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Introduction
MCCCI, SOCAM and ECAMA have come together to develop a single set of proposals to feed into the Government’s tax review process.
We recognise that the current Government is facing a major task to bring the macroeconomy back on track. The need to pay off debt incurred in past years when the previous Government was ‘off-track’ with the IMF, means that there is little scope for net tax revenue reductions in the 2005-06 budget, unless there is a significant reduction in Government expenditure or at least growth of expenditure well within the rate of inflation.
However, the tax review is both welcome and opportune. Malawi needs to look at the structure of the tax system for the coming budget year and for the years beyond when the budgetary position should be quite different, particularly as the Government convinces the IMF and Development partners that is has regained control of its expenditure and used the proceeds of the revenues for developing the economy and addressing poverty. In itself, the tax system and administration of it can be a major factor in building our economy and generating the self-sustaining revenues that will support and underpin the development of this nation. Having a better functioning tax system could even become a competitive advantage for Malawi, bringing forward domestic investment and wining foreign direct investment within the region. Given that Malawi faces considerable structural costs (transportation and crossing borders) in both imports and exports, then we need to have a tax system that is at least as good as our neighbours and in particular that supports investment and trade as the lifeblood of any successful economy.
With an eye to both the immediate constraints and yet also to the need to move the economy to a new level, we have focused our suggestions to those changes that are broadly revenue neutral or revenue enhancing over a three year period, or which are absolutely essential in order to restore the viability and competitiveness of Malawian businesses. The key would be to phase the changes suggested over a period of two to three years in line with an improved budgetary position of the GoM and to redress the significantly higher burden of taxation that has fallen onto the formal tax compliant private sector over the last 4-5 years.
This increased burden has acted as a major drag on investment resulting in significant disinvestments over recent years and limited domestic and international investment. It has also fostered an increased climate of non-compliance as ever more stringent revenue raising measures and tax collection practices have made it ever more difficult to comply and to operate formally. Concessions on tax do not necessarily equate to reduced revenues – much depends on the starting point and the overall context. There are many countries that have reduced rates on certain low yielding taxes to find that the overall tax take has increased. Where compliance is low then more attractive taxes (rates, operation, thresholds) can result in increased revenues. In some cases, such as Capital Gains Tax and even Surtax, sensible adjustments in favour of businesses could increase overall GoM revenues. This requires a degree of boldness that we believe Government will have the will to seize.
The burden of taxation has increasingly fallen on the same group of businesses with significant effects on their profitability and returns on investment. Eventually this impacts on their willingness to continue investing and ultimately whether to continue operating at all. Government has been successful at raising revenues from 17.1% of GDP in 2001/2 to over 22% in 2004/5 with an ultimate target understood to be 25% of GDP. Whilst the percentage point increase may seem small, the effect of increasing revenue to 25% of GDP would be to increase tax revenue by nearly 50% (8%/17.1%) much of which will fall on the same formal tax-compliant businesses as have carried the burden so far.
It is also important for Government and other stakeholders recognise that the formal sector tax-compliant businesses are now at a significant competitive disadvantage in an environment where there is widespread non-compliance by substantial businesses,
particularly in the trading sector. Those businesses that do not comply with the proper administration of tax (PAYE, Surtax/VAT, Withholding Taxes) have an immediate cost advantage over those that do. A key policy question is therefore how can the burden of
taxation that falls on those businesses that comply and contribute revenues to building this country be shifted onto those that are deliberately or ignorantly not complying? Increasing the incentives to comply with more favourable taxation treatment, would reward compliance, combined with a shift of the pressure to comply on the non-compliant shadow private sector. If this shift of the burden is not achieved soon, then Malawi will see an increasing infomalisation of the business community and increased culture of non-compliance thereby reducing medium-term revenues.
It is worth noting that because of lack of data and a shortage of time, this private sector proposal does not take into account two important sets of considerations. First, it is not based upon a view about Malawi’s competitiveness with regard to countries that compete for investment. We would suggest that in order to foster investment Malawi needs to offer the best tax regime in the region. We understand that the consultants will be “Conduct[ing] a comparison of Malawi’s marginal effective tax rate with key regional competitors”, and look forward to examining the results of this study.
Second, the private sector has not had access to detailed data about MRA’s tax collection by type of tax. We thus are unable to assess the revenue implications of the changes that we have proposed, but would expect this analysis to be made available so that the assessments of revenue implications of different measures can be viewed transparently.
Whilst this review is inevitably focused on revenue, the key problem to be addressed by Government is not revenue raising (budget for 2004/5 is almost 25% more than 2003/4 which has already seen significant and painful increases) but on control of government expenditure. The budget deficit is a function of the past over-spending not fundamentally the lack of revenue. As with any business that has expenditure exceeding its revenue, the first actions must be to cut back expenditures significantly and quickly. Increases in the expenditure budget for 2005/6 at or above the level of inflation would not be welcomed by private sector. There needs to be a considerable reduction in the increase in government expenditure to well below inflation and at the least, below the rate of revenue increase budgeted. This would allow more realistic revenue increases to be budgeted, again ideally well below the level of inflation. Too much emphasis on revenue increases in the past have caused damage to the tax compliant private sector.
Finally, we would like to thank the Government for seeking input during the review process. This is a very welcome sign of the increasingly strong cooperation between Government and the private sector. We welcome the opportunity to be involved in the continued consultation process.
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