Pension tax irks workers

Malawi Congress of Trade Unions (MCTU) has decried the 16.5 percent value added tax (VAT) that will be levied on pension administration fees, saying it is counter-productive and presents additional costs to employers.

MCTU’s reaction comes on the back of notices from pension fund managers on the roll out of VAT levied on pension administration fees payable by firms or organisations effective September 1 this year.

MCTU general secretary Denis Kalekeni in an interview yesterday said that employers are already struggling with the effects of the Covid-19 pandemic, resulting in retrenchments and salary cuts; hence, the tax is counter-productive.

He said: “If employers fail to pay the VAT as imposed by Malawi Revenue Authority [MRA], it is obvious that the pension administrator will deduct the VAT from the employees’ pension contribution.

“This, if left unchecked, will erode the accumulation of employees pension funds.”

Kalekeni said imposing another expense in form of VAT to such employers will encourage default of the pension remittances, which  will eventually suffocate the employees at the time they have been fired.

All along, pension business was undertaken by life insurance companies and pension contributions were paid together with life insurance premiums as a percentage of the payroll together with pension administration fees.

But following the enactment of the Pension Act, 2010, life insurance business was separated from pension administration operations to comply with the Act.

Life and Pensions Association of Malawi president Stain Singo said in a statement that the pension industry engaged MRA to clarify the application of VAT on pension administration fees and the guidance given is that VAT is applicable, which is a complete departure from the old practice.

Gerald Chima, Nico Pensions Services Limited general manager said the move will increase cost of pension to employers by 1.5 percent, but each employer will need to check if their VAT status allows them to claim this tax.

Employers Consultative Association of Malawi executive director George Khaki described the move as an unexpected, but said organisations that are VAT registered can claim this.

Weighing in, tax expert Emmanuel Kaluluma said pension benefits are for the future, observing that the development defeats the purpose as it is a burden.

But in a written response yesterday, MRA head of corporate affairs Steve Kapoloma said the tax collection agency is only implementing Section 16 of VAT Act, which deals with VAT on supply of services.

“Pension administrators charge an administration fee for managing pension schemes. The fee attracts VAT like any other fee charged on taxable services,” he said.

Kapoloma said according to the VAT Act, pension contributions do not attract VAT, but added only fees for administering the pensions contributions attract VAT.

“The VAT charged on fees is paid by the employer who is the recipient of the pension administration service,” he said.