VALUE ADDED TAX (VAT) IN MALAWI

 

What is Value Added Tax?

A value-added tax, known in some countries as a goods and services tax, is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end consumer. If the ultimate consumer is a business that collects and pays to the government VAT on its products or services, it can reclaim the tax paid. It is similar to, and is often compared with, a sales tax. It is one of the indirect taxes also known as consumption taxes. Specifically, it is a general consumption tax imposed on all the goods and services except those that are exempted by act the hence broad based.

Further definition of VAT

Value added refers to the value which is added to the goods or services throughout the distribution chain. It is generally believed that as goods and services pass on the distribution chain value is always added. Value Added Tax is therefore charged on the value that is being added and is collected at all stages of production and is finaly paid by consumers. It is also called Consumption tax.

Value added tax is therefore one of the consumption taxes or indirect taxes levied on the goods or services and paid by the final consumer. To ensure that only the final consumer pay VAT all players in the distribution are allowed to claim any VAT they pay on purchases of their inputs known as input VAT except final consumers. This is why VAT is also grouped as one of the consumption taxes.

To ensure smooth operation of VAT especially when international trade is involved, the tax operates on principles. The principles are Destination Principle and Origin Principle.

ORIGIN PRINCIPLE

This is where Value added Tax is charged where the goods or services are coming from or produced. In international trade the tax is charged in the country of origin for the goods or services.

An origin-based VAT is imposed in the jurisdiction where the goods or services come from. That means an exporter has to levy VAT on the same basis, and at the same rate, as a local supplier. The principle assumes that imports in the country of destination are not subject to VAT.

DESTINATION PRINCIPLE.

Destination principle is where the tax is charge where goods and services will be consumed. In international trade tax is charged in the country where goods or services are consumed.

Destination principle is where the tax is charge where goods and services will be consumed. In international trade tax is charged in the country where goods or services are consumed. 

WHO PAYS VAT

VAT is a tax that is paid by consumers when they in the course of consuming goods and services. Some consumers may enjoy relief from paying VAT and arrangements are made so that they do not suffer the VAT. This is done through exemptions

WHEN TO REGISTER FOR VATVAT

A business must register for VAT if the taxable supplies and imports exceed the mandatory/ compulsory registration threshold of MK 25,000,000 per annum/year.

Furthermore, a business may choose to register for VAT voluntarily where the total value of its taxable supplies is less than MK 25, 000,000 but it feels that not registering for VAT will negatively affect the operations of the business. In this case a special application must be made to the Commissioner General Station the reasons for wishing to register voluntary. The Commissioner may accept or reject to register a business under voluntary registration. (VAT Act 2005, sections 11(1))

TAXABLE SUPPLY

For the purposes of understanding whether a registration obligation exists, a taxable supply refers to a supply of goods or services made by a business in the Malawi that may be taxed at a rate of either 16.5% (standard rate) or 0%. Imports are also taken into consideration for this purpose, if a supply of such goods or services would be taxable if made within the jurisdiction of Malawi. Taxable supplies are all those supplies not found in the First Schedule of the VAT act 2005.

 

EXEMPT SUPPLY

Some goods and services are exempt from VAT. If all of the goods and services business sell are exempt, the business is exempt, and won’t be able to register for VAT. This means the business can’t reclaim any VAT on business purchases or expenses. Examples of Exempt Supplies; life Insurance, education, agricultural products etc. Refer First Schedule of the VAT act 2005.

TAXABLE PERSON

A taxable person for VAT purposes is any business that carries out commercial activities and makes taxable supplies as per the VAT Act 2005. There is no restriction to entities with legal personality, such as a natural or legal person, so a partnership that does not have a separate legal personality can be a taxable person. In addition, a group of companies, each with its own distinct legal personality, can be a single taxable person (VAT group registration). (VAT Act 2005, section 10.)

 

WHAT IS VAT REGISTRATION

This is the process aimed at capturing traders that qualify to be operating Value Added Tax in the tax administration system and issuing them the VAT Registration Certificates which mandates them to be imposing VAT on taxable goods and services and account for the collected VAT to the tax administration body that administers VAT. In Malawi the tax is remitted to Malawi Revenue Authority which is the body that administers taxes. 1.5

TYPES OF VAT REGISTRATION

• There are two main types of VAT registration. This depends on why a trader has been registered for VAT. One gets registered because he qualifies to be a taxable person or because it is his own wish to be registered, the two types of registration are compulsory and voluntary registration.

 

COMPULSORY REGISTRTAION

This is the type of VAT registration which applies to a business that has qualified to be making a turnover of MK 25 Million or more of taxable supplies per annum.  The business must apply for registration to the Commissioner General within 30 days of becoming registrable (Section 11 subsection 4)

Failure to do so will attract penalties and the business will be assessed. The assessment will assume that all the sales made after qualifying for registration were VAT inclusive (Section 11 subsection 5

 

QUALIFICATIONS FOR MANDATORY / COMPULSORY REGISTRATION

A business must register if:

• The total value of its taxable supplies and imports exceeds the mandatory registration threshold over the previous 12 months, or
• The business anticipates that the total value of its taxable supplies and imports will exceed the mandatory registration threshold in the next 30 days.
• The mandatory registration threshold for Malawi is MK 25, 000,000 per annum.
• The business is engaged in the exploration of minerals in Malawi.

VOLUNTARY REGISTRATION

This is the type of registration where a business registers for VAT though its turnover of taxable supplies is below the required threshold. The business is required to make a special application which will be evaluated by the Commissioner General. The Commissioner General might accept or reject the request after examining the reason for applying for voluntary registration (Section 11 Subsection 11a).

Qualification for Voluntary Registration

• A business may apply to register if it does not meet the mandatory registration criteria and:
• The total value of its taxable supplies and imports or taxable expenses in the previous 12 months less than MK 25,000,000.00 threshold, or
• The business will be disadvantaged if it remains not registered for VAT

 

VAT WITHHOLDING REGISTRATION

The Commissioner General may sometimes register a business or any entity to be withholding the VAT and remit it directly to the authority in order to safeguard revenues. The Commissioner General in this case will be excising powers as vested in him by Section 14A of the act.

THE LAW ON VAT REGISTRATION

The law gives mandate to Malawi Revenue Authority to collect VAT and register traders for VAT if they qualify to be taxable persons. This is covered under section 11 of the VAT Act 2005.

The section was amended to accommodate introduction of electronic fiscal devices. Section 11 (6), gives clear guidance on registration including the need to acquire a fiscal device. It also puts emphasis on when to apply for registration. Officers must know that the requirement is not for a trader to be in business for one year or when he reaches a turnover of Twenty-five MILLION.

The phrase reasonable grounds to believe that one will reach a turnover of 25 million in 12 months must be well understood.

“Nowhere in the law have we come across grace period. It is therefore not correct to give grace period for registration for VAT”

Upon registration a registered person will be allocated a number for identification known as Taxpayer Identification Number. The numbers for sole traders and partnership or other entities starts with 30 and for limited companies start with 20. These numbers are eight digits numbers.

FACTORS THAT MIGHT LEAD TO FAILURE TO BE REGISTRED FOR VAT

1. If the person has no fixed place of business
2. The applicant will not keep proper records of business transactions
3. Will not submit regular and reliable tax returns
4. Is not fit and proper person to be registered?

WHO IS SUPPOSED TO REGISTER FOR VAT?

Any entity that carries out business in Malawi and makes taxable supplies and has a turnover of MK 25 Million per annum of more is supposed to be registered for VAT. As stated above some businesses might register voluntarily. Below are examples of some businesses and organizations that can register for VAT.

SOLE TRADERS

This is one-man businesses or individuals carrying out a business. The business is usually in the name of the owner. The owner is the one that gets registered and the name of the business is indicated on the business registration certificate as a trading name.

An example is when we register Tawakali Jumbe and his trading name is Wayiona Enterprises. The sole trader Tawakali Jumbe will be registered and the certificate will read as Tawakali Jumbe trading as Wayiona Enterprises where Wayiona is a trading name. if the person has more than one business all the trading names will be included.

PARTNERSHIP

These are businesses owned by more than one person who might have contributed capital. Sometimes partnerships are created because people of different areas of specialization or expertise want to utilize their skills together to run a business.

An example will be where a civil Engineer partners with an Electrical Engineer or a dentist partners with a surgeon or a marketer partners with an accountant. The partners will come up with a partnership agreement which will outline how risks or rewards will be shared.

Partnerships are in most cases born out of sole traders combining businesses. Partnerships can be ordinary partnerships or limited partnerships. The type of partnership will determine how risks are spread in the partnership. For ordinary partnership liabilities spread up to the partners personal assets where as in limited partnership liabilities are restricted to the business assets in some cases one partners having unlimited liability.

In VAT the partnership will be registered in its own capacity separate from the registration of the individual partners.

The VAT certificate will only indicate the name of the business. The example will be where a business called Kayiwona trading is owned by Steve Gondwe and Martha Mbewe. The VAT certificate will read Kayiwonga trading.

In VAT, partnerships are registered separately from the partners to take care of issues of compliance. This ensures that if partners have individual businesses and are having compliance challenges but the partnership is compliant, problems of the partners should not mix up with those of the partnership by ensuring that separate VAT returns are submitted.

LIMITED COMPANIES

These are businesses that are formed by issuing of shares. Those wishing to be part of the owners of the business will buy shares in the business and they will earn rewards in form of dividends in times of profits. People that have acquired shares in a limited company are known as shareholders.

There are mostly two types of limited companies, private limited companies and public limited companies. Private limited companies formed by having restrictions on the shareholders. Shares might be only made available to chosen individuals e.g. members of the family or friends. Public limited companies are those that have no restrictions on shareholders. Anyone can acquire shares and the shares are sold publically. All limited companies however will have liabilities restricted to the shares.

The registered name on the VAT registration certificates will be the trading name plus the words limited e.g. Mwano Limited.

OTHER ORGANISATIONS

Any organization that makes taxable supplies is registrable for VAT. These organizations might include Government departments or ministries, clubs, Associations, un incorporated Organizations etc. can all be registered for VAT if they are engaged in commercial activities where their supplies are taxable and they meet the registration required threshold. (section 11 (8).

GROUP REGISTRATION

Group registration is where a group of companies that operate as separate entities choose to have one registration for VAT and submit one VAT return. Normally group registration applies to companies that are related or have the same management. The application will be a special application and the commissioner General will consider a number of factors before effecting registration.

It is important is to check if there will be no negative impact on VAT revenues after considering the application of the credit mechanism. Sometimes group registration might be part of tax planning by taxpayers to minimize amounts of remittances instead of applying for tax refunds. (Section 11 (9)).

REGISTRATION OF BRANCHES

Some businesses might opt register their branches as separate entities for VAT. This is only acceptable if the branches have complete separate administration from the head office. This is to ensure that there is no confusion on the claiming of input tax (Section 11 (10)).

Officers handling this type of registration should make sure that purchases and any other expenses that attract VAT are separated from the head office and can be easily identified.

Just like in group registration acceptance of this registration must be after careful evaluation otherwise it might be part of tax planning.

REGISTRATION OF AGENTS

Agents are traders that act as middlemen. They make supplies but in most cases the supplies are not theirs. They conduct business of supply on behalf of the principal. If the agent makes supplies on behalf of the principal, the agent will be registered the same way like the principal if he qualifies. The agent then will charge VAT on the supplies made just like the principal and account for the VAT just like any other registered taxpayer.

Agents are paid commission for their service. Commission is taxable at standard rate of 16.6 percent. The agent can be registered for the supply of his or her services as well and will be required to charge VAT on the commission.

Agents can therefore be registered either for the supply of the goods on behalf of their principal or for their service. They might also be registered for both and will be required to account for VAT. Refer to VAT Act 2005, section 18.

REGISTRATION OF BROKERS

Brokers are traders who act on behalf of their principal. They do not get possession of the goods but they simple make buyers and sells meet to conduct business. Their services can be either to the buyer or the seller depending on who has contracted them.

They earn a commission and if the commission which is taxable at 16.5 percent qualifies them for VAT registration, they must be registered like any other business.