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Malawi Plans Expanded VAT Base In Budget

by Lorys Charalambous,, Cyprus

02 June 2016

Malawi's 2016-17 Budget, which was announced on May 27 by Minister of Finance and Economic Development Goodall Gondwe, included measures to significantly improve tax revenue collections, including by broadening the country's value-added tax (VAT) base.

Despite a continuing food crisis and sharp cuts in support from donors, and despite revenue collections having fallen in 2015-16, Gondwe projects that tax revenues will increase by 21.8 percent in 2016/17. After adjusting for a 17.4 percent inflation rate, the economy is expected to grow by 5.1 percent.

Taxes on income and profits are expected to generate 55.4 percent of total tax revenues in 2016-17 and taxes on goods and services 37.2 percent. This is despite recommendations from the International Monetary Fund in January 2016 that Malawi should shift the tax burden away from direct taxes on labor and investment. Gondwe announced that, with technical assistance from the IMF, his Ministry is reviewing Malawi's tax system.

Ahead of that review, the Budget's tax measures will begin to "broaden the tax base, improve tax administration, remove economic distortions to spur production, and encourage tax compliance, to generate more domestic resources," he said.

With regard to VAT, which "has been used in Malawi as a social security tool," he noted that "numerous exemptions and zero-ratings on goods and services have eroded the tax base and compromised revenue-generation capabilities."

Subject to parliamentary approval, the standard VAT rate of 16.5 percent will therefore be imposed on "a number of products" that are currently zero-rated or exempted, including many essential goods for low-income taxpayers. Gondwe said that these measures "will expand the tax base [and] restore the integrity of the tax system by removing distortions that favor some products against others."

VAT rules that currently act as a disincentive for mining investors will also be changed, "as a person who is engaged in mining exploration cannot to be registered for VAT" before they begin to supply taxable goods. The Government intends to amend the VAT Act to allow companies to register for VAT during the exploration phase to recover VAT.

Gondwe said this VAT measure for the mining sector will be followed by wider reform of Malawi's mining fiscal regime. Legislation is to be introduced "that aims at providing clarity in the determination of taxable incomes, incentives, and proposals, by transferring the administration and collection of royalty from the Ministry of Mines to the Malawi Revenue Authority (MRA)."

Further, he said the mining fiscal regime bill will "separate the taxation of mining projects even if the projects are owned by the same company, so that each project should pay its fair share of tax, … [and] bring transparency to the tax incentives provisions that are granted to mining investors." The new regime will also "lay bare all tax incentives, details for claiming depreciation allowances, and determination of assessable income, thereby promoting transparency and accountability," he said.

Other measures proposed by Gondwe include removing the lower corporate tax rate for insurance companies in Malawi, which has been in place since the late 1960s. The 21 percent tax rate enjoyed by insurance companies (as against the standard 30 percent rate) will be eliminated.

In like manner, Malawi will remove the tax exemption for interest income of up to MWK10,000 (USD14.10) earned on banking deposits.

Last, to encourage tax compliance in the private sector, and especially in the informal sector, it is proposed that all businesses entering into contracts with government ministries, departments, and agents will be required to first furnish a tax clearance certificate from the MRA.

TAGS: compliance | tax | investment | business | value added tax (VAT) | tax compliance | tax incentives | mining | fiscal policy | law | insurance | budget | corporation tax | Malawi | food | legislation | tax rates | tax breaks | inflation | VAT refunds | business investment | Tax

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