Tax relief, yes, but who will fill the gap?

To be honest, taxes are generally faced with resentment. In fact, not many of us would want to honour the obligation given a choice.

This feeling is not peculiar to Malawi, it dates back to the Biblical days when Pharisees, in an apparent attempt to entrap Jesus Christ, asked Him whether it was legal to pay taxes to Caesar.

While the Pharisees anticipated a yes or no response, in Matthew 22 verse 21 the Bible quotes Jesus as having elaborated: “Therefore, render to Caeser the things that are Caesar’s, and to God the things that are God’s.”

In Romans 13 verses 6 to 7 in the New Testament, St Paul also stressed the need for people to pay personal and property taxes as well as to respect and honour them all as the authorities who use taxes are also working for God when they fulfill their duties.

To quote a 1789 letter from United States of America founding father Benjamin Franklin to Jean-Baptiste Leroy, “in this world, nothing can be said to be certain, except death and taxes”.

Taxes are a major source of revenue for governments across the world to finance service delivery. From road networks, hospitals and schools to justice delivery, agriculture and all, governments use money collected from taxes.

Like rain which falls and feeds crops even in gardens of non-believers, taxes benefit both taxpayers and non-payers alike. To some extent, non-taxpayers also tend to benefit more as they mostly use public services such as schools and hospitals.

Taxes are key to fostering economic growth and development which is why through national budgets such the one Minister of Finance and Economic Affairs Sosten Gwengwe is set to present on March 2 2023, taxation issues loom large and generate great interest.

During the Pre-Budget Consultation Meetings held in Blantyre, Lilongwe

and Mzuzu a couple of weeks ago, various interest groups submitted their proposals for consideration. In a nutshell, both corporate and individuals in formal employment lobbied for tax relief or incentives.

For instance, Employers Consultative Association of Malawi (Ecama) lobbied for an increase in the monthly minimum wage by at least 30 percent from K50 000 to K65 000 and also an increase in the zero-rate tax band from K100 000 to K150 000. The Institute of Chartered Accountants in Malawi, on the other hand, proposed that the zero-rate tax band should move to K250 000 in view of the high cost of living.

The Centre for Social Concern also wants the zero-rate tax bracket at K200 000. The centre argues that the cost of living was K164 000 in June 2020 when the band was last revised to the present K100 000 and in January 2023, a family of six needed K356 000 to survive in a month.

In the 2022/23 National Budget expiring on March 31 this year, Gwengwe maintained the zero-rate tax band at K100 000, but revised other tax brackets with those earning between K100 000 and K330 000 taxed at 25 percent, those earning between K330 000 and K3 million taxed at 30 percent while those earning between K3 million and K6 million are taxed at 35 percent.

National Statistical Office (NSO) says headline inflation rate increased by 0.5 percentage points to 25.9 percent in January 2023 due to a rise in non-food inflation. The going is really tough economically.

Proposals for tax relief or incentives are not a bad idea, but then when putting forward such suggestions, it would also be important to suggest alternative sources where taxes can be collected to fill the gap.

But in a country such as Malawi where tax compliance among small businesses is still a challenge, Pay As You Earn (Paye) is one surest way government collects taxes. This is why calls for a review of the zero-tax bracket will always come up every time a budget is about to be presented.

Increasing or widening the zero-tax bracket means lost revenue for Gwengwe and his Treasury team. In 2017, responding to similar calls for review of income tax brackets, former minister of Finance Goodall Gondwe said the proposal would have cost the public purse almost a quarter of tax revenue.

Malawi is in a difficult situation with high unemployment and high levels of informal sector. The corporate sector is not that broad to fill gaps in the personal or income tax, very few people are in the formal sector where they are taxed Paye while the rest pay value-added tax for goods and services consumed.

At 12.3 percent, the country’s tax to gross domestic product is one of the lowest in Africa. Thus, it would be suicidal to review tax brackets just for fun or to score political points. What is needed is a critical examination of our realities and find ways to balance between revenue for provision of public goods and services and easing the burden on the few compliant taxpayers.

Above all, the government should also be more efficient and accountable in using taxes. People will likely be more willing to pay taxes if they drive on quality roads, get the best services in hospitals, schools and others.