Malawi warned on tax rate increase

Against a backdrop of donor aid freeze and an increased national budget, Malawi Government has been cautioned not to increase tax rates as that would reduce the private sector’s competitiveness and economic growth.

Donors suspended aid to Malawi in November last year due to the Cashgate which has created a big gap in the country’s fiscal plan, which draws about 40 percent from the development partners.

Recently, Minister of Finance, Economic Planning and Development Goodall Gondwe was silent on whether the government would raise tax rates or introduce new ones when he announced that this year’s budget would rise to K743 billion, a 16 percent jump compared to last year’s K638 billion.

Gondwe admitted that the government is struggling with the budget amid aid freeze and mounting domestic debt and arrears.

But in a telephone interview on Wednesday, Chancellor College professor of economics Ben Kaluwa warned government against raising tax rates, arguing it would negatively affect the competitiveness of the local industry and economic growth.

President Peter Mutharika earlier said the government targets to achieve a 7.5 percent GDP growth rate over the next five years compared to last year’s 4.4 percent.

However, Kaluwa pointed out that apart from stifling economic growth, tax revenue may fall if rates are increased beyond an optimal level.

“I would not recommend the government to increase tax rates. I would encourage the government to increase the tax base by formalising the informal sector so that it pays taxes,” said Kaluwa.

He also urged government to look at the long-term implications of taxes on investment and economic growth.

This week Malawi Revenue Authority (MRA) announced that it has set K492 billion tax revenue target for this year, a rise from the previous’ K345.11 billion target and an actual collection of K394.1 billion hoping on factors including an increased corporate tax revenue.

Earlier secretary to Treasury Newby Kumwembe said that the government plans to broaden the revenue base by, among other things hiking government user fees, fines and levies.

However, in an interview on Wednesday, Ministry of Finance spokesperson Nations Msowoya said although the government intends to increase some of the fees and fines, it will promote some sectors to prompt economic growth.

“Specifically the government will support the cotton production including its backward and forward linkages.

“The government will also support agro-processing, manufacturing and value addition. The support will either be in direct financing or fiscal policy,” said Msowoya.

He, however, added that the government is aware of the current budget constraints and said there is a limit to how much the government will support the sectors.