Lilongwe-based Centre for Social Concern (CfSC) has faulted Malawi’s tax regime, saying the system simply perpetuates income inequality among Malawians.
In an analysis titled ‘Malawi tax regime perpetuates inequality and undermines State-citizen accountability,’ CfSC programme officer for economic governance Mathias Kafunda observes that the system is letting corporate individuals avoid paying their fair share of tax.
He said: “When corporate individuals are able to avoid paying their fair share of tax, ordinary citizens must bear a greater share of the burden through Pay As You Earn [Paye] and sales tax, this dynamic contributes to increasing inequality.”
Kafunda also notes that corporate income taxation in Malawi is an area where little progress is being made, adding that trends in revenue collection for corporate tax have been consistently ‘flat overall.’
He says major factors to explain the underperformance of corporate tax include the granting of generous tax exemptions as well as high levels of corporate tax avoidance and evasion.
Kafunda says it is unfortunate that research repeatedly finds the evidence that tax exemptions and incentives aren’t an effective tool to attract foreign investment.
“The evidence shows that investors consider a wide range of issues as important, from good infrastructure to political stability, skilled labour, contract enforcement and governance concerns.”
He says what is clear is that the focus on tax incentives to attract industry leads to damaging tax competition between States and a proliferation of low tax rates which he says undermine the country’s tax system.
According to Kafunda, Malawi’s tax regime is generally characterised with low levels of tax revenues due to limited support for revenue-raising efforts, low quality of government institutions, and ineffective and unaccountable government characterised by an absence of representation for taxpayers in the tax policy process.
He further explains that since the nation is characterised by a limited dependence on taxes, it has on average made recourse to foreign aid as source of revenue.
“This reliance on foreign aid rather than taxation has led to a ‘state society imbalance’, where the State has considerable enormous power over society because it mainly gets its revenues from a source largely independent from the domestic or local economy; as such, it is therefore, capable of resisting democratic pressure from taxpayers and can afford to be unresponsive to its citizens; thus our government is more accountable to donors than it is to the taxpayers,” he adds.
He also says as it stands now, Malawi tax system is depriving government of badly needed revenues to combat poverty and foster human development.
Ministry of Finance Spokesperson Nations Msowoya could not be reached for his comment on CfSC analysis on tax system as his mobile phone was out of reach.
But Minister of Finance Ken Lipenga said in a recent interview that currently, Malawi is depending on a narrow tax base which he said is inducing over-reliance on donor resources.
“Scaling up revenue collection must be done in a fair manner so that we do not over penalise the existing tax compliant companies. We need to broaden the tax base and ensure that everyone pays their fair share of taxes,” said the minister.