A tax expert says changes made to the Value Added Tax (VAT) regime in the mining sector allowing companies to register for VAT and claim input VAT in the exploration phase will encourage mining activities in the country as the new regulations will help mining companies to cut costs.
The expert, Misheck Msiska, who is also Executive Director at EY, an international auditing and tax firm, said mining companies pay a lot of money to acquire exploration and mining licenses and that denying them input VAT meant that most were not able to recoup set-up costs resulting in huge losses.
Presenting the national budget for the 2016/2017 financial year, Minister of Finance, Goodall Gondwe, announced that mining companies will now be allowed VAT registration and input VAT claim in the exploration phase prior to commencement of mining operations.
And Msiska said prior to the introduction of the new regulations, many investors were easily frustrated with most choosing to take their investments elsewhere.
“To be honest with you, the VAT change has indeed been long overdue. I have personally handled mining companies who were frustrated by the unfriendly tax regime in Malawi and had to leave the country after investing millions of dollars in exploration.
“The main reason for leaving was because they were not allowed to claim the input VAT incurred on exploration. The problem with a harsh tax regime in that it not only causes businesses to close down but also scares away potential investors,” Msiska said.
He said the new regulations will help mining companies to cut costs.
“The practice has been that the mining companies who have not yet started mining are not allowed to claim input VAT before mining operations commence resulting in enormous VAT cost to the companies during set-up and exploration stage.
“But now mining companies would be allowed to register for VAT and be able to claim input VAT which would reduce costs for the companies. So this is a very positive development for the mining industry,” he said.
In his speech, Gondwe said the current VAT rules and regulations do not allow a person who is engaged in mining exploration to be registered for VAT. He said a person is eligible for VAT registration only when he has begun to supply taxable goods or services.
“Mr. Speaker, Sir, as you are aware, it takes time for a mine to be operational and during exploration phase, a miner or prospector will have incurred VAT which he is not able to claim because he is not registered for VAT.