Tax policy measures for the 2022/2023 budget
CUSTOMS & EXCISE
Removed
Import and excise tax on solar lamps
Import and excise tax on solar fridges
Import and excise tax on sanitary pads
Import duty and excise tax on interchangeable tyre re-treads
Import duty and excise tax and VAT on spare parts used for energy generation and distribution (Electricity)
Amended
• Reduced minimum value addition for purposes of industrial rebate scheme as follows
• Pharmaceuticals, medicants, fertiliser producers and high technology producers minimum value of 5%
• SMEs and Cooperatives (E.g., Welders, Carpenters etc) minimum value of 5%
• Local Market Producers a minimum of 10%
• Registered as Export Companies minimum value of 35%
• Category a, b, c and be in the scheme for a maximum period of 10 years and d for a maximum period of 15 years
• Reduced excise duty of drinks that are not energy drinks and are not soft drinks from 20% to 10%
• Government to gazette valuation method to be used in disposal to determine value for purposes of duty
• Increased surcharge on blankets from 10% to 20%
• Revise importers processing fee from MK15,000 to MK20,000
Introduced
• 10% import duty on refined glycerine imported in bulk
• 15% import duty and 16.5 VAT on moulds
• Retired Speaker of National Assembly to be added to Customs Procedure Code (CPC) to benefit from duty free importation of goods
• 10% surcharge on ball points pens
Income Tax
Amended
Pay As You Earn as below
2021/2022
First MK 100,000 @ 0%
Next MK. 900,000 @ 25%
Next MK2,000,000 @30%
Next MK3,000,000 @35%
Excess of MK6,000,000 @40%
2022/2023
First MK 100,000 @ 0%
Next MK. 230,000 @ 25%
Next MK2,670,000 @30%
Next MK3,000,000 @35%
Excess of MK6,000,000 @40%
• On Pay as You Earn, MK670,000 has been pushed from 25% tax rate to 30% tax rate
• Accrued interest rate to 6% on USD equivalent of the loan from LIBOR plus 5%
• Withholding Tax on Fees from 10% to 20%
• Reduced Withholding Tax on bales above 10 bales from 3% to 1% and making the 1% final
• Reduced Withholding Tax on gambling from 20% to 5% and making the first MK500,000 taxable at 0%
VAT
Removed
• VAT on cooking oil
• VAT on Tap Water
•
General Commentary
The budget that was presented by the Minister of Finance, Hon. Sosten Gwengwe received praise from the general public. The basis of the praise was the removal of VAT on cooking oil, as the general public is expecting that cooking oil that has increased tremendously will go down. The budget centred at accelerating implementation towards wealth creation and food security aims to address four things:
a) Public Debt Management
b) Export Diversification
c) Import Substitution
d) Balance of Payments (BOP)
Contrary to the 2021/2022 budget that increased personal income tax brackets, the 2022/2023 budget has reduced personal income tax bracket.
On customs and Excise, the minister has removed import and excise on solar lamps, solar fridges, sanitary pads, interchangeable tyre re-treads and spare parts used for energy generation and distribution (electricity) which has also seen VAT being removed. In an economy where energy is limited, this will motivate individuals and businesses to consider using alternative sources of energy most likely solar power. The removal of import and excise tax and VAT on spare parts used for generation and distribution of electricity will see companies having reduced costs in production and distribution of electricity. This comes at a time; Electricity Supply Corporation of Malawi is failing to meet the demand for lack of sufficient funds that has seen the power being generated to be not enough for the population.
The notable amendments on customs and excise include the reduction of minimum value addition for purposes of industrial rebate scheme. This has been done to empower local manufactures to have the muscle to compete on the international market. Also to encourage local resource solicitation. That’s manufacturers using more locally sourced raw materials than imported ones and local manufacturers using locally sourced labour than imported labour with a view to benefit on industrial rebate reduced import duty tariffs.
The Minister has also introduced 10% import duty on refined glycerine imported in bulk. This is a good gesture to business individual as it will discourage the importation of refined products though the margin. The minister could have further addressed the anomaly he cited was made, by removing import duty on Crude glycerine. When raw materials are imported, we are sure there should be job creation unlike in situations when companies are importing finished goods.
The Minister announced that government has increased Withholding Tax on fees from 10% to 20%. This came as a surprise to me as there was no service prior to the 2022/2023 budget that has 10% withholding tax apart from carriage and haulage. The 10% withholding tax on fees was revised in the 2019/2020 budget upwards to 20%.
The Minister amended the Pay As You Earn as below. As it stands Pay as You Earn, MK670,000 has been pushed from 25% tax rate to 30% tax rate. The new rates will have adverse result on those receiving more that MK330,000. There will be no change for those whose salary is MK330,000 and below.
Citizenry expressed gratitude upon hearing the Minister announcing the removal of VAT on cooking oil and domestic tap water. People expressed this through social media posts and other social interaction avenues. The hope on this matter is that cooking oil and water price will likely go down. It is a good move and Bravo and Kudos to the minister for considering what people wanted. However, If not critically looked into the decision may not yield what people are expecting. It could have been best if the Minister Could Zero rate cooking oil and Tap water. VAT is a consumption tax paid by final consumer and VAT is multi-staged throughout the production chain. We therefore need to appreciate levels of production to come up with a final product.
To come up with cooking oil, manufacturers buy other raw materials locally and they also import from outside the country. They don’t pay VAT when buying agricultural raw materials like soya in the country because agricultural products are exempted from VAT. There are a number of components beside the cereal Soya required to produce the cooking oil i.e., Machinery, crude oil, electricity etc. All these attract VAT. Removing VAT at the end only or at the selling point only is faulting the manufacturer who has already paid tax in the production of cooking oil, and added mark-up on a cost that has tax embedded in it. This will mean the price will not go down as expected. If the manufacturers won’t make enough money to run their businesses, we should expect job losses as most of them will likely exit the market.
The Minister should have zero rated cooking oil and water. Thus, allowing cooking oil manufacturers not be paying tax when importing machinery and raw materials relating to production of cooking oil. This will reduce cost of production and the price will drop. A need for a vibrant regulator to monitor the manufacturers from point of importation of materials to disposal/sale to the consumer need no over-emphasis. The communication should have stated that the cooking oil is zero rated that’s manufacturers shall be able to claim all VAT charged for raw materials and production and will not include the claimed vat in their selling prices.
Tax can be seen in two angles: TAX BASE and TAX RATE
The government should not only rely on the thin pockets of taxpayers, rather it should embrace other tax revenue source streams by broadening the tax base and not increasing the tax rate. A good example is ESCOM which charges tax on electricity. The government is losing revenue through customers who applied for electricity 2-3 years ago but are yet to be connected. This is readily available revenue opportunity government is failing to seize. The same applies to a number of public and quasi-public institutions that were incorporated to generate income. How much money would government collect if all those who applied for electricity were connected? It means government would increase its customer base and individual and corporate customers from where revenue would be realised and collected.
Lastly though not least, tax matters are always complex and critical. Tax amendments should never be implemented ordinarily for short-term people’s appeasement without meticulously looking into relative impacts and long term ramifications of the same. Government should always consider impact of possible foreseeable and unforeseeable tax revenue losses. VAT is critical for every economy be they small, medium or large. It is broad in nature and contributed by almost every consumer as long as one is a consumer he or she contributes into the Value Added Tax basket. Any amendment on VAT results in material and significant visible effects on the economy most especially virgin economies like Malawi.
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