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NATIONAL ASSEMBLY HANSARD 7 MAY 2013 VOL. 39 NO. 13

PARLIAMENT OF ZIMBABWE

Tuesday, 7th May, 2013.

The House of Assembly met at a Quarter-past Two O’clock p.m.

PRAYERS

(MR. SPEAKER in the Chair)

MOTION

LEAVE TO MOVE SUPENSION OF STANDING ORDERS NO. 22,

33 (2), 34 (5) AND 205 (5)

THE MINISTER OF FINANCE on behalf of THE MINISTER OF CONSTITUTIONAL AFFAIRS: I seek leave of the House to

move that the provisions of Standing Orders No. 22, 33 (2), 34 (5) and 205 (5) regarding the automatic adjournment of the House at Five minutes to Seven o’clock p.m. and at Twenty-five minutes past One o’clock p.m. on Fridays, private members motions taking precedence on

Wednesday after question time and that question time shall be on Wednesdays and stages of Bills respectively, be suspended in respect of the Constitution of Zimbabwe Amendment (No. 20) Bill [H. B. 2, 2013].

This is in order to facilitate debate on the historic Constitution Bill.  You are aware Mr. Speaker, that this is the first time that Zimbabwe has had a Constitution for itself and by itself.  The current Constitution is a Statutory Instrument of the British Parliament so this is a very happy occasion. To facilitate that, let us have an open uninterrupted debate on this important document.  I thank you Mr. Speaker Sir.

MOTION

SUPENSION OF STANDING ORDERS NO. 22, 33 (2), 34 (5) AND

205 (5)

THE MINISTER OF FINANCE on behalf of THE MINISTER

OF CONSTITUTIONAL AFFAIRS: I move that the provisions of

Standing Orders No. 22, 33 (2), 34 (5) and 205 (5) regarding the automatic adjournment of the House at Five minutes to Seven o’clock

p.m. and at Twenty-Five minutes past One o’clock p.m. on a Friday, private members motion taking precedence on Wednesday after question time and that question time shall be on Wednesdays and stages of Bills respectively, be suspended in respect of the Constitution of Zimbabwe Amendment (No. 20) Bill [H. B. 2, 2013].

Motion put and agreed to.

FIRST READING

CONSTITUTION OF ZIMBABWE AMENDMENT (NO. 20) BILL

(H.B. 2, 2013)

THE MINISTER OF CONSTITUTIONAL AND PARLIAMENTARY AFFAIRS presented the Constitution of Zimbabwe Amendment (No. 20) Bill.

Bill read the first time.

Second Reading:  Wednesday, 8th May, 2013 –(HON. MEMBERS:

Inaudible interjections)-

THE MINISTER OF CONSTITUTIONAL AND

PARLIAMENTARY AFFAIRS: The reason why Mr. Speaker is, this is an important Bill which must be afforded enough opportunity and hon. members must be seen to be debating this fully. With your leave, I move that the Second Reading be done tomorrow –(HON. MEMBERS:

Inaudible interjections)-       

  1. SPEAKER: Order, order in the House. I have given you

sufficient time to consult on this matter. I would now like to hear from the Minister whether you are agreeing on any one position on that matter?

THE MINISTER OF CONSTITUTIONAL AND

PARLIAMENTARY AFFAIRS: Thank you Mr. Speaker. The position is motivated by consultations which commenced yesterday. This issue was raised at Management Committee Meeting yesterday and the consensus amongst members of the Management Committee was that the introduction would be done today as I have done, and that the Second Reading would be done tomorrow and thereafter, debate will follow. As soon as debate is finished, the matter will eventually go to the Senate. I can confirm Mr. Speaker –[HON. MEMBERS:  Inaudible

interjections]-

  1. SPEAKER: Order hon. members, order!

THE MINISTER OF CONSTITUTIONAL AND

PARLIAMENTARY AFFAIRS:  I can confirm that at half past One

o’clock today, I left Cabinet early in order to attend to a number of issues which I thought should be attended to before I make the final touch to the Second Reading Speech. I want to state as a fact that because of the agreement brokered yesterday, I came here simply to do what needed to be done today and my Second Reading Speech is still to be polished and I will do it tomorrow. I thank you.

SECOND READING

MICRO-FINANCE BILL (H.B. 2, 2012)

First Order read. Second Reading: Micro-Finance Bill (H.B. 2,

2012).

THE MINISTER OF FINANCE: Mr. Speaker Sir, Mr. Speaker

Sir, Mr. Speaker Sir! –[HON. MEMBERS:  Inaudible interjections]- MR. SPEAKER: Order, order in the House! I have recognised the

Minister of Finance.

THE MINISTER OF FINANCE: Mr. Speaker Sir, the MicroFinance Bill shall provide for the regulation and supervision framework for the Micro-Finance Sector including minimum requirements in respect of rules and regulations, licencing of the different classes of Micro-Financing institutions, credential supervision and institutional arrangements, roles of various stakeholders and a framework that promotes fairness and equity in the provision of micro-finance service. The major reference point for the Bill is the National Micro-Finance Policy of Zimbabwe. Lessons have also been drawn from experiences and legislation of other jurisdictions to ensure adherence –[HON.

MEMBERS:  Inaudible interjections]-

  1. SPEAKER: Order, order in the House, Order! Hon. Minister may you continue.

THE MINISTER OF FINANCE: At the core of the proposed

Bill is the recognition of the Micro-Finance Sector in the economic development of Zimbabwe and the need to put in place a framework that promotes the development of the sector in line with developments in the country and in the global arena.

As you are aware Hon. Speaker, with the collapse of formal credit in this economy, micro-finance has become so critical and central in this economy but the challenge we have however is that the current MicroFinance Act is outdated, it does not recognise the changing dynamics and mobility and fungibility in this sector.  We seek through this amendment to modernise our Acts and we also seek through this amendment Hon. Speaker, to deal with some of the nefarious practices that are being practiced by a few money lenders in this country. Some of them are charging extortionate usurious rates of interest that are crippling households in Zimbabwe, so we seek to regulate that.

Third Hon. Speaker Sir, there are many people who are operating the business of micro-finance without being registered - people who are outside the loop. This Act is making it very clear that if you lend money and if you carry out the business of micro-financing and you are not registered, that transaction is void and not voidable and the legal effect of it is that if I borrow money from you and you are not registered, I have no obligation to repay it because the transaction is void. So that is one of the things that we are doing. We are also creating in this country Hon. Speaker, many of the capital requirements to have a banking licence which are US$12 million and which is a lot of money for the majority of our people.

There are a group of Zimbabweans who are rich but not rich enough to start a bank but sufficiently rich enough to lend money to people. So we are creating, for the first time in the history of this country, deposit taking micro-finance institutions. They will be half bank with lower capital requirements, although that does not mean that there is a lower fiduciary standards - lower corporate standards - no it does not mean that.  That is what we are trying to do in this. Having gotten your attention, I now proceed to my prepared speech.

In recent years throughout the world, there is a growing recognition of the critical role of micro-finance in economic development and poverty alleviation through the provision of financial services to low income groups which are normally unable to access financing from the traditional banking system. Improved access and efficient provision of savings, credit and insurance facilities enable the poor to be self sufficient by providing them with self employment opportunities.

This is particularly pertinent to Zimbabwe Mr. Speaker where 57% of our people are in either agriculture or the informal sector and with only 22% in the formal sector. It is critical that we have a sound microeconomic framework that is the mainstay of the support to financial services and to the informal sector. It is also consistent with financial inclusion Hon. Speaker.  Only 19% of Zimbabweans have access to banking services and only 77 000 people share a one bank branch in Zimbabwe. Micro-finance are low capital businesses which can be located anywhere in communal lands, in Growth Points and even in townships, so the promotion of a sound micro-finance framework Hon.

Speaker, is part of the democratisation of access to financial services in Zimbabwe which is as long overdue as it is desirable.

The rapid growth of the micro-finance sector and its size relative to the formal financial markets calls for adequate regulatory systems and structures to close regulatory gaps and foster orderly development of the financial sector.

Regulation also provides micro-finance with legitimacy and confidence to the customers and investors given those benchmarks of acceptable behaviour increase certainty, transparency and levels the playing field.

Regulation also promotes consumer protection as it deals with abusive and reckless lending by some microfinance institutions. Mr. Speaker, there are agreements which have been brought to our attention at the Ministry of Finance where the monthly rate of interest was 35% and therefore the capitalised interest was 400% per annum. Something that is totally unacceptable and this is one of the things that we are looking at.

Furthermore, the 2008 Global Finance crisis resulted in the realisation of the importance of adequate regulation of financial institutions to ensure financial stability and Hon. Speaker this does not just pertain to regulation of the micro-finance industry. It also pertains to regulation of the formal brick and mortar banking sector. As I have just indicated one of the key failures that were a causer to the global economic crisis of September 2008 was the lack of regulation and the lassez faire approach adopted by regulators across the world from New York to Sandton. So in this particular law, we are dealing with microfinance institutions to ensure financial stability but in a few weeks time, I will be bringing to this hon. House substantive amendments to the Banking Act that will ensure the experiences of the bank failures we have seen in the last 18 months in this country do not happen.

The micro finance sector in Zimbabwe basically has the following players:

  1. Banking institutions and building societies. These are licensed under the Reserve Bank Act and the Banking Act, Chapter 24:20 and the Building Societies Act Chapter 24:02.  We have not had a problem in this sector.
  2. The non bank micro finance institutions MFIs. These are institutions conducting micro finance business in terms of the Money Lending and Rates of Interest Act, Chapter 14:14.  They usually have more than one branch and lending is mainly for business activities though during hyper inflation, lending changed to consumption.  In other words, most of these registered people were lending to the productive sector.  With the advent of hyper inflation, many people were borrowing for school fees, hospital bills and so forth.  In fact, a frightening statistic is that, 88% of domestic lending in Zimbabwe is actually for health services and health related industry which is quite frightening.
  3. Money lenders – these are small companies with usually one branch and are generally owner managed. 93% are consumption loans and 7% are business.  This tends to be characterised by high interest rates.  Speaker, this is where the bulk of the mischief is, where you have a one man operation, operating from some

smelly office and charging absolutely usurious rates of interest.  Obtaining all kinds of malicious security, bicycles, beds, mobile phones, cars and so forth and selling those assets without court judgements.  Absolute laws unto themselves and this is one category of people, your ‘Merchant of Venice’ type of lender that you are trying to deal with.

  1. The Savings and Credit Cooperatives Societies, SACCOS. These institutions are registered under the Cooperatives Societies Act, Chapter 24:05.  They take deposits and lend to members.  They are generally membership owned institutions that offer savings, new interest rates, significant outreach in peri-urban and rural.

I need to mention Hon. Speaker that apart from these formal ones that are covered by the Co-operatives Societies Act, we have another fifth category.  These are what I can call for lack of a better word, Community Lending Micro Finance institutions.  They tend to be organisations like burial societies that lend to their members.  There is also another form of this community based lending.  This practice of friends lending to each other called mukando.  It is also another category of micro financing.  Mai Chibadura throws to Mai DubeMai Dube throws to Mai Gwenya, that is mukando.  We have no problem with this sort of money lending which is as old as our people.

Another category is the Government managed finance programmes, the main one being SEDCO which was established by the Small Enterprises Development Act Chapter 24:12.  It has been lending to small and medium scale enterprises at concessionary rates.

You know Hon. Speaker that under the current Budget, we allocated US$50 million to this sector.

I just want to talk about the regulatory framework, prior to 2004, the micro finance institutions were registered by the Ministry of

Finance in terms of the Money Lending and Rates of Interest Act, Chapter 14:14.  Although this Act is still applicable, the licensing and regulation functions were transferred to the RBZ.  The RBZ regulates and prudentially supervises all categories of MFIs with the exception of SACCOS whose supervision falls under the Ministry of SMEs headed by Hon. Nyoni.  However, the legislation currently applicable in governing the activities of micro finance institutions and micro finance in Zimbabwe is very fragmented.  There are currently more than five pieces of legislation being applied.  The degree of fragmentation is high and not in the interest of developing the micro finance sector.

The legislation was not drafted with micro finance in mind but rather to address different interests altogether.  A case in point is the Money lending and Rates of Interest Act which provides for the licensing of micro finance institutions.  However, the main substance of it is to control the practice of usury by capping interest rates chargeable.  Elsewhere, it has been proven that interest rates controls are not effective instruments of consumer protection but rather it results in more limited access to financial resources by low income households.  The point that I am making is that this country has never paid attention to micro finance.  As a result, we have got this eclectic balkanised approach where different pieces of legislation cover micro finance, the Banking Act, the Building Societies Act, the Consumer Contract Act, the Contractual Penalties Act, the Cooperative Societies Act and the Money Lending and Rates of Interest Act.

What we are seeking to do Hon. Speaker is to have a one stop legislative instrument that deals with micro finance.  So you will see  in this Act a definition of micro finance, a categorisation of different micro finance activities particularly the issue of deposit taking and non deposit taking micro finance.  This is a best practice.  Before we prepared this Bill, we sent people to Kenya, Ethiopia and other African countries where deposits taking micro finance institutions are now in the scene, but they also have to have their own capital requirements which will be defined by regulations.  At the present moment we are debating whether it will be US$1 million or US$2 million but they certainly have to have some capital requirements because if you proffer yourself out as someone who can lend money to people, we must be convinced as regulators that you have got the money.  If you do not have the money, you are going to take people’s money and use it to buy the kind of funny things that we see parked at Sam Levy’s Village.

The policies have been followed up with formulation of Microfinance Acts, other consumer protection related legislation or regulations giving guidelines on the following areas:

  1. Definition of microfinance
  2. Categorisation of the different microfinance activities, e.g. deposit taking and non deposit taking MFIs
  3. Licensing and registration of MFIs
  4. Minimum capital and entry requirements
  5. Supervision and regulatory framework – tiered approach to   We are proposing here a tiered approach, the RBZ, the Government and then a combined intra regulatory approach.  You will see this approach when we come with the amendments to the Banking Act which I am going to bring in a few weeks time.

I want to underscore Hon. Speaker, the fact that what we are doing is based on a precedent.  We have sent out teams.  I just want to give you – this is for hon. members that are interested, the comparative empirical approach that we took.  We sent people to Kenya, the supervision is done by the Central Bank and they have got a Micro Finance Act there.  The Central Bank does the licensing.  In SA there is what is called the National Credit Regulator which is an independent body that does the regulation and there is a National Credit Act.  However, in South Africa, the National Credit Act covers not just microfinance, but also higher purchase, durable consumer lending for cars and so on. So, it is a much more comprehensive Act than ours which is having a narrow definition of microfinance.

In Tanzania, the regulators are Central bank but they have got what is called microfinance companies and micro credit activities Act of 2005.  In India, the regulator is the Central bank but microfinance is regulated under the Reserve Bank Act of 1934 but I want to say that when we sent our team there, they are actually moving towards a model of having a separate Act of microfinance to deal with microfinance.

In India, they also have a National Bank for Agriculture and Rural Development that deals specifically with lending to the agricultural sector.  So, I make this point to illustrate the point Mr. Speaker that we did not pluck this Bill from thin air; we plucked it after research, after experiences, particularly experiences from the pocket of microfinance lenders who are really abusing our people.

I also want to talk about shareholding.  The Bill shall prescribe the maximum shareholding in the MFI by any single person. One of the mischiefs we have seen in individually owned banks or microfinance institutions is the total decimation of corporate governance.  This is particularly between management which lies in management and then policy making which lies in the board and then the shareholding component.  In the one man owned shares, he is the shareholder, he is the board of director, he is the Managing Director, this is not consistent with good corporate governance.  So, we are proposing limits of ownership particularly in deposit taking finance. This old business of saying ndini Museyamwa, ndini Gushungo, ndechangu is not good and this is what we are trying to deal with in this Bill.

The Bill shall prescribe the procedures to be followed in granting of loans.  As I have said, what we are proposing here is very drastic.  If you lend money and you do not have a licence, it is a void transaction.  Akwereteswa mari haadzorere, the law will not assist an illegal transaction.

On disclosure of financial statement, the Bill shall prescribe the submission of the following to the RBZ by deposit taking MFIs.

-An audited balance sheet, showing assets and liabilities

-An audited profit and loss account

-A copy of the auditor’s report.

These are really low scale.

We are also going to insist on the appointment of both an internal auditor and external auditor.  We are doing this in the interest of good corporate governance.

The RBZ will provide prudential supervision to deposit taking MFIs to ensure protection of the safety of deposits and protection of the financial system as a whole. For non deposit taking institutions, the RBZ will provide non prudential supervision.  Certain sections of the Banking Act are going to cover deposit taking MFIs.  That means that where there is corruption and so forth, the RBZ will have the power of placing that bank under curatorship.

Most importantly, the Bill shall provide for Deposit Taking MFIs to make contributions to a Deposit Protection Scheme to ensure protection of depositors in the event of a failure of the institution.  The provision shall give details on liquidation of failed institutions and compensation of depositors.  So there will be a form of insurance.

Mr. Speaker, this is a revolutionary Bill in  terms of enhancing and deepening financial inclusion and organising the role of the informal sector in this country, the role of small monies to finance small business in this economy.  I therefore humbly commend this Bill to hon. members and move that the Bill be read a second time.

  1. CROSS: I am speaking as the Acting Chairperson of the Budget and Finance Committee, which is the Committee of Parliament responsible for the three Bills that are scheduled for second reading this afternoon, the first which we have just heard. When these Bills were given the First reading in the previous Session of Parliament, we requested as a Committee, the opportunity to conduct public hearings for those three bills. We were denied that facility because of financial reasons.  We met yesterday for the first time since the Parliament was adjourned and we decided unanimously as a Committee that we wanted to conduct the public hearings before these Bills were in fact considered for a second reading.

The reason for this is that these three Bills Mr. Speaker, are both complex and important from a national point of view.  The second Bill is the Income Act which is of profound interest to every Zimbabwean.

  1. SPEAKER: Order, order, restrict yourself to the Bill that has just been read.
  2. CROSS: In terms of this particular Bill, we have had written recommendations from several institutions, raising serious issues regarding the way this Bill has been drafted and requesting amendment. We do not feel competent as a Committee, having held only one short meeting on this particular subject, to pass judgment one way or another or to make recommendations to the House as to what should be our procedures from there on.  What we would like to request Mr. Speaker, is that the debate on this Bill be held over until your Committee has conducted public hearings and make its position known to the Minister prior to the Second reading.  Thank you.

THE MINISTER OF FINANCE: I think the learned hon. member should have been fair with me and had this discussion with me before standing up.  This Bill, I gave notice of it in November of last year just before the Budget.  I think for the Committee to say we have not had time to consult, I think the hon. member also needs to be alive to the thing that there is an election this year, so the luxury of public consultations with great respect, it is a sui generis here.  What I would suggest Mr. Speaker, in the interest of fairness; I defer debate to next week.  I move that the debate do now adjourn.

Motion put and agreed to.

Debate to resume: Tuesday, 14th  May, 2013.

SECOND READING

SECURITIES AMENDMENT BILL (H.B. 1, 2012)

THE MINISTER OF FINANCE:  Mr. Speaker Sir, this is a very

important amendment that we are making to our law.  It is consistent with international best practices and it is consistent with some of the lacunas and gaps we have seen in our present law, particularly around issues of insider trading.  There has been a lot of insider trading on our Stock Exchange but our law is not allowed to deal with the intricacies of white collar crimes, particularly as it pertains to dealings on the capital markets.

We are also trying to re-visit the regulatory framework.  As you are aware Hon. Speaker Sir, the Securities Commission is full of fulltime commissioners.  The Securities Commission oversees markets but there is only one market in Zimbabwe which is the Zimbabwe Stock Exchange.  So there is no justification at all of having full time Commissioners regulating one market which markets itself and has also its own internal regulations which are:

  1. The Committee of the Zimbabwe Stock Exchange; and
  2. The Board of Directors of the Zimbabwe Stock Exchange.

I am aware Mr. Speaker Sir, that we are going to set up a Commodity Exchange very soon.  So there will be two markets but that does not justify the existence of full time commissioners.  We hope the

Commodity Exchange Market will be operational in the next two weeks.  The main reasons for this is tightening up where there have been gaps particularly, omissions and commissions by stock brokers,  tightening up the regulatory framework, tightening up the issues of corporate governance and the issue on structure of the market.  So it is a very important Bill.

I want to justify the amendments Mr. Speaker and summarise what is in my lengthy prepared statement.  In the call of the amendments to the Securities Act is the recognition of inadequacy and shortcomings of the current Act which has resulted in compromising supervision and the regulation of the Securities Market.  The inadequacy of the Act has seen the regulator, the Securities Commission being challenged in the courts by some players in the market particularly the Zimbabwe Stock Exchange.  Almost every change that the regulator tries to put in place ranging from charging fees to corporate governance issues has been challenged and resisted by the market.

One of the omissions that took place when the Act was made was that if you look at the original Act itself, it is very narrow and very small but a lot of the regulation was now purportedly done in regulations like in a Statutory Instrument.  That is a problem because much of the things that are in the Statutory Instrument and the regulations are not mothered or fathered in the actual Act.  Therefore, they are ultra-vires the principal Act.  The stockbrokers have got money, they are at the Stock Exchange and they are rich people, so they have been taking the Zimbabwe

Securities Commission to court and we have been unable to function.  We want to put some things that are not in the regulations and the Act so that no one can challenge the decisions of the Zimbabwe Commissions on the basis that their decisions are ultra-vires to the Act.  That is one of the main reasons why we are coming here.

The other thing that we are also dealing with is the question on intra-sectoral challenges that have been happening.  I want to give an example of a situation we once had and it is of the Rennaisance

Merchant Bank.   The Rennaisance Merchant Bank was owned by Rennaisance Holdings and the Rennaisance Holdings owned 35 percent shares of Affre, the insurance company.  The Affre owned a significant share in the Rainbow Tourism Group (RTG) which owns among other things the Sheraton.

So when there is a collapse at the bank, it had collateral and multiple effect on all the other sectors like the banking sector, the insurance sector and the Zimbabwe Stock Exchange.  This is because the Regulator, the Securities Commission had no power to go to the insurance component.  They had no power to go to the RTG component and they had no power to go to the banking sector.  So we are now giving sweeping powers that if it is a company and it is listed, it does not matter when the commission can come into it, but notwithstanding another super regulator like the insurance regulator.  That is one of the things that we are trying to do.

Mr. Speaker Sir, we are also democratising the appointment of the commissioners to ensure that the Minister does not have the right of nominating commissioners or board members.  That they are sector generated, so the banking sector will nominate their representative, the insurance sector will nominate their representatives and the agricultural sector will nominate their representatives.  So we are diluting the serious powers of the Minister.  The bonapetite powers of the minister of appointing willy nilly the board of commissioners and allowing the sector to appoint the men and women of their choice.

However, the Minister and the Ministry will be there to ensure that there is no conflict of interest.  We have had massive conflicts of interests, just to give you one example, we had someone who was working for a listed company OK and was sitting on the board.  We kindly asked her to retire and she did not take that kindly and we have been taken to the Supreme Court.

The reality is that you cannot be a regulator and work for a company that is on the Stock Exchange.  So in this Bill we want to ensure that conflict of interest does not happen.

In short, we have a law that was designed for a very small boys club capital markets but as we saw in America with people like Madoff, the kind of shenanigans that can take place on markets are so great, so intricate, so sophisticated and our law was not equal to that.  We are now trying to modernise our law so that we can also play the games that these crooks are playing and this is what we are doing among other things.

We are also establishing sub-committees of the board.  At the present moment the Commission does almost everything.  So we are now establishing committees of the board like the Human Recourses Committee, the Audit Committee and other various committees consistent with good corporate practice.  This is the same as we did a few years ago to the Central Bank and to the Revenues.  We are also establishing an investor protection fund.  There are many companies that are listed on the stock exchange which due to our difficulties are actually collapsing.  Yesterday, we were reading the story of a company

Gulliver’s whose assets were sold.  So anyone who is a shareholder in that company stands to suffer if the company gets defaced.  So we are establishing an investor protection fund to protect anyone who is going to buy shares and participate on our Stock Exchange.  We are very proud that we are going to do that.

As we are living in an ICT era, we are also making it compulsory that any market that will under the supervision of the Securities Commission will have its trade automated.  In other words it will have its trades computerised.  There are huge challenges arising out of non automation of trades in Zimbabwe.  In fact without ICTs the whole issue for insider trading can take place and automation can reduce that.  We are insisting on compulsory automation of trades and I am glad to say that the Commodities Exchange that is coming in is already automated.

We are also re-visiting the licence system.  The current licence system for a stockbroker of a market is one year.  So, we are proposing to issue a licence in perpetuity.  In other words, once you get a licence, you get your licence but, this will not be subject and will continue to be subject to the payment of an annual fee.  However, if you commit any omissions and commissions, that licence will be cancelled.

Mr. Speaker, we are also providing for a standardised form of listing requirements.  At the present moment, listing requirements are so bificated and they are scattered across all the landscape and one of the problems which we have had in the country Mr. Speaker is that if you look at the Stock Exchange Act before it was amended in 1997, it basically provided for very minimalist conditions.  The rest was left to internal regulations of the Stock Exchange which sometimes were unevenly and unequally applied.  So, what we are now doing is that we are making it clear that if anyone wants to float a company, these are the minimum requirements that you go through – your prospectus, your AGM, the underwriting and so forth.  We are proposing to standardise

that.

I have already referred to the issue of insider trade.  This is something that we are coming down very hard on.

Hon. members, I know you have had 18 months of reading this Bill.  It is a very important Bill in terms of modernising the Act and to anticipate Hon. Cross’s argument, I am prepared again to defer debate to next week on Tuesday.  I thank you Mr. Speaker.  I now move that the debate do now adjourn.

Motion put and agreed to.

Debate to resume: Tuesday, 14th May. 2013.

SECOND READING

INCOME TAX BILL (H.B. 5, 2012)

Third Order read: Second Reading: Income Tax Bill.

THE MINISTER OF FINANCE:  Mr. Speaker Sir, this is a very important piece of legislation which is fundamentally changing the structure, the process, the substance and the output of our income tax in Zimbabwe. I want to concede that unlike the other two Bills, this is something that consultations should have taken place and if they have not taken place, I would have no objection in deferring debate on the Second Reading to the end of May or first week of June because of its importance.  This Bill Mr. Speaker, I do concede that this is a very important Bill.  It is different from the Micro-Finance Bill and the Securities Commission Bill.  This is a revolution.

It is changing fundamentally the way that the Income Tax Act is structured in Zimbabwe.  So, I will do my Second Reading but I would like workshops to be held in which our experts, some of whom are here, will participate.  We can explain what we are trying to do here.  I want to say Mr. Speaker that the basis of any tax law must be based on three principles.  The first one is that it must be simple.  Unfortunately, our current Income Tax Act is not simple at all – [AN HON. MEMBER: It was written by lawyers]-  The hon. member says it was written by lawyers.  I think it was written by accountants because lawyers would have simplified things.  So, it is not simple at all.  In fact, if lawyers and accountants say it is understandable, they are not telling the truth.  It is only a few selected accountants and lawyers who understand it.  It is not simple.  If you look at the current Income Tax Act and the draft, it is very simple.  We have tried to simplify the language.

The second principle of good Income Tax law is that it must be equitable in the sense that it must treat all tax payers equally or equitably.  Now, our current Income Tax Act is very much in favour of capital and big business in particular, very much in favour of the mining industry.  So, just to give you an example, for an individual like you and me, the upper rate of tax is between 35 and 42%.  In fact that is the effective rate.  In other words, there is no difference between the nominal rate and the effective rate but if you look at the mining sector, the nominal tax rate is 25%, but the effective tax rate is 80% because there is a huge category of tax expenditure – this allowance, this deduction and this rebate.  So, the current Income Tax Act is not equitable and we are trying to do that.

The third principle is the progressiveness of a tax regime.  By progressive, if you take the VAT or the sales tax, it is 15% and it does not matter whether you are Standard Chartered Bank, OK Bazaars, John Chibadura or Peter Dotito.  It does not make a difference.  So, the principle of progressivity is another principle that we are trying to deal with in this Bill.

         Before we drafted this Bill, I announced in the 2010 Budget Statement the appointment of a Steering Committee on Tax Reforms comprised of tax experts from Treasury, the Zimbabwe Revenue

Authority and the private sector to oversee the drafting of the new

Income Tax Act.  I am pleased to advise that in 2010, we set up this Steering Committee which comprises of some of the biggest tax minds in this country in our jurisdiction. They have worked from 2010, 2011 and 2012. For virtually three years, they have been working on this.

Hon. Chibaya your phone is ringing. – (Laughter) -. They have been working on this Bill.

Let me, on behalf of the Government of Zimbabwe and the Ministry of Finance, thank the men and women who were in this steering committee. Some of the talent that we have in this country is absolutely frightening and I had the pleasure of working with some of these people, very young people for that matter, who worked on this very complex and difficult piece of legislation. I also want to say that we were indebted by offers from so-called experts. Maybe they are real experts, across the world from Washington, Beijing, Timbuktu, people who offered to craft this Act for us and we refused. What is before you is a genuine Zimbabwean driven, Zimbabwean made and Zimbabwean crafted new Income Tax Bill. – [AN HON. MEMBER: Indigenous.] - It is very indigenous but without the application of the Indigenisation Act.

We intend to achieve the following and when honourable members debate, they must check whether any of the provisions is loyal to the following that is what we are trying to do. The first thing, as I have already said is, we are trying to simplify the language for easy of understanding on the part of tax-payers and administration by the revenue authority. Tax administration, tax practice and tax application cannot be the preserve of an elitist group of people namely; accountants, auditors and lawyers. We are trying to simplify it so that my grandmother from Dotito, my grandfather from Chiendambuya and my aunt from Nkayi can understand what we are trying to do.

We are also reviewing existing legislative provisions in line with regional and international best practice. Most importantly, we are also expanding the tax base. The essence of the current Income Tax Act where principles that were developed in 1932, that is the essence. Since then capitalism has evolved and evolved and evolved, the capacity and I dare say, the capricious capacity of business to both evade and avoid tax is unbelievable. That is why lawyers and accountants are hired to both avoid and evade tax. So it is a growing industry. The law has to catch up with the many things that are now considered normal but that are in fact either tax avoidance or tax evasion.

Part of the things that we are doing is that we are expanding the tax base by looking and revisiting some of the many loopholes that are existing in the current legislation, including the over 33 schedules of tax expenditure, in other words, deductions that are contained in the current Income Tax Act which are very complicated if you read them. They are full of formulas, full of what. In this Bill, we have tried to reduce them as much as possible and have left technical formulas in a few sections that are unavoidable, for instance, capital allowances and so forth.

We are also introducing new principles and I am now moving to that. Hon. members this is very key to understanding that. The current income tax law is based on the source principle where taxes levied on income originated in Zimbabwe, that is very clear from Section 14 of the current Income Tax Act read together with Section 7. However, in certain circumstances income was deemed to be from a Zimbabwean source especially income of a passive nature such as foreign interest and dividends, hence subject to tax in Zimbabwe.

The proposed legislation provides for residents based tax system, whereby the taxable income of a taxpayer resident in Zimbabwe is the taxpayer’s income from all geographical sources less any deductions allowed under the Act. The proposed legislation also defines what constitutes a resident company, resident and temporary resident individual, resident transit, resident partnership and non-resident. Below is a summary of selected definition.

A company is a resident company if it is incorporated or formed under the laws of Zimbabwe or its effective management and control is exercised in Zimbabwe at any time during the year of assessment, undertakes the majority of its operations in Zimbabwe during the year of assessment. This is a revolutionary thing comrades and friends. It is best practice. You are trying to deal with the many shenanigans where, and I will not mention companies by name but they are there in the banking sector.  They are notorious in the mining sector, some are even bigger than Mbada, where taxes manipulated purely on the basis of source and we are dealing here with the issue of residents, the effective control.

In other words, where is the income? Where is the wealth and where is the surplus being generated? That is what we are working on. I know when you start consulting, you are going to receive representations that; ah well, if I go to the diaspora and stay three days, am I now being punished. Those are pedestrian arguments that are being made by people who have not closely read what we are doing. When you do come across such pedestrian arguments, please ask the relevant comrades to actually read the Act.

You are also going to come across very powerful interests. My mail inbox is full of mail from some of these powerful interest groups in our country who are going to be hard hit by this revolution. Some of them have got money and can use this money very capriciously. I hope comrades, you will be very careful because this is something that is going to affect a lot of people. I know that towards an election zviwanikwa zvinenge zvave kutsvagwa, kwete nenzira idzi hama dzinodikanwa. This is very important and it is best practice. Anyone who says that the graduation from source to residents is not in the best

interest of Zimbabwe, examine what he is. He owns a big multi-national or something like that. We will not accept that.

The second thing is the movement from gross income to income, Section 22. Again the interest among other things of simplification is that we are making a clear distinction between the different types of income. We are making a clear distinction between employment income, what you earn. It is a category of income.  We are making a clear distinction. Business income, in particular, net gains on the disposal of business property. Put differently to the experts in this House, we are creating a very thin line between the capital gains arising out of the disposable of a business. We are treating that as income.

Naturally, we are going to revisit a number of Acts such as the Finance Act, Estates Act, and Capital Gains Act. We are doing it because a lot of shenanigans take place on disposal of assets. We are just saying it is income. We are also making a separate distinction on property income - net gains on disposal of investments property and then of course other income. Business income now includes previous untaxed gains from the disposal of certain assets used primarily in the production of income, mainly business property and investment property.

We are also making a restriction in allowable deduction. The New Income Tax Act proposes to restrict allowable deductions to expenses incurred in the production of income. I want to underline this because this is possibly, the Section where you are going to get more representations more than any other. The current law states that any expense occurring in business is deductable. That is a very wide definition.  Some can include curtains, lunches bought for small-houses. It is a very wide provision.

What we are seeking to do is that we are saying, show us that this particular expense was incurred in the production of surplus. So wages are there, raw materials are there. There is a fear which is unfounded that we are going to discount certain things that are not directly but indirectly involved. For example, the motor vehicle allowance of a chief executive is not directly engaged but in our view it is so proximate that it can be allowed in the profit and loss account. We are not seeking to create income tax revolution but we are seeking to curb the many excesses that are being done by our people.

This particular provision has been interpreted and there are countless tax judgments that will be able to guide between that which is  excessive and that which is not excessive.  I want to assure you Hon. Cross and others that this one Section you are going to have a disproportionate number of alarmist representations. Our intention is not to kill business. Our intention is to ensure that what belongs to Caesar gets to Caesar. It is a very important provision.

The Bill also seeks to provide clearer distinction between deductions from income that of a technical nature closely related to the production of income in question and those that are tax expenditures. The Bill will also deal with the issue of double taxation. The normal provisions for avoidance of double taxation will continue to apply so that a resident of one contracting party will not be taxable in the other contracting party, on business profits unless it operates in that other contracting party through a permanent establishment.

In instances where no avoidance of double taxation agreements exist, companies are taxed in the country of actual residence and in Zimbabwe. However, the tax in the country of actual residence will be allowed as a credit. In instances where the tax rates are equal, that is in the country of residence and in Zimbabwe, no tax liability arises in Zimbabwe.

Here, we are addressing the biggest fear of the migration from source to residence, that you are going to tax us double. We are very clear that there are instances where there are double taxation agreements like we have got agreements with South Africa, Mauritius, Kenya and we are currently negotiating with Seychelles  and so forth. Where there are not there, the standard thing applies that is to say, in instances where we allow actual residents as a credit. That is what we will do.

Another area I want to deal with is the income tax base. The income tax base has been rearranged in terms of taxable income earned by a resident, non-resident, company, miner, trust, insurer, and petroleum operator for ease of reference. If you are in any of these categories, it is actually easy to go and see what the law says in respect of your industry.

All businesses other than life insurance will be taxed on the same principles. However, Special Mining Lease Operators will continue to be taxed on the basis of special provisions contained in the respective agreements. The reason why we did this is that with mining, the President issues special grants in terms of the Mines and Minerals Act and this special grant by operation of law normally contain certain special provisions that are in there. We have not interfered with that.

Allow me Mr. Speaker Sir, to speak in greater detail on taxation of net gains from the disposal of business and other assets. Under the current legislation, taxation of capital gains or losses is restricted to specified assets, that is, immovable property and marketable securities which are taxed under the Capital Gains Tax Act. However, under the proposed Income Tax legislation, all capital gains or losses on the disposal of business assets will be subject to income tax unless specifically excluded by the regulations. Disposal of assets includes sale, donation, loss or destruction of an asset.

The capital gain on disposal of an asset shall be the difference between the proceeds from disposal and the cost base of an asset. A capital loss on the other hand is equal to the amount by which the cost base of the asset exceeds the proceeds. This eliminates provisions relating to recoupment and scrapping allowance.

The cost base of an asset (Income Tax Value) is generally the expenditure actually incurred on acquiring the asset including the expenditure directly related to the acquisition or disposal of that asset or to improve the asset. A new concept on the taxation of gain and deduction of losses arising from the disposal of business and investment assets has been introduced. Previously, any gain above recoupment was disregarded for income tax purposes.

It is not Greek what I am saying. If you read the provisions, you will see how simple we have tried to make some of these principles. The Bill will also abolish the Special Court for Income Tax Appeals while retaining the Fiscal Appeals Court which will now become the Appellant Court for first instance of income tax appeals. This is very important because of the delays.

We have also tried to reduce instances because the Fiscal Appeals Court is almost on par with the High Court. We have reduced instances of delays where the internal system is adjudicating which often at times causes delays and abuse because so much discretion is given in the tax administrators. That is why we are doing that.

Generally, we are updating and modernising of outdated terms to take account of contemporary developments in the field of income taxation such as the change over to the accrual basis of accounting. Over and  above the new concept, the Draft Income Tax legislation retains most of the provisions of the current Income Tax Act save to say that we have reworded the language to make it simpler, sexed it up, if you like.   However, the Draft Income Taxation modernises the money taking into account the relevance of existing cases which form the basis for interpretation of some of these provisions. Hon. Speaker, I intend to introduce some amendments during the Committee Stage after the Second Reading which takes into account some of the representations which I have already received. I want to say that on some of the key principles, we cannot accept because it will destroy the essence of what we are trying to do. For instance, trying to persuade us to retain the current source based method of calculating tax.

There are also other areas Hon. Speaker which will come with amendments in the Second Reading. This is the area in particular of Insurance Taxation. Insurance Taxation is very complicated. What we deliberately did was to retain the current status quo because we got to a stage that if we were waiting for this bill to be perfect, we were not going to present it. We have experts working on that and we hope that by the time of the Second Reading, we will come with a schedule that is going to deal with the complicated issue of taxation of the insurance sector.

There are one or two other areas Hon. Speaker that we are also working on which when you start your consultations, they will become self evident to you. My failure to mention them here is not an accident. It is deliberate understanding that because of the complexities of this Bill, consultations have to take place and certain amendments will be made in the Second Reading. As I said, there are certain things that we will not compromise on, which are the issues around Section 35 and the issues around the sacrosanct principle of residence based taxation. With those few words Hon. Speaker, I respectfully and humbly move that the Bill be now read a second time, subject to the consultation issue.

Motion put and agreed to.

THE MINISTER OF FINANCE:  I move that the debate do now

adjourn.

Motion put and agreed to.

Debate to resume: Tuesday, 3rd June, 2013.

  On the motion of THE MINISTER OF FINANCE, the House

adjourned at four o’clock p.m.

 

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