VAT reforms to remove distortions—Goodall
Minister of Finance, Economic Planning and Development Goodall Gondwe says government has instituted measures to restore the integrity of the tax system by removing distortions that favour some products against others.
The minister said this on Friday during the 2016/17 National Budget presentation in the context of value added tax (VAT) rated at16.5 percent having failed to live up to the expectation of being a productive, stable and efficient source of government revenue.
Said Gondwe: “One of the reasons is that VAT has been used in Malawi as a social security tool through the introduction of numerous exemptions and zero-ratings on goods and services deemed to be used by low income earners in society.
“The numerous exemptions and zero-ratings on goods and services have not only eroded the tax base and compromised revenue generation capabilities, but they have also acted as a subsidy to consumers who have purchased the zero-rated goods and services.”
He said due to government’s inability to ring-fence goods such as laundry soap, the higher income earners have also had access to zero-rated goods, which effectively means that low-income earners have subsidised high income earners.
People’s Party (PP) spokesperson on finance Ralph Jooma told a local radio on Sunday they welcome reforms on VAT, as some well-to-do people have been benefiting more from VAT exemptions on some goods as compared to the intended beneficiaries.
“The idea to zero rate certain goods on VAT was ensure that low-income earners who buy salt, for example, should benefit. However, at the end of the day, it was the rich people who were the biggest beneficiaries,” he said.
Jooma, who is also member of Parliament (MP) for Mangochi Monkey Bay, said the reforms are necessary to broaden the tax base.
Gondwe said the fallacy of exemptions and zero-ratings is that the exempted or zero-rated product or service is not really cheap as, in the case of exemptions, exempted goods or service will always come with VAT that is not claimable and ends up being passed on to the final consumer.
“In the case of zero-rated goods, delays in refunds act as a tax on the supplier of the product who may have to borrow money to pay for VAT and has to wait for months to get a refund.
“Effectively, suppliers of zero-rated products load the costs of delay in getting refunds in the prices of their goods or services, which erodes the subsidy effect,” he said.
Currently, VAT rules and regulations do not allow an investor who is engaged in mining exploration to be registered for VAT but is only eligible when they have to supply taxable goods or services
To address this situation, which the minister said has acted as a disincentive for investors, government plans to amend the VAT Act to allow the mineral exploration phase to be eligible for VAT registration and, therefore, qualify for VAT claims.
Goods that will now attract VAT will be announced by Malawi Revenue Authority (MRA) and will be effective July 1 2016, which is the start of the new financial year.
Government envisages that tax policy and administrative measures will support domestic mobilisation of money to finance more than 80 percent of its activities. n
