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Home Business Business News

MRA outlines informal sector taxation hurdles

by Dumbani Mzale
25/11/2020
in Business News, Editors Pick
4 min read
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The Malawi Revenue Authority (MRA) says it is not easy to broaden the country’s tax base by bringing the informal sector into the formal tax net as most people generally think.

MRA director of policy, planning and research Waziona Ligomeka said this at the weekend during a two-day Economics Association of Malawi (Ecama) Annual Lakeshore Conference.

Most small businesses are not organised

In his presentation titled Tax and the Pandemic: Will Malawi Raise the Revenues it Needs?, Ligomeka said that MRA has a number of measures that it uses to bring the informal sector into the tax net.

He, however, said that over the years, it has not been successful as the administration cost of taxing the informal sector layers is “very high because they need to be chased all the time but revenue collection from them is also small.”

Said Ligomeka: “Unless players in the informal sector are organised into associations or something like that, taxing the informal sector will continue to be a challenge.”

Malawi’s informal economy-which continues to grow exponentially-covers a multiplicity of activities and different types of work including the self-employed, casual workers without fixed employment, street vendors, hawkers and people in the agricultural sector, among others.

Ligomeka, a tax specialist with over 15 years work experience in tax policy and tax administration, also said in the context of Covid-19 pandemic, most informal sector players have seen their income shrink as they have also been hard-hit by the pandemic.

He said: “The poorest 50 to 80 percent of households should not be expected to pay more. They are suffering enough.

“There are already other areas where government is looking at such as reviewing the tax incentives scheme as well as improving tax administration.”

Ligomeka, therefore, suggested that much of the additional tax burden should fall on the wealthy -or on those who have avoided economic pain during Covid-19 crisis through capital gains, dividends, interest and rental income.

He said the authority is aware that it is imperative for the country to ensure that value added tax (VAT) is operating better by focusing on efficiency in the operation of electrical fiscal devices (EFDs), adding that the country should cultivate a culture of tax compliance.

Information sourced from the conference suggest that only about 400 000 people pay direct individual tax in Malawi out of the 19 million estimated population.

This means only 2 percent of the population pay direct tax as individuals.

On one hand, the country’s tax to gross domestic product (GDP) ratio stands at 16 percent using the rebased GDP figure of $10.9 billion (K8.2 trillion), which is slightly way below the sub-Saharan average of 16.5 percent.

“We need to review our tax regime and enhance tax administration and we can do this by leveraging on technology , exemption in VAT, curb smuggling of products such as cigarettes, alcohol, motor vehicles, sealing loopholes and leakages through tax exemptions and incentives or reduced rates,” Ligomeka said.

During the conference, most economic experts said that going forward, it will be difficult for the country to restore revenue losses emanating from Covid-19.

International Monetary Fund country representative Farayi Gwenhamo said the fund estimates a 4.3 percent revenue loss in 2020 and a similar 4.3 percent loss in 2021.

She said currently, the fiscal space remains tight while at the same time revenue shocks remain elevated.

Government has been struggling to balance its books and effectively deliver services to its citizens since the uncovering of the massive plunder of public funds commonly christened Cashgate in October 2013.

Up to 40 percent of Malawi’s development budget from the country’s traditional donors was lost in the process and as a consequence, the situation has raised the country’s domestic borrowing and puts a huge strain on the economy, with domestic debt currently K2.4 trillion (33 percent of GDP) or 57.2 of Malawi’s Total Public Debt currently at K4.1 trillion.

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