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How tax deals bleed Malawi

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Sosten Gwengwe

Minister of Finance Sosten Gwengwe last week announced a K3.87 trillion budget which has a yawning gap due to inadequate resources.

Now, according to a cluster committee of Parliament which is scrutinising the budget, government loses as much as K500 billion annually in tax expenditures – money some of which would have gone some way in plugging the deficit hole.

With a total revenue estimated at K2.55 trillion, the national budget this year faces a deficit of K1.32 trillion.

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According to Gwengwe, the deficit will be financed through foreign borrowing amounting to K288.78 billion and domestic borrowing amounting to K1.19 trillion.

It turns out that tax expenditure is a hidden side of government spending that is hurting the country’s economy.

Gladys Ganda, co-chairperson of the cluster committee scrutinising the budget, has since urged the government to review its tax expenditure or Malawi will keep hurtling down the cliff of lack of resources and being throttled by huge debts obtained to fill the deficit gap.

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In simple terms, tax expenditures are government revenue losses from tax exclusions, exemptions, deductions, and preferential rates.

“The information that I have as budget and finance chairperson indicates that about K500 billion of revenue is being lost annually due to tax expenditures.

“This is sad most especially to an economy which is not faring well,” Ganda said.

She said tax incentives are not essentially bad but not all of them are worth it.

“They are done to attract investors into the country but there are some tax incentives that are unnecessary.

“It doesn’t matter whether you give them or not because companies would still come to invest anyway. A good example is the Kayelekera Uranium Mine. I see no need for a tax incentive on this mine,” Ganda said.

She added that there is need for the Ministry of Finance to review some of the tax incentives in order to recoup the lost revenue.

“So we are looking forward to have a full discussion with Ministry of Finance to see what reforms they are going to take in the tax expenditure area to make sure the country doesn’t lose much,” she added.

Reacting to the development, Principal Secretary for the Ministry of Finance, Patrick Zimpita, said some incentive deals are done following treaties the country is signatory to while others are done following policies that the country has.

“If they can give us a list of which tax incentives are unnecessary, the better,” Zimpita said.

Economist Edwin Simama has since joined the cluster in calling on the government to review its tax incentive regimes.

“Some of these tax incentives are unnecessary. It is better that government should be giving the tax holidays to local companies who, after making profits, would benefit Malawians,” Simama said.

A policy brief issued by Norad and ActionAid in 2019 estimated that Malawi was losing about K88 billion each year to tax expenditures.

This estimate, according to the brief, did not include some tax incentives for which data was not made available, including tax holidays, capital allowances and export tax exemptions.

It also did not include tax losses incurred from discretionary tax incentives.

“The total tax loss to incentives is therefore likely to be higher,” said the two organisations in the brief.

They cited tax exemptions in Malawi’s Export Processing Zones and in mining and transportation sector.

The report which focused on girls’ education indicated that only 6 percent of the lost revenue then could educate 154,000 girls who were out of primary school.

Norad and Action Aid therefore urged the government to:

  • Act swiftly to reduce the amount of tax revenue forfeited to tax incentives.
  • Stop offering harmful tax incentives and only other incentives selectively to facilitate development.
  • Review all tax incentives – including discretionary tax incentives and those applicable to special economic zones –to assess whether they are fit for purpose
  • Review tax treaty networks to ensure that they do not result in tax losses and renegotiate those that do.
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