Increase VAT to cushion poor—Mejn

Under two signposts on the paved roadside in Lumbadzi, Dowa District lies a pyramid of shrinking vegetables that twinkle at the flash of thunder from the darkening clouds.

Its owner, 65-year-old Ackwell Chikamgwera is coiled under a nearby tree looking frail and lost in a puzzle of thoughts.

Asked on Saturday about the status of his business, he fixes his gaze at the sun sinking below the horizon and responds,almost inaudibly: “It’s a very bad day. I have only sold okra worth K400.”

On a brighter day, Chikamgwera, who resides in Phatisa Village, Traditional Authority Chimutu, Lilongwe, says he makes up to K2 000.

Having spent a good part of the day hungry, he has just spent part of his day’s earnings on fritters. By his admission, that is a misallocation.

“I was hungry and I had no choice. But, whatever I earn, I am supposed to spend a kilogramme of flour so I can eat with my family,” reveals the widower, who looks after his child and two orphaned grandchildren.

He discloses that his family eats once a day, mostly in the evening after he retires from his hand to mouth business.

Despite being ultra poor, Chikamgwera reveals that he has not benefited from any social protection intervention.

“In the past two years, I was overlooked in social cash transfer and relief food. What I was told was that the money and maize were not enough,” he says.

Summing up his disappointment, he adds: “It hurts because I deserve it. I am old and poor.” Life would be miserable for him if he is not bailed out.

Chikamgwera would love the proposal of a one percent increase on value added tax (VAT) that Malawi Economic Justice Network (Mejn) has made to expand the social protection (SP) budget.

Such a move, Mejn has calculated, would raise funds that could stretch the K232 billion which the Ministry of Finance and Economic Affairs has allocated to SP in the 2024/25 National Budget.

The civil society organisation’s recommendation is part of its Policy Review and 2024/25 National Budget analysis focused on social protection policies in education, agriculture, health and extractive sectors.

Presenting it to the related parliamentary committees in Lilongwe on Thursday, Mejn consultant Christopher Mbukwa said: “The allocation to social protection through the national budget has increased from K130 billion to K232 billion in 2024/25

“This allocation is likely to improve gender equality (economic empowerment).  However, despite the increase in social protection spending, it still falls short of the regional average.”

Mbukwa said the adjusting VAT would secure long term financing of SP which currently heavily relies on donors. VAT is consumption tax on goods and services which is currently at 16.5 percent.

“There is also a sustainability issue considering that government funds carter for around five percent only. As a country, we need to develop and implement a comprehensive social protection long- term financing strategy,” the Mzuzu University economics lecturer said.

The SP measures include social cash transfers to the ultra-poor and labour-constrained households and provision of public works whose total beneficiaries is around 1.1 million households or 3.6 million people, according to the Mejn analysis.

Some lawmakers argued in their contributions that increasing VAT would increase the tax burden on Malawians, but Mejn board member Andrew Kumbatira said the one percent cannot disrupt a majority’s income.

“And again, it is the responsibility of all of us to support each other. Our main concern is those that are very poor, those that cannot fend for themselves.

“We think that we all have a duty to them and this is our humble request that we are presenting,” he said.

Wisdom Mgomezulu, an economics lecturer at the Malawi University of Business and Applied Sciences, warned in an interview on Saturday that increasing VAT without thorough assessment may lead to the government eroding its tax revenue base.

“When taxes go up, we expect prices to go up. How that behaves depends on two things; whether the goods are elastic or inelastic.

“We may end up collecting less tax because consumers might decide to stop purchasing elastic commodities which they feel they can do away with,” he said.

Mgomezulu also feared that the increasing VAT may hurt the very poor people as they may end up spending more on taxes than the safety nets they receive.

In her remarks, the Budget and Finance Committee of Parliament chairperson Gladys Ganda supported the findings that funding towards social protection is low.

“For argument’s sake we are allocating $20 (K34 000) per person which is not good enough. While resources are limited, there are so many ways we can handle that. One of them is the proposal to increase VAT

“If government is able to raise that, we should be able to cater for the social protection programmes such as having enough fees for needy students.

“That’s an issue that we need to look into and we need to do a thorough cost benefit analysis because we can’t just be raising the taxes unnecessarily,” she said.