What is 30% withholding Tax on Contracts?

What is 30% Withholding Tax on contract? 30% Withholding Tax is a tax withheld by the payer when they enter into a contract with a person who does not have a valid tax clearance (ITF263). This tax head is dealt under Section of 80 of Income Tax (Chapter 23:06) which stipulates that.

80 Withholding of amounts payable under contracts with State or statutory corporations
(1) In this section—
“contract” means a contract in terms of which the State or a statutory body, quasi-Governmental institution or registered taxpayer is obliged to pay one or more persons an amount or amounts totalling or aggregating five hundred million dollars more or, where the contract is denominated in foreign currency, two
hundred and fifty United States dollars or more

With effect from 1 January 2022, through the Finance Act No 7 of 2021. The withholding tax on contracts was reviewed from 10% to 30%. Payer will only withhold 30% based on annual limits as per table below.

A scenario on how the 30% withholding tax on contracts operates. If A, who does not have a valid tax clearance enters into a contract of sale to provide goods or services to B amounting to $250.00 once a year. In this case, no 30% is withheld when making a payment by B, if A fails fails to provide a valid tax clearance. However, if A, supplies B worthy $250.00 five times in a row, with in a year, with out providing a valid tax clearance. The moment A supplies goods aggregating to $1000.00, B must withhold 30% and remit to ZIMRA .

When do the payer withhold the 30% Withholding Tax on contracts?

30% withholding tax on contracts is applied strictly at the time of making payments not on the time of receiving an invoice. 30% should be withheld notwithstanding the fact that the tax clearance was valid when the invoice was received before the expiry of the ITF263 certificate. Payment means payment by cash, barter,set-off,crediting a director’s loan accounts. Payment can also be an inter-company debits and credits or by any other settlement obligations

Lack of a clearance certificate is an indication that a taxpayer’s affairs are not in order. Not having a valid tax clearance has:

• A financial bearing on operations in that it results in loss of potential revenue a time of receiving payments due.
• Though, the taxpayer has a potential to recover the withholding tax against income tax chargeable, opportunity cost foregone and the value of money in so doing that.
• If you are importing, 30% is withheld as well.

To know more about valid tax clearance certificate, https://lucent.co.zw/what-is-a-tax-clearance-certificate/tax/.