Malawi embarks on VAT reforms

Malawi will introduce a standard Value Added Tax (VAT) rate of 16.5 percent on a number of products which are currently zero-rated or exempted to expand the tax base and create a simple, efficient, transparent and fair tax system.  Presenting the 2016/2017 budget statement in Parliament on Friday, Finance Minister Dr. Good Gondwe said the reforms would also restore the integrity of the tax system by removing distortions that favour some products against others.

He further announced that the reforms, which will come into effect on 1st July 2016, would also remove the causes of high refund bills that the Malawi Revenue Authority (MRA) is sometimes not even able to honour.
“The comprehensive tax review also aims at rationalizing the taxation of international investment to ensure competitiveness while preventing base erosion; integrating tax policy with national development strategies; streamlining tax incentives; modernizing and stabilizing the current tax legislation, as well as eliminating obsolete and contradictory measures to provide taxpayer certainty, among other objectives,” he said

Dr. Gondwe observed that over the last decade, 32 African counties had introduced VAT as their main broad-based consumption tax.
“SADC member states are developing guidelines for VAT’s best practices. VAT has therefore gained popularity because it is considered to be a revenue-efficient tax with a self-policing mechanism through the credit method - where one’s input-tax is another’s output-tax. Some scholars have termed VAT as the workhorse for governments in domestic resource mobilization, he said.

He pointed out that the January 2016 review of the Malawi tax policy conducted by the IMF strongly recommended a shift in the reliance of domestic revenue from taxes that fall on labour and investment to taxes that fall mainly on consumption.
“Malawi’s VAT, unfortunately, has failed to live up to the expectations of being a productive, stable and efficient source of government revenue since it was introduced, on account of many reasons. One of the reasons is that VAT has been used in Malawi as a social security tool through the introduction of numerous exemptions and zero-ratings on goods and services deemed to be used by low income earners in society,” he said.

The Finance Minister said the numerous exemptions and zero-ratings on goods and services have not only eroded the tax base and compromised revenue generation capabilities, but they have also acted as a subsidy to consumers who have purchased the zero-rated goods and services.
“Due to our inability to ring-fence goods such as laundry soap, the higher income earners have also had access to zero-rated goods. Effectively, low income earners have subsidized high income earners. The fallacy of exemptions and zero-ratings is that the exempted or zero-rated product or service is not really cheap as, in the case of exemptions, exempted goods or service will always come with VAT that is not claimable and ends up being passed on to the final consumer.

“In the case of zero-rated goods, delays in refunds act as a tax on the supplier of the product who may have to borrow money to pay for VAT and has to wait for months to get a refund. Effectively, suppliers of zero-rated products load the costs of delay in getting refunds in the prices of their goods or services, which erodes the subsidy effect,” he said.

Dr. Gondwe also proposed amending the VAT Act to allow the mineral exploration phase to be eligible for VAT registration and, therefore, qualify for VAT claims. He observed that the mining sector had been gaining prominence in Malawi as evidenced from the growing exploration appetite and the increase in the number of exclusive prospecting licenses awarded.
 
He said currently the VAT rules and regulations do not allow a person who is engaged in mining exploration to be registered for VAT.
“A person is eligible for VAT registration only when he has begun to supply taxable goods or services. Mr. Speaker, Sir, as you are aware, it takes time for a mine to be operational and during exploration phase, a miner (prospector) will have incurred VAT which he is not able to claim because he is not registered for VAT,” he observed.

He said the proposed amendment of the VAT Act will not only relieve a VAT cash flow burden on miners, but will also act as an incentive in the mining sector and this is likely to spur the mining industry to greater heights.

By Wadza Otomani