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Government taxes water, bread

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In the face of hyper-inflation rate that has eroded disposable incomes of many households, government has chosen to go ahead with amendments to the Value Added Tax (VAT) Act, consequently removing exemptions and zero rating on basic commodities such as bread, tap water, milk and laundry soap.

Governments commonly use zero-rating on goods to lower the tax burden on low-income households. But during the recent sitting of Parliament, Finance Minister, Goodall Gondwe, proposed new tax measures, among them introducing the standard 16.5 percent rate on some basic needs.

Gondwe justified hi s proposals on the basis that the measures will expand the tax base and restore the integrity of the tax system by removing distortions that favour some products against others.

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But economic commentators are querying government for the changes arguing that while the move may be good for businesses who will now be able to claim input VAT on the goods that were previously zero-rated, the consumer and ordinary Malawians are likely to pay a higher price for the changes.

A tax consultant, Emmanuel Kaluluma, who previously worked for the Malawi Revenue Authority as a Commissioner for the Customs and Exercise Division, said while ideally such measures aim to make businesses more competitive and reduce their production costs by allowing them to claim input VAT, most businesses do not pass on the benefits to consumers.

Kaluluma said businesses take advantage to exploit the system and charge higher prices for goods and services that should otherwise be offered at a lower price.

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“It needs proper costing otherwise the consumer cannot benefit. It is unfortunate that we do not follow the proper procedures and businesses take advantage of the system to exploit consumers,” he said.

Chancellor College Economics Professor, Ben Kalua, said it is unfortunate that government is tampering with essential services such as water and nutritive supplements which include milk.

Making reference to some research, Kalua said already urban dwellers in high density locations are disadvantaged on the pricing of water by paying more for the commodity as compared to those in the higher income bracket and living in low density areas.

“This means the price of water for those low income earners will go up even more,” he observed.

Kalua also faulted the introduction of VAT on milk, arguing that despite the importance of milk in a person’s diet, Malawi is already among countries with the lowest per capita consumption of milk.

“Poor people already cannot afford milk, with these changes, milk will become even more remote for them,” he said.

Going forward, Kalua said authorities need to think through policies before implementing them.

“Some of the things we implement as a country are so illogical,” Kalua lamented.

Malawi is among countries with highest inflation in the region, including the 26 member Common Market for Eastern and Southern Africa, where Malawi is trailing Zambia with an inflation rate of 25.9. This means the price of goods and services in Malawi rises at a faster rate as compared to the other 24 countries in the regional trading bloc.

And some consumers we spoke to in Blantyre City said government should have first looked into the working conditions of people in the face of the prevailing high inflation before affecting the tax measures.

One observer said even though government has consented to the proposals effecting VAT on basic commodities like water and bread, people’s salaries have remained stagnant as the business environment has made it prohibitive for businesses to effect significant salary increments.

A survey conducted by the Centre for Social Concern (CfSC) in 2014 found that an average worker receives K44,000 per month and CfSC says the figure has not significantly changed despite salary increments which have been effected since then. CfSC reported a rise in national cost of living of 0.26 percent between the months of June and July. As it stands, a family of six living in Malawi’s major cities requires about K166,086 to meet basic needs in a month.

With the new changes to the VAT Act, the cost of living is likely to go further up as the Centre based its figures on a figure of K249 for 250 millilitres of milk in Lilongwe, for example, standard bread at K350, soap at K378.

Applying 16.5 percent on the products will see the price of milk going up to K270, bread to K407 and soap up to K440.

Government is under pressure to implement a budget largely dependent on domestic revenue and it expects 80.3 percent of the resources required to execute the 2016/2017 national budget to be generated domestically while the remaining 19.7 percent will represent donor grants.

Presenting the financial plan, Gondwe, said the budget seeks to increase domestic resource mobilisation so that tax revenue is in tandem with the rate of growth in nominal Gross Domestic Product.

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