Developing countries such as Malawi should use lower effective tax rates as an industrial policy tool, the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) has advised.
The effective lower tax is used to offset ‘imperfect market conditions’ prevalent in the developing countries, according to the MCCCI public private dialogue manager Hope Chavula.
“In such cases governments must have capacity to pick industries with positive spillovers that are higher than the costs of distortions the intervention may cause in resource allocation,” he said in a paper presented to Finance Minister Ken Lipenga to be incorporated in the 2013/14 budget, whose meeting starts on May 17 at Parliament in Lilongwe.
Chavula said the private sector expects that the sectors that have been picked under the Economic Recovery Plan (ERP) and National Export Strategy (NES) will be given the necessary incentives in forthcoming budget to reduce their effective tax rates and ensure they lead the country’s economic growth agenda.
Quoting Jean-Baptiste Colbert, then Controller General of Finances in the French Government, who said “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest amount of hissing,” said government should not aim at increasing the corporate tax.
According to World Bank Doing Business Report 2013, Malawi’s effective corporate income tax rate (ETR) is 23.6 percent, as opposed to statutory corporate income tax rate (STR) of 30 percent.
But Chavula said the overall ETR is 34.7 percent, due to the inclusion of other taxes levied on companies.
“Although this overall ETR was better than in OECD [Organisation for Economic Cooperation and Development] countries at 42.7 percent, corporate income tax is the main tax revenue source for developed countries whereas developing countries like Malawi depend more on border taxes as their main revenue source,” he explained.
Chavula emphasised that government should not contemplate of increasing corporate tax rates despite its enormous demands to boost the treasury.
Zeroing in on the corporate tax which was described by experts as discriminatory, he said apart from distorting the allocation of resources by players on the ground, the sectors targeted for discriminatory corporate tax rates may have higher effective tax rates already; hence, punishing them even more.
Discriminatory tax is a tax on particular producers that is intended to make it easier for other producers to compete.
Said Chavula: “Fiscal authorities should never lose sight of the various positive spillovers or externalities various industries or sectors have on the economy. The telecommunications sector, for instance, has created various small businesses, cut communication hurdles, simplified sending of money to rural areas.”
He said the ‘discriminatory’ corporate tax rate of 33 percent for the telecommunication sector should revert to 30 percent, and that no sector, for example, the financial sector should be treated in the same manner.
The increase in corporate tax has been a bone of contention between government and the telecommunications sector particularly those in the mobile telephony category.
Airtel Malawi recently told Business News that the industry is still concerned with the corporate tax and pleaded with government to consider revising the rate downwards if government wants to encourage investment in the sector.
“There was that introduction of an extra three percent from 30 to 33 percent on corporate tax which was levied on mobile telecoms companies. Obviously, we were tempted to lobby against that, but it was rather too late,” he said.
Airtel Malawi managing director Saulos Chilima said the corporate tax has an impact because the levied profit could have been declared as dividend for shareholders, stressing that increasing corporate tax means increasing tax on money that could have been retained as profits to be invested in expanding the services that the company offers.
“Already at 30 percent, it was high and increasing to 33 percent, it is just making it worse, but we are hopeful that perhaps with continued lobbying, government will be kind enough to listen to us to revise it downwards, either the way it was at 30 percent or perhaps further down so that they can encourage investment,” he said.
The industry also argues that the taxed money can be used to deploy additional coverage and expand the telecommunication company’s footprints.
Lipenga, who announced the increase in the corporate tax, said government’s desire is to widen the country’s tax base, but without penalising Malawians.
He said, in an earlier interview, that the corporate tax base is still narrow due to the status of the economy and that the value added tax base continues to be narrow since the list of exempted or zero-rated supplies is longer than in most countries.
According to Adam Smith, who is regarded as the father of the modern tax system, a good tax system is guided by four main canons or principles, but the two most important are the canon of equality and economy.
The canon of equality calls for the broadest shoulders to bear the heaviest burden, thus basing magnitude of tax paid on ability to pay and it also calls for the burden of taxation to involve an equal sacrifice for every individual in proportional terms, so that the rich end up paying more than proportionate to their income.
This is already the case in Malawi because those with higher income pay proportionately higher tax rates than those with lower incomes.
But Chavula observes that additional tax bands with higher rates of income tax would imply that the already higher proportion which high income taxpayers pay is increased, thus punishing such income earners for being more productive since in the general incomes depend on productivity.
But the danger is that if economic players see that their extra effort is punished by an unnecessarily higher tax rates, they will choose not to expend their energies just to work for government, thus affecting productivity choking economic growth in the process.
The canon of economy calls for tax collection not to be too expensive to collect and also not to discourage business and productivity.
On the tax free thresh-hold, which members of MCCCI recently proposed should be at between K30 000 (about $75) and K50 000 (about $125), the chamber argues that fiscal authorities’ actions should support monetary policies that are being implemented.
“If fiscal measures push inflation, then there will be no cure to the evils which monetary is targeting, i.e. inflation and high money growth rate,” he said.