The Covid-19 pandemic undoubtedly ravaged most businesses around the globe. Amongst the most hit, is the tourism and hospitality sector which largely depends on local and foreign guests. Due to local and international travel embargoes the hospitality sector was brought on its knees. Accordingly, as a way of incentivising and alleviate the tax burden on hotels, motels, lodges, Inns and other hospitality players the government through Statutory Instrument (S.I.) 87 of 2021 exempted VAT on some goods and services offered by these operators.
The S.I. 87 of 2021
Basically, the S.I. exempted VAT on several services offered to domestic tourists by the tourism and hospitality players. Specifically, the exemption applies on:
- Food and beverages served at places of accommodation
- Shuttle services
- Car rental services
- Sport fishing
- Safari operations
- Touring and exploring national museums and monuments and
- Recreational activities provided by companies registered with Zimbabwe Tourism Authority (ZTA)
Accordingly, any other goods or services which fall outside the above stated list are basically subject to VAT at a standard rate of 14.5%, unless they inherently qualify for zero rating or an exemption. The S.I. further provides that a domestic tourist includes ‘any person who visits but does not sleep over at the place or in the area visited.’ This implies that domestic tourist includes both local and foreign visitors however, on the condition that accommodation is sought outside the place or area visited.
Enter Exemption
The S.I. stipulates that the exemption is valid for 12months from the day it was published i.e., 26 March 2021. Consequently, it is due to expire on the 25th of March 2022. Now looking at some of the specifics in detail, it is key to note that food and beverages qualify for the exemption only if they are served at a place that also offers accommodation services. Conversely, the exemption is not applicable to food and beverages served exclusively at sit-in restaurants or retail outlets i.e., where there is no place of accommodation. Additionally, any other recreational facilities other than shuttle services, car rental services, sport fishing, safari operations, touring and exploring national museums and monuments qualify for the VAT exemption only if they are being provided by an operator registered with ZTA. Technically, should the government not extend the exemption, all of the goods and services listed above will revert to the default standard rate of 14.5% with effect from 26 March 2022.
Where such supplies qualifying for the VAT exemption constitutes more than 10% of the operator’s revenue, input tax attributable to such supplies technically becomes a prohibited claim. Consequently, an apportionment of any input tax that cannot be directly allocated to either taxable or such exempt supplies is required to determine the prohibited portion. Conversely, where the exempt supplies are less than 10% of the total revenue an apportionment of the input tax is not required i.e., claim 100% input tax. However, it is of paramount importance to note that the exemption is only applicable if the guests i.e., domestic tourists, do not sleep at the visited hotel, motel, lodge etc or even in the area visited. Technically, such a requirement is difficult to administer or enforce from both the tax collector and business operator’s perspective. For clarity, let us assume that a person visits Harare and buys food at Hotel A and sleeps at Hotel B when both hotels are in Harare. Hypothetically, Hotel A is supposed to charge VAT at 14.5% as the visitor slept ‘in the area visited.’ However, from a practical business perspective, Hotel A will not charge VAT on the food to the visitor as it qualifies as ‘food served at a place of accommodation’ and the visitor i.e., the domestic tourist, did not sleep over ‘at the place’ visited. In essence, the definition of a domestic tourist is not practical and brings ambiguity in the business scope.
Conclusion
The exemption mainly benefits the tourism and hospitality players and it expires on the 25th of March 2022. Hence, it is key for these industry players to properly account for VAT on the qualifying supplies. As alluded to above, where such goods and services (qualifying for exemption) constitute more than 10% of the total revenue input tax might need to be apportioned to determine the non-claimable portion. As an addition, where VAT is charged on a supply which is supposed to be exempt, such VAT technically becomes due and payable to ZIMRA.
