Tax regime: targets, efficiency, spreading burden

Beating targets, meeting projections and achieving goals is what every planner would die for. Apparently the Malawi Revenue Authority (MRA), the country’s tax collector is always over the moon, atleast since July 2012 when the revenue collector started publishing its monthly reports. However the targets are achieved regardless of the country’s thin tax base.

Beating projections

MRA, according to its latest revenue outturn, collected K29.09 billion in August which is approximately 12 percent above its August projection.

The tax collector argued that the beating of the targets was due to the strong performance in the high revenue collection reflected in the strong growth in Pay As You Earn (Paye), withholding tax and Value Added Tax (VAT). The tax collector further argued that the good economic performance hinged on the fuel availability in the country and capacity utilisation by the industry.

In August, according to the MRA figures, local excise exceeded the monthly target by about 22 percent due to increased domestic production of excisable goods.

However on the contrary, the figures indicate that import excise was about 19 percent below the month’s projection due to a reduction in the value of imported excisable goods.

Looking back, since the tax collector started publishing its revenue outturn, the tax body collected K276 billion beating its revised target by K21.88 billion between July 2012 and June 2013.

Specifically, MRA collected K129.3 billion about 47 percent from income and profits, K110 billion from goods and services, and K32.8 billion from international trade.

Rising grants, widening deficits

Regardless of beating of targets, the country’s reliance on donors has not been falling while deficits, the difference between expenditure and revenue has been increasing.

As indicated by Ministry of Finance financial statement, the 2013/14 fiscal deficit was estimated to hit K18.2 billion, 35 percent up from K13.5 billion gap projected mid-year necessitating the government to borrow.

The Ministry of Finance financial statement also estimated that the deficit will balloon at the end of this year and widen further next year.

According to the 2013/14 Budget statement donor grants stand at K240.3 billion, representing 40 percent of total revenue and grants, while the annual deficit is projected at K34.8 billion up from K18.2 billion last year.

The 2013/14 proposed budget puts donor grants at 40 percent of the total of domestic revenue plus grants, up from 31.5 percent in the initial 2012/13 budget which was however revised to 39.6 percent in midterm budget review.

Beating fraudsters, increasing revenue

In a bid to increase revenue and beat fraud, recently MRA launched the scanners five scanners.

According to MRA the scanners will be used for both imports and exports to determine what type of cargo is entering or exiting the country.

The scanners would therefore reveal whether the transporter is carrying some undeclared goods or that the goods are more than the declaration made.

MRA noted that the scanners would impact on MRA’s operations as it is expected to contribute towards increased revenue collection as ordinary goods can pass through customs unnoticed without any payment of tax in the absence of the scanners.

The tax body also recently announced that it would avail an opportunity to tax defaulters to pay their taxes under a Voluntary Compliance Window (VCW) without being penalised through interest and criminal prosecution.

According to MRA, the window will run for three months from November 1 2013 to January 31 2014 in which tax defaulters would pay their taxes without paying interest and penalties, or any charges with regard to late submission of returns and criminal prosecution.

MRA commissioner general John Biziwick announcing the window noted that through the window, the tax body will make tax administration in Malawi fair and equitable by drawing more tax payers into the net.

Apart from the scanners and the VCW, the revenue authority also announced that it will introduce an electronic fiscal device (EFD) for VAT which will replace manually generated receipts and invoices to increase compliance and revenue collection.

Apart from increasing tax compliance, the new system, will reduce cost of records management will enhance easier data analysis and intelligence for future planning.

Spreading the burden

The increasing tax revenue at least in nominal terms , burdens a few as shown by reports and argued by experts.

In August this year individual income tax (largely Paye) contributed about 24 percent of the total revenue for the month.

The report indicated that corporate tax contributed only 3.2 percent while withholding tax contributed slightly above 13 percent of the total August tax revenue.

The analysis further revealed that VAT contributed 36 percent; excise duty 11 percent and international trade 12 percent to the total tax revenue collected in August.

On how the authority is increasing the country’s tax base, MRA marketing communications manager Wilma Chalulu responding in an e-mail on Tuesday noted that to ensure incorporation of the informal sector into the tax net, the authority has intensified taxpayer education among small and medium enterprises (SMEs).

“The Authority is also in the process of mainstreaming taxation issues in business manuals to enable as many businesses to learn more about taxation at the beginning of their businesses. MRA has also intensified inspection of business on a door to door basis to ensure that those not registered are brought into the tax net and pay their fair share of taxes due to Government. Another initiative that will be introduced specifically for bringing the informal sector into the tax net is the Withholding Tax on Imports scheme. This scheme has been approved by Parliament and the Authority is now working out modalities of implementation,” said Chalulu.

However, Malawi Economic Justice Network executive director Dalitso Kubalasa in an e-mail on Tuesday noted that there is so much Malawi must do in the quest for efficiency and effectiveness in our tax regime.

“We need to First of all ensure that the linkages are clear between taxes paid and the services provided to citizens between tax reforms and positive gains and losses and their impact These will help efforts at changing the mindset to boost ownership and willingness of stakeholders to be a part of the progressive agenda.

Authorities must also address tax evasion, especially in our case where the informal sector is huge and is yet to be brought into the tax net.

We need to develop fair procedures to ensure tax compliance by all tax payers, without just burdening the few compliant ones,” said Kubalasa.

But Chalulu noted that targets are based on business research, economic trends and Government’s development agenda and comes up with the annual targets after consultation with various stakeholders including the International Monetary Fund (IMF).

“Exceeding targets is a reflection of several factors including enforcement drives by the authority and changes in the economy that result in increased economic activities. MRA will implement timely tax audits and investigations just to ensure that the right amounts of revenues are remitted. The Authority is also introducing a number of initiatives through the modernisation programme with a view to improve service delivery including the introduction of electronic banking, destination inspection, risk management and cargo scanning,” said Chalulu.

However, Kubalasa noted that government must also undertake efficient management of the tax system which will most importantly bring confidence and trust in public finance management, as government does everything to take further steps to equitably broaden the tax base.

He argued that Malawi needs to urgently continue building transparent practices in reporting the flow and use of such revenues to encourage stakeholders realise the common good of taxes.