The World Bank has said Malawi’s tax regime remains prohibitive to attract meaningful foreign direct investment (FDI).
In the newly released Malawi Economic Monitor report, the bank said there are wide concerns regarding Malawi’s taxation system which it noted negatively impacted private sector growth.
“The investment allowances currently in force are insufficient to attract or induce meaningful investment, the industrial rebate scheme is cumbersome, with the short validity period for the industrial rebate license creating uncertainty amongst investors; the withholding tax creates unnecessary burden, especially for the smallholder farming community.
“Additionally, actors in the financial sector claim that policy uncertainty regarding export bans for agricultural produce and the weak judicial system as constraints preventing them from lending out to commercial farming and agri-business,” reads the report.
To remedy this, the bank has called for discussions between representatives of the private sector and government agencies to identify lasting solutions to the challenges that the private sector feels impede industrialisation, without sacrificing much-needed revenue for the government.
Reacting to the observation, Economics Association of Malawi (Ecama) executive director Maleka Thula said one of the best ways to enhance FDI is to reduce the rate of corporate tax.
He said: “The current [corporate tax] rate of 30 percent is too prohibitive and a disincentive to investors. Investment allowances are only temporary measures as they enable only setup but once operations kick in, investors need to feel the tax system is still supporting their operations.
Thula said the issue of export ban as raised by the World Bank was also bad for investment, but said the Control of Goods legislation reviewed and passed in Parliament would make a difference.
But Minister of Finance, Economic Planning and Development Goodall Gondwe dismissed the World Bank’s assessment, saying the current taxation regime is in line with the International Monetary Fund recommendations.
He said: “Tell them that is nonsense because the taxation regime that we are implementing now was given to us by the International Monetary Fund.”
Despite the findings by the World Bank, a report by the 2018 Oxfam and Development Finance International Commitment to Reducing Inequality (CRI) Index ranked Malawi among the 10 countries in the world in designing progressive tax systems aimed at reducing inequalities.
The report shows that Australia, Denmark and South Africa occupy the first three positions in that order, with Malawi on position seven while near the bottom of the tax index are Bahrain and Vanuatu, which have no corporate or personal income tax.
On progressive tax systems, the report looked at three main sources of tax in most countries based on personal income tax, corporate tax and value-added tax (VAT).
In its report titled Mistreated Research Report, ActionAid stated that most companies engage in tax avoidance and Malawi can raise more from corporate tax if progressive taxation regime can be employed to ensure companies do not feel the pinch when paying corporate tax.