Tax incentives not strategic—expert

Taxation expert Misheck Msiska has faulted the Malawi Government for lacking strategic focus in providing tax incentives that could turn around the country’s ailing economy.

He was commenting on the United Nations Children’s Fund (Unicef) analysis which indicates that Malawi has been losing tax revenue through value added tax (VAT) exemptions that give greater benefits to households that spend more while poorer households receive a smaller share of the relief.

Msiska: There is need to provide incentives strategically. | Nation

Malawi and the International Monetary Fund (IMF) estimate the country’s VAT policy gap at 2.8 percent of the gross domestic product (GDP) while Unicef estimates that recovering half of the gap can generate revenue equivalent to 1.4 percent of GDP, or about K20.8 billion.

In an interview on Sunday, Msiska advised the government to strike a proper balance between the country’s revenue needs and investment into future revenue requirements.

He said: “There is need to provide incentives strategically only into sectors that would help the economy to grow and encourage exports following up on sectors into which the incentives have been poured to clear any hurdles and bottlenecks faced in registering and doing business.

“There is also need to ensure that standards are met for both local and international demand.”

The Unicef analysis on VAT base rationalisation contained in the Sustainable Financing Strategy, a document prepared by the Ministry of Finance, Economic Planning and Decentralisation, indicated that only 44 percent of household consumption is subject to VAT while 40 percent of the VAT base is entirely exempt and another 14 percent is zero-rated.

The analysis further noted that many of these exemptions are typical of VAT regimes internationally, reflecting administrative necessity, in the case of financial services, or the broader social objectives of government, in the case of food, health services and education.

Reads the analysis in part: “Peer reviewed research by the UK’s Institute for Fiscal Studies spanning six low-income countries suggests that while preferential VAT rates benefit people living in poverty, they are not well targeted towards poor households.

“This is primarily because higher consumption households spend more on exempt and zero-rated goods and, therefore, accrue a greater share of the benefit.”

The Government of Malawi’s Domestic Revenue Mobilisation Strategy 2021-26 includes a commitment to reduce the number of VAT exemptions and zero rated goods.

This commitment was also reiterated under the November 2023 four-year $175 million (about K306 billion) Extended Credit Facility with the IMF where the conditionality included commitment to repeal VAT relief on motor vehicles for privileged individuals and groups, ensuring that supplies of a motor vehicle would be standard-rated for VAT purposes and elimination of VAT exemptions on business inputs and building materials.

Minister of Finance, Economic Planning and Decentralisation Joseph Mwanamvekha earlier said the increase in revenue forgone through tax incentives and exemptions had outpaced overall economic growth, making it necessary to assess whether the measures are delivering the intended benefits.

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