Tax Update
General domestic tax incentives

General domestic tax incentives

General Domestic Tax Incentives are accessible by every taxpayer operating as a business person or business entity. There are four General Domestic Tax Incentives in Malawi but today we will analyze only two incentives.

The first incentive allows businesses to carry forward their losses for a period of up to six years from the year in which they incurred the losses. This provision allows an investor to carry forward business losses and factor in the previous years’ losses into current years’ profits. This results in an overall reduction of the tax liability at the time the business starts making profits, hence working capital is not adversely affected.

The second incentive allows businesses to be granted initial and annual allowances at various rates besides the depreciation allowances. These are essentially Capital Allowances allowable on staff housing specifically for the agriculture sector. The operationalization of the claim is in three ways.

Firstly, Capital Allowances allow the loss of value of a business’s capital items to be treated as a current expenditure and thereby be used in the assessment of a business’s taxable income. This provision makes the loss of value of a capital item become an acceptable expenditure and is used to offset the gross profit, thereby reducing the total taxable income for Corporate Income Tax obligations.  

Secondly, there are three different forms of capital allowances, namely Initial Allowances, Investment Allowances and Annual Allowances. Initial Allowances are given to the taxpayer in the first year after the taxpayer has claimed the allowance at the end of the year upon submission of financial statements. Annual Allowance is given to the taxpayer every year from the first year for the lifespan of the capital asset. Investment Allowance is given to the taxpayer in the first year only.  

Thirdly, the business entity is supposed to submit a return of income attaching the capital allowances schedule at the end of the financial year in order to benefit from this incentive.
However, investors should note that Initial or Investment Allowances are only claimed once in the first year of use of the capital asset. Furthermore, no Investment Allowance can be claimed when Initial Allowance has been claimed. This entails that a business entity can only claim either Initial Allowance or Investment Allowance.

Investors should also note Annual allowance is claimed at the end of each year, for the lifespan of the capital asset and Investment Allowance is not applicable as a General Incentive. Next week we will look at the two remaining General Domestic Tax Incentives before moving on to the Specific Domestic Tax Incentives.

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