Africa-Press – Malawi. The International Monetary Fund (IMF) has cited widespread use of tax incentives and exemptions as one of the key impediments to Domestic Revenue Mobilisation.
The revelation comes at a time Malawi has been struggling to raise enough revenue to meet its growing budgetary needs, forcing authorities into heavy borrowing to finance the gap.
In its Article IV Consultations Report released last week, the Bretton Woods institution says Malawi provides various tax holidays, preferential tax rates, and allowances, which are often poorly targeted and inefficient.
These incentives, the fund says, while aimed at attracting investment, frequently result in substantial revenue losses without significantly boosting economic activity.
“These measures reduce the tax base and create loopholes for tax evasion and avoidance, allowing importers to exploit provisions to reduce their tax liabilities.
“In countries where tax legislation grants Ministers discretionary power to provide tax exemptions, the management of these regimes, particularly in strategic partnerships, can lead to opportunities for preferential treatment and lack of transparency,” the report says.
The report further says arbitrary tax policies also undermine the rule of law by fostering inconsistent enforcement, thus weakening taxpayer confidence.
According to IMF, the main tax incentives and exemptions are in the areas of corporate income tax; value-added tax and withholding tax.
In terms of VAT, the report says zero-rating occurs when a tax rate of zero is applied to sales, allowing business to claim credits for taxes paid on inputs.
It notes that in Malawi, there are 18 zero-rated supplies, adding that the current zero-rate applicable to building materials is a large tax expenditure, accounting for 0.17 percent of GDP:
“(i) exemptions means no tax is charged on sales, but businesses cannot claim input tax credits. There are 21 exempt supplies in Malawi. Within the exempt supply of industrial & construction machinery, there are 55 sub-categories of exempt supplies.
“In sum, only 44 percent of the VAT base is subject to the standard rate under the existing VAT framework, while 40 percent is exempt and 14 percent is zero-rated. The limited VAT base significantly constrains Malawi’s ability to generate additional tax revenue, particularly from the informal sector,” the report says.
On withholding tax, the Fund says while the tax is an effective measure to reduce tax losses from the informal economy, its revenue potential is curtailed by exemption certificates granted to registered taxpayers, government ministries and departments, and tax-exempt persons.
“Additionally, certain imports under specific customs procedure codes and transactions with duty-free status are also exempt,” the report says.
Other impediments to Domestic Revenue Mobilisation include high degree of Informality, and limited administrative capacity.
The report says the country’s large informal sector, accounting for an estimated 40 percent of GDP, limits the tax base and makes revenue collection a major challenge.
Recently Finance Minister Simplex Chithyola Banda said the government is committed to strengthen Domestic Revenue Mobilisation as one way of bridging the resource gap.
For More News And Analysis About Malawi Follow Africa-Press
