James M. Kenani Stan G. Kaunda Chiyembekezo Chafuwa Evolution of Tax Policy and Administration and Revenue Performance in Malawi since Independence
Taxation policy and performance in Malawi since independence by J Kenani
Jun 19, 2015
Malawi has witnessed a number of policy agendas and shifts in the area of taxation and revenue generation since gaining independence in 1964. The different taxation and revenue policies had separate objectives, including: increasing revenue generation; improving levels of investment and exports; improving tax collection efficiency and fairness; implementing and supporting Government development objectives and plans. The policies changes included changes in tax administration which led into the consolidation of tax administration into one Authority. The driving forces for the different policy agendas have been, among others, the Government itself and international multilateral and donor organizations, such as the International Monetary Fund (IMF). Conspicuously absent from the taxation policy debate, even after democratization in 1994, have been effective parliamentary and political party debate, civil society and the general public interest, engagement and involvement. Results of the tax and revenue policies have shown mixed outcomes. Whilst tax collection has in real terms continually increased, in terms of its ratio to GDP it has plateaued and remained at around 15-17% of GDP (lower than the rate for most countries at the same level of development). In addition, tax compliance levels are low and the tax base still remains very narrow despite the fact that the levels of entrepreneurship and informal business creation have increased over the years.
The paper traces, outlines and sequences the key taxation and revenue policy changes in Malawi since independence. The paper then analyses the objectives for each policy shift and agenda and assess the outcome and consequence of implementation- including by looking at the trend and performance of revenue collection. The paper also analyses the key influencers and drivers in tax policy initiation and development and on actual collection effort and performance- including by assessing the potential impact of aid assistance on tax collection effort and performance, and the role and place of taxation in public policy debate. From this historic analysis the paper makes relevant recommendations for policy in taxation and revenue generation.
The paper traces, outlines and sequences the key taxation and revenue policy changes in Malawi since independence. The paper then analyses the objectives for each policy shift and agenda and assess the outcome and consequence of implementation- including by looking at the trend and performance of revenue collection. The paper also analyses the key influencers and drivers in tax policy initiation and development and on actual collection effort and performance- including by assessing the potential impact of aid assistance on tax collection effort and performance, and the role and place of taxation in public policy debate. From this historic analysis the paper makes relevant recommendations for policy in taxation and revenue generation.
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James M. Kenani
Stan G. Kaunda
Chiyembekezo Chafuwa
Evolution of Tax Policy and Administration and Revenue Performance in Malawi since
Independence
Presentation Layout
• Introduction
• Tax Policy and Administration Reforms
• Revenue Performance
• Conclusion and Policy Implication
INTRODUCTION
• Malawi tax system has undergone several tax policy reforms in the last five decades
• The reforms had different objectives including Revenue generationIncreased investment levelImproving equity and efficiencyIncreasing international trade competitiveness
• Interestingly despite the reformsBudget deficit is wideningDonor dependency still at 40 percentInvestment levels not improvingLittle civil society and Parliament participation
INTRODUCTION• The study evaluates the evolution of tax
policy and administration reforms and revenue performance since 1964.
• The study further evaluates the driving forces for the reforms.
Overview of the tax system• At independence Malawi inherited the U.K tax
system that heavily relied on direct than indirect taxes a pattern which was more reminiscent of developed countries
• Personal taxes were collected from individuals working in public sector large firms and had four taxes:
• Minimum taxes levied on income less than graduated tax and all males above 18 years were required to pay;
• Graduated tax was levied on income above specified amount and had five bracket;
• Assessed tax for self-employed in farming and petty trading; and
• PAYE
Overview of the tax system• Personal (individual) taxes are now categorized into:
• PAYE• Non-Resident tax• Fringe benefit tax• Withholding tax
• Personal taxes was characterized by exemptions and allowances:• Personal allowance for single or married person• Children allowance for up to four below 18 years or above if in school• Education allowance• Interest paid on a mortgage• Life assurance premium for taxpayer and spouse• Pension contributions
• Company taxes were levied from only few large private firms.• Indirect taxes were only customs duties and excise tax
• Customs duties were designed to promote import substitution and discouraging consumption of luxury goods
• Excise tax was applied to limited traditional excisable products i.e. beer, alcohol and fuel
Tax Policy and Administration Reforms
• Key Tax Policy and Administration reforms can be grouped into four time periods:
• 1964 -1977 reforms• 1979 -1984 reforms• 1985 - 1999 reforms• 2000 - 2010 reforms
1964-1977 Tax Policy Reforms• The 1964-1977 reforms were initiated following:
• Increased need of revenues• Expanding the base of taxes as taxes were collected
on narrow base• Increased need for new investments
• Major reforms in company tax were first done in 1969 in an effort to increase investments
• Allowances on contribution to pension or provident fund
• Introduced capital, annual and investment allowances• Introduced allowances in mining operations
1964-1977 Tax Policy Reforms• Other reforms done in company tax were compensate
loss of revenues following incentives of 1969• Company tax extended to clubs, societies and associations
whose operations were not solely for social welfare in 1969;• Company tax was extended to non-residents who partly or
wholly produced, mines etc. within Malawi and exports before sale in 1971;
• In 1975, government raised rate to 45 from 40 percent.
• On personal tax main reforms included:• Allowances on contribution to pension or provident fund in
1969;• Inclusion of income from a spouse or minor child when
computing taxpayer taxable income;• In 1975, government raised rate to 45 from 40 percent.
1964-1977 Tax Policy Reforms• Indirect taxes reforms included:
• Introduction of Surtax at 5 percent rate in 1970;• Raising surtax rates in 1971 and 1977 to 10 and
15 percent respectively;• Introducing 1.2 uplift factor on imported goods
for surtax• Introducing 8.5 percent surcharge on imports in
1969 though abolished in 1971
1978-1984 Tax Policy Reforms• The policies in this period were ad hoc and lacked long-
term vision and main focus was revenue generation.• Major tax policies were inclined towards;
• Raising tax rates;• Expansion tax base by taxing other items previously not
taxed or narrowing exemptions; and• Introduction of new taxes
• Main tax policies for direct taxes• Increasing the top marginal rate for company and personal
tax to 50 percent from 45 percent in 1981 and 1982 respectively;
• Inclusion insurance business other than life assurance into tax net in 1982; and
• Elimination of personal allowances and exemptions in 1983.
1978-1984 Tax Policy Reforms• Indirect taxes main tax reforms included:
• Raising rates for surtax in 1979, 1980 and 1984 to 17 percent, 20 percent and 25 percent respectively for domestic output and 20 percent, 25 percent and 30 percent for imports;
• Extending import duty and Surtax to capital and intermediate goods;
• Introducing import levy on CIF value of all imported merchandize goods in 1981 and the rate increased to 5 percent in 1984; and
• Introduction of accommodation and refreshment tax in 1982
1985-1999 Tax Policy Reforms• The tax policy reforms prior 1985 focused on short-term and
brought in more worrying features into the tax system.• The main concern was incentives available for agriculture and
manufacturing sectors were not desirable for the growth of the sectors and the country in the long-run.
• The need for greater economic growth and movement to the market economy, government with assistance of IMF and World Bank agreed to reform the whole tax system
• The main objectives of these reforms were in four fold:• Improving efficiency of tax system by developing a tax neutral
system• Achieving equity in tax system by placing burden of taxation
proportionate to income • Improving the quality of tax administration • Laying the strong foundation for future revenue generation.
1985-1999 Tax Policy and Administration Reforms
Major reforms taken:Personal and Company taxesThe reforms were to consolidate revenue base and bring equity
• Introduction of withholding tax system in1985 and the tax extended to income from agricultural produce, royalties, rent and in transport sector, bank interest etc.
• Introduction of fridge benefit tax in 1991;• The concept of taxing income on accrual basis was introduced
in 1992;• Introduction of non-resident taxation under law 12 of 1987;• Extended taxation of income to dividends and capital gain
income under law 7 of 1992• Introduction of a zero rate bracket in 1991
1985-1999 Tax Policy ReformsPersonal and Company taxes reformsOther reforms were meant for giving incentives and equity in the tax system:
• Extending company tax to state owned enterprises in 1987 and trusts in 1990;
• Change of the payment period of company tax to current year;
• Introduction of more allowances i.e. export, research, transport, pay-roll levy etc.;
• Reduction of top marginal rate from 50 percent to 38 percent
• Abolishment of the minimum tax on individuals who earned below the minimum threshold in 1993 and graduated tax in 1994
1985-1999 Tax Policy ReformsIndirect tax Reforms centred on shifting the taxes from a production and trade base to a consumption base
• Introduction of a crediting system instead the ring (suspension) system in surtax;
• Abolishment of uplifting factor on import surtax;• Harmonizing surtax rate on same domestic and
imported goods;• Non-protective aspects of import duty and import levy
into import surtax• Introduction of ad valorem excise tax rates • Reducing customs duty tariffs to maximum 30 percent
1985-1999 Tax Policy ReformsAdministration reforms
• Introduction of taxpayer identification numbers (TPIN) in 1988
• Establishment of Tax Policy Unit in the Ministry of Finance in 1993
• Enactment of MRA Act in 1998 which became operational in 2000
• Adoption of ASYCUDA system in Customs and Excise Division
2000-2010 Tax Policy Reforms• The period corresponds to the time
government embarked on IMF’s Poverty Reduction and Growth Facility (PRGF).
• The objectives were to improve efficiency in tax system, promote equity of the tax system and promote economic growth thereby reducing poverty levels.
• Most policies aimed at reducing tax burden, increasing disposable income, broadening the base and increase trade competiveness.
2000-2010 Tax Policy ReformsMajor reforms taken in:Personal and Company taxes
• Reduction of marginal rate of company tax to 30 percent from 38 percent;
• Introduction of 100 percent allowance in mining sector in first year of assessment;
• Increase export allowance rate to 15 percent from 12 percent;
• Introducing 10 percent final withholding tax rate on dividends;
• Reducing the personal income tax brackets number to 3;• Reducing withholding tax rates for fees and rents to 10
percent from 20 percent
2000-2010 Tax Policy ReformsIndirect tax Reforms centred on expand the tax base for consumption taxes, reducing tax burden on the poor and companies
• Exemption of fuel products (petrol, diesel and paraffin) from surtax;
• Zero-rating milk, capital goods and machinery salt and exercise books from surtax;
• Introducing VAT in 2005;• Petrol goods carrying vehicles, gaming/betting including
lotteries, pharmaceuticals and rail locomotives, aircrafts, aircraft engine and related spare parts were zero rated;
• Reduction of the standard rate to 16.5 percent from 17.5 percent in 2008;
2000-2010 Tax Policy ReformsIndirect taxes
• Introduction of excise tax on petrol, diesel, paraffin, airtime, ordinary bulbs and some food products;
• Introduction of tax stamps and specific excise rates on cigarettes depending on the lid of the packet;
• Additional excise tax on motor vehicles depending on year of make were introduced;
• Introduction of import duty on wheat flour• Reduction of excise tax on footwear and petroleum jelly.• Reduction of tariff rates for capital and intermediate goods • Introduction of three tariff bands of 0, 15 and 25 percent for
raw materials, intermediate goods and finished products respectively under COMESA
• Reduction of import tariff tariffs for goods originating from SADC trade bloc to almost zero rates except for South Africa
2000-2010 Tax Policy ReformsAdministration Reforms
• MRA became operational in 2000;• Operation of ASYCUDA system in collection of import taxes;• MRA established Large Taxpayer Office (LTO) in 2007 to handle
taxpayers with revenues exceeding set minimum threshold;• Establishment of Domestic Taxes Division to handle all
domestic taxes by one office;• Introduction a self-assessment scheme and payment through
banks;• Introduction of the use of Tax Clearance Certificates issuing of
and renewing business licenses and permits for professionals;• Establishment of Revenue Policy Division in Ministry of Finance
in 2006.
Revenue Performance• Revenues have been substantially increasing as
percentage of the GDP
• The revenue collection in 1970 registered 12.0 percent of the GDP and reached 20.3 percent in 1995; declined to 11.8 percent in 2002 before reaching 20.9 percent in 2010.
• Indirect taxes ( VAT/Surtax, Excise tax and Customs duty) dominate direct taxes (personal and company taxes)
• There were drops in revenues during economic crisis of 1981, 1991 and 2001
• There is substantial increase in revenues after major policy changes
Revenue Performance 1970-2010
1970
/71
1972
/73
1974
/75
1976
/77
1978
/79
1980
/81
1982
/83
1984
/85
1986
/87
1988
/89
1990
/91
1992
/93
1994
/95
1996
/97
1998
/99
2000
/01
2002
/03
2004
/05
2006
/07
2008
/09
2010
/11
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Figure 1: Overall revenues as a percentage of GDP
Taxes on income and profits Taxes on goods and services International trade taxes
Revenue Performance• Revenues were pro-cyclic to GDP but grew
faster than GDP• There is real revenue growth after every
major policy shift, indicating widening of the base
• There was high performance of taxes in 1995 following high economic growth
Revenue Performance 1970-2010
1970
/71
1971
/72
1972
/73
1973
/74
1974
/75
1975
/76
1976
/77
1977
/78
1978
/79
1979
/80
1980
/81
1981
/82
1982
/83
1983
/84
1984
/85
1985
/86
1986
/87
1987
/88
1988
/89
1989
/90
1990
/91
1991
/92
1992
/93
1993
/94
1994
/95
1995
/96
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09
2009
/10
2010
/11
-100%
-50%
0%
50%
100%
150%
200%
250%
Figure 2: Growths of Revenue and GDP
Nominal Tax Revenue Growth Real Tax Revenue Growth GDP Growth
Revenue Performance 1970-2010• Direct taxes have been dominating contribution to total
taxes with more than 40 percent across the period. • Direct taxes dominated contribution between 1981 and
1990 when rates were 50 percent • Taxes on goods and services have been widening over
the years from 10 percent in 1970 to about 47.4 percent 2007.
• Taxes on goods and services have increased substantially its total contribution from 2002 when surtax was extended to retail stage of business
• Customs duties are narrowing from 34.6 percent contribution in 1970 to 9.8 percent.
Revenue Performance (1970-2010)
1970
/71
1971
/72
1972
/73
1973
/74
1974
/75
1975
/76
1976
/77
1977
/78
1978
/79
1979
/80
1980
/81
1981
/82
1982
/83
1983
/84
1984
/85
1985
/86
1986
/87
1987
/88
1988
/89
1989
/90
1990
/91
1991
/92
1992
/93
1993
/94
1994
/95
1995
/96
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09
2009
/10
2010
/11
0%
20%
40%
60%
80%
100%
120%
Figure 3: Contribution to Gross Tax Revenue
Taxes on income and profits Taxes on goods and services International trade taxes
Conclusion and Policy Implication
• Tax policy and administration reforms were carried mainly to raise revenues to support government expenditure programs.
• Ad-hoc policy decisions hindered an effort of widening tax-base, improving efficiency and equity and promoting economic activity and investment.
• Lack of analysis of economic impacts gave a weak foundation of reforms in terms of the achieving Government’s economic policy and revenue objectives.
• Most of the policy reforms from 1985 have been influenced by external events and institutions i.e. SADC, COMESA, WTO, IMF, World Bank etc.
• The policy implication which emerges is that although the design of the new policies may be theoretically attractive, little consideration has been given to their impact on private sector economic activity.
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