for the Tourism sector to contribute 15% of the GDP to the economy by 2015, and be in line with the UNWTO 2015 Tourism Day theme “One Billion tourists, One Billion opportunities.” There is also a need for the industry to become profitable and grow so that the current stock of rooms would be increased in order to meet the demand of the projected growth of the tourist arrivals of 4.7% by 2015.

Informed by this pertinent observation, the Committee recommends the Executive to urgently consider the following, pursuant to the need to achieve two of the four ZIM ASSET Strategic Clusters of Food Security and Nutrition and Social Services and Poverty Eradication.

6.0 Recommendations

6.1 The Committee recommends for an ongoing evaluation of the tourism business and monitoring of the situation and effects so that the recovery of the sector is not undermined by the 15% VAT on foreign tourists. This is partly because timing of the move was wrong and indications are that it is difficult for the industry to come up with attractive rates for domestic and regional markets. Some of our tourism products are now 35% more expensive compared to some regional markets. The 15% VAT charge dampen average hotel room and bed occupancy levels expected to improve this year to 61% and 42% respectively.

6.2 It also recommends the Executive to introduce creative and intelligent taxation that moves the whole value chain. It must be emphasised, at this juncture, that an insistence on tax compromise would grow the sector and avoid the consequences of cancellations of already made commitments. If a zero rating, in terms of section 10 of the Value Added Tax Act (Chapter 23:12), cannot be continued on the tourism sector, VAT on foreign tourists can either be introduced on an incremental basis as in phases of 3%, 5% and 7% beginning in 2016. Economically, it is destructive to introduce a 15% tax all at once. There is severe damage pending if this continues. Uganda and Tanzania have experienced the impact of added cost through VAT and have since retracted.

6.3 The Committee further recommends that, with immediate effect, duty rebate introduced by Government covers all tourism products required by the tourism players to operate. Currently, some sectors in tourism such as the car hire and tour operators are totally left out, thereby exposing tourists to unwanted poor service in those areas. Airlines are excluded from the schemes extended yet they have a lot to offer the destination by way of a conducive and appealing destination.

6.4 It is the Committee’s recommendation to the Executive that the implementation of measures to enhance the competiveness of industries in Zimbabwe be expedited in order for the sector to be able to revise its costing structure downwards. The Cost of Doing Business impacts negatively on the pricing structure in the country and wards off potential tourists. Zimbabwe’s tourism services are deemed exorbitant.

6.5 Last but not least, the Committee strongly recommends the Executive to totally suspend the VAT for foreign tourists with effect from 1st August 2015 until 2019, for the sector to recover, grow volumes, allow the many potential dividends from the UNWTO to pay off and increase direct arrivals at the new Victoria Falls Airport.

7.0 Conclusion

With the above submissions, Mr. Speaker Sir, I now commend this report for consideration by this august House. I thank you.

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