The African Development Bank (AfDB) says some mild and gradual adjustments in income tax and value added tax (VAT) rates could significantly improve Malawi’s debt ratio trajectories, especially in the medium to long-term.
In its paper titled A DGE Model for Growth and Development Planning: Malawi published last week, the bank said adjusting income tax and VAT rates by about five basis points from 15 percent to 15.5 percent and from 16.5 percent to 17 percent respectively, could help improve consumption expenditure and control inflation.
Reads the paper in part: “The effects of combining the public investment scaling up with fiscal adjustments in the form of changes in tax rates, reductions in government transfers, and reductions in government consumption are encouraging.
“Fiscal adjustments, particularly consumption expenditure related adjustments, in addition to supporting sustainable debt profiles, also help to control inflation. Inflation is about four percentage points lower when there are fiscal adjustments than when there is fiscal inertia.”
The development comes in the wake calls from various groups to either reduce VAT on bread and utilities, as well as against an outcry from the private sectors on taxes increase relief during the 2019/20 financial year.
Figures provided by the Institute of Internal Auditors Malawi (IIA-M) show that VAT in Botswana is pegged at 12 percent, 15 percent in South Africa, Zimbabwe and Swaziland while in Kenya and Zambia it is at 16 percent.
In Tanzania and Rwanda, VAT, which is a consumption tax placed on a product whenever value is added at each stage of the supply chain, is at 18 percent, which is higher than in Malawi.
Malawi Confederation of Chambers of Commerce and Industry (MCCCI) head of real sector and macroeconomic policy Hope Chavula recently said, the chamber believes, the tax system should support economic growth and not disrupt business activities.
“Government should plan to obtain more revenue from the introduction of new businesses and growth instead of existing ones and not increase tax. The private sector needs fiscal space to develop such as tax breaks as incentives under specific conditions,” he said.
IIA-M immediate past-president Thokozire Kuwali said at 16.5 percent, the VAT rate in Malawi is high compared to other neighbouring countries.
Said Kuwali: “While we agree that VAT has some advantages when compared to other tax instruments prevalent in developing countries which is explained by its widespread adoption around the world, the advantage outweighs the disadvantages where VAT rate is high as it decreases people’s disposable income.
“The low-income earners are the most disadvantaged when it comes to making ends meet.”
Minister of Finance, Economic Planning and Development Joseph Mwanamvekha is expected to table a new financial plan next month.
He earlier indicated that Treasury will have to evaluate the proposal before a decision is made to balance the budget in terms of revenue against expenditure.