GOVERNMENT has moved to plug loopholes in the utilisation of the Clothing Manufacturers’ Rebate (CMR) after some players in the garment making sector were found to have abused the facility over the past six years resulting in the State losing millions of dollars in potential tax revenue.
Finance and Economic Development Minister Professor Mthuli Ncube said although the facility had assisted manufacturers to reduce production costs making local apparel competitive on the export market, some beneficiaries of the scheme were undermining tax revenue and distorting both national and regional value chains and linkages through various malpractices. These included the disposal of fabrics intended for value addition on the domestic market and transfer pricing.
The decision by Government to find ways of curbing the abuse of the facility follows revelations that some clothing manufacturers were using transfer pricing, under-invoicing and incorrect declarations to evade local taxes while taking advantage of preferential trade agreements to realise huge profits in regional markets.
Prof Ncube said Government decided to take action after allegations of malpractices were raised against some beneficiaries.
“In light of the seriousness of the allegations, Zimra will undertake a comprehensive Post Clearance Audit on utilisation of the facility by beneficiaries in order to inform Government on appropriate measures to address the malpractices,” he said.
Prof Ncube said inputs worth US$43.9 million (ZWL$413 million) were imported since inception of the rebate facility in 2013, while revenue forgone to the fiscus amounted to about US$14 million (ZWL$131 million) as at April 2019. In order to resuscitate the clothing value chain, Government initially granted the rebate on selected imported fabrics for use in the manufacture of clothing for a period of one year.
The rebate facility, which is due to expire this year after benefiting more than 50 companies, has been renewed over the years after taking into account developments in the textiles and clothing industry.
Materials eligible for the rebate are from man-made yarn and include denim, cotton sewing thread, woven fabrics of polyester staple fibres, chenille fabrics, tulles and other net fabrics. The fabrics are kept in bonded warehouses from where they are withdrawn under the supervision of Zimra as and when they are required for use. An investigation into the conduct of some of the beneficiaries revealed that some companies were misrepresenting to Zimra, the amount of materials needed to make apparel.
In one case, a company lied to Zimra that it was using 12 metres of cloth to manufacture one worksuit when it was actually using only 2,7 metres. This meant material withdrawn purportedly to make a single suit was actually enough for four units. In another case, one of the country’s major garment manufacturing companies made work suits at an average cost of US$9 per unit which were surprisingly exported to South Africa for $6, way below the production cost.
Further investigations revealed that the “exported” work suits had simply been moved to a sister company in South Africa, which later sold each unit for R250 after being accompanied by Sadc and Comesa certificates, which exempted the Zimbabwean entity from paying duties for exports into the South African market.
With the minimum monthly wage for the industry pegged at ZWL$237 beginning April this year compared to the R3 500 ($2,124) awarded to South African workers in January, the company realised super profits after benefiting from the very cheap local labour and duty exemptions in Zimbabwe and South Africa.
“While there is absolutely nothing wrong with local companies exporting goods and making huge profits, it becomes worrying when the companies deny the Government its dues by evading tax.
“When a company purports to export a product at a price below the manufacturing cost, something doesn’t add up and suspicion must be raised. The Government needs to investigate who the companies are exporting to because it has become clear that some of them engaging in transfer pricing and exporting to their companies domiciled in other countries. When this happens, the profit remains resident outside the country and this effectively means money would have been externalised,” said a source close to the investigation.
“What is unfortunate is that some of the companies benefiting from statutory instruments are constantly hiking prices and compromising the popularity of the very Government that sought to bail them out.”
Indications are that some players in the industry have been importing material that is locally available and later producing garments for the international market, a development that is threatening to destroy downstream players such as cotton farmers, ginners, spinners and weavers.
Some of the locally produced fabrics that are being imported include cloths for protective clothing and T-shirts. Three years ago Zimspin, a local producer of fabric, had plenty of stocks but ended up selling the material at a loss for $1 instead of $2,95 owing to a glut of cheap imports.
Zimbabwe Textile Manufacturers’ Association president, Mr Admire Masenda, recently said they were not aware of any companies abusing the CMR, but said authorities should come down hard on anyone breaching laws and regulations.
“By introducing the CMR, the intention of the Government was to help local clothing manufacturers to be competitive in the region. We have not received reports on anyone abusing the rebate but it is possible for some to be involved in such things as under-invoicing and false declarations,” said Mr Masenda.
Zimbabwe Clothing Manufacturers association chairman Mr Jeremy Youmans said it was possible for some companies to abuse the CMR by selling imported fabrics on the local market instead of making them into garments.
“I am not aware of any malpractices but if there is anyone abusing the CMR, we will certainly report them to Zimra,” said Mr Youmans.
Cotton Company of Zimbabwe managing director Mr Pious Manamike said Government needs to tighten controls to ensure that there was no abuse of any facilities by industry players. Another industry player Mr Kingston Mhako opined that the Government could remove the statutory instrument in question to ensure that importers paid the right duties and then give incentives to exporters upon presentation of the necessary documents showing that all transactions were above board.
“We can have a situation where exporters apply for a duty drawback from Zimra who will then refund any duties after being satisfied that imported materials were subsequently exported,” said Mr Mhako.
Duty drawback is the refund, reduction or waiver in whole or in part of customs duties assessed or collected upon importation of an article or materials which are later exported.