Govt set to reform VAT on building materials

The Malawi Government is set to implement reforms to the value- added tax (VAT) levied on building and construction materials, Ministry of Finance and Economic Affairs has confirmed.

This is one of the commitments made to the International Monetary Fund (IMF) as part of the broader economic agenda agreed under the four-year $175 million (about K306 billion) Extended Credit Facility (ECF).

These reforms are contained in the draft Bill Minister of Justice Titus Mvalo is expected to table in the fifth meeting of the 50th Session of Parliament that starts on August 26.

Ministry of Finance and Economic Affairs spokesperson Williams Banda, in an interview on Thursday, confirmed that the government has drafted the Bill, but could not be drawn to provide details.

He said the Minister of Justice will outline specific details of the Bill and which building materials will be included in the VAT reforms.

The draft Bill follows a commitment to remove VAT exemptions for building materials the Ministry of Finance and Economic Affairs made in the Memorandum of Fiscal and Economic Reforms signed with the IMF in November last year. The reform was supposed to be implemented by July this year.

Reads the memorandum in part: “We will eliminate VAT exemptions and zero-rating for business inputs and repeal the VAT relief for building materials by July 2024.”

On the other hand, the education and health sectors are expected to retain special benefits under the proposed reform and will also not apply where there is an agreement between the government and other “bona fide” institutions, according to the memorandum.

Reacting to the developments, EK Tax Consulting senior tax consultant Emmanuel Kaluluma said in an interview on Thursday that if implemented successfully, exempting key social sectors such as education and health from the revised tax measures will allow the government to boost revenue without compromising progress for human capital development.

He said: “When people buy or import raw materials to build a church or such kind of building without paying a tax, it means the government is indirectly contributing to that tax.

“Eliminating the exemption will remove that contribution and allow the government to save and collect the tax at the same time.”

But while agreeing that eliminating the tax exemption would boost the government’s fiscal consolidation strategy, economics researcher and consultant Exley Silumbu advised government to conduct a thorough study to determine the losses and gains from the move.

He said: “If the government implemented the exemptions to boost activity in the construction sector and raise its contribution to the economy, then that has to be quantified.

“It has to be checked against the potential gains the government will get if they remove the exemption.”

Silumba said while the reforms are expected to generate additional revenue, careful consideration must be given to their potential economic impacts.

 The government’s ability to balance revenue generation with economic growth will be a key factor in the success of these reforms.

The IMF’s ECF provides medium-term financial assistance to low-income countries with protracted balance of payments problems. The ECF is one of the facilities under the Poverty Reduction and Growth Trust.