By Justin Mkweu:
Between 2022 and 2024, the Financial Intelligence Authority (FIA) registered 90 cases where non-governmental organizations, businesses and individuals engaged in tax fraud.
Some of the cases involved the organizations, and businesses colluding with MRA employees, defrauding the authority billions of taxpayer money using the value added tax claims.
What are VAT claims?
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VAT is a consumer tax. In simple terms, the final consumer of the product or service pays the tax after purchasing the product or service and it is currently at 17.5 percent.
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The tax is collected by the business, which also remits to government through MRA.
The claims on VAT by businesses, individuals, or organizations come when it has been proved with documented evidence that the entity remitted more VAT than it collected or it remitted VAT through the process of manufacturing goods which are zero-rated.
For example, in Malawi, fertilizer is VAT zero-rated but during its manufacturing process, the manufacturer may encounter VAT on electricity, water, sacks and other raw materials.
This means that after selling the fertilizer which is VAT zero-rated, the manufacturer is supposed to claim the tax and get a refund from MRA because the business has paid money which it did not collect.
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NGOs are also exempted from VAT by law. Therefore, if they encounter some they need to reclaim.
That is where the problem starts.
Exploiting VAT
In its latest report covering the period between 2022 and 2024, FIA gives a number of examples where MRA was defrauded through tax claims.
FIA analyzed a case in which an unnamed organization claimed VAT amounting to K1.5 billion from MRA, with the help of an MRA employee.
The organization submitted VAT claims to MRA for payments that the organization purportedly made to goods and service providers including hotels, motor vehicle dealerships and electronic goods suppliers.
However, it was established that none of the goods and service providers supplied any goods or services to the organization for the material period.
“The MRA employee fraudulently examined the submitted claim receipts and signed them off as qualifying for VAT refunds,” the report indicates.
Those involved in this fraud were eventually arrested, according to the report.
The Taxation Act exempts VAT on services offered by NGOs where the NGOs are allowed to pay VAT on the services and later claim that expense from the MRA.
In one case, an unnamed NGO falsified VAT claim returns for refunds. It filled a VAT refund claim form with MRA and the VAT refund claim was supported with invoices and payment receipts from the service providers and was processed.
MRA paid a sum of K200 million to the NGO.
The report further says the funds were withdrawn using cheques from the NGO’s accounts mainly by its two executive directors who turned out to be a couple.
“Investigations noted that all the invoices used to support the VAT refund claim and the supporting receipts were falsified.
“Furthermore, it was established that the VAT refund claim was processed by MRA employees who circumvented controls. This was a case of collusion between the MRA employee and the NGO officials,” reads the report.
The cost
A taxation expert Emmanuel Kaluluma said for a country like Malawi where tax compliance is low, VAT is the vital revenue basket.
“The biggest cost of this [fraud] is that it perpetuates poverty because the money that was supposed to be channeled to poverty alleviation and development goes into the pockets of very few individuals,” he said.
Call for coordination
In its report, the FIA recommends that among others, there should be enough collaboration between FIA, Anti- Corruption Bureau (ACB), MRA, the Office of Director of Public Officers’ Declaration (ODPOD), Office of the Director of Public Prosecutions (DPP), and the Malawi Police Service (MPS).
“Digitalization of work processes will enhance efficiency, transparency, and accountability in public financial management,” the report adds.
MRA spokesperson Patrick Achitabwino asked for more time to comment.
