VAT on non-banking services

Of late, there has been an outcry against the increase in the cost of living. Among the commodities whose prices have gone up are cooking oil and fertilizer. 

What makes this issue interesting and perplexing is the way various authorities are explaining the genesis of the increase in the cost of living. For example, government is attributing the increase to the Covid-19 pandemic which is negatively affecting even the biggest economies in the world such as the USA.

On the other hand, consumers, through the Consumers Association of Malawi (Cama), are attributing the increase to various taxes the Malawi Government has introduced to maximise revenue mobilisation.  One such tax that has generated a heated debate is the recently introduced 16.5 percent value added tax (VAT) on non-banking services.

The question is: Was the introduction of this tax ill-timed? To understand this, there is need to know the role of banks in an economy. 

Banks, by definition, are financial institutions that accept deposits and make loans. Usually, the depositors happen to be households or business firms that have excess funds, but without immediate investment opportunity.

Borrowers, on the other hand, are households or business firms that have a shortage of funds, but a profitable investment opportunity. Thus, banks play an essential economic function of channeling funds from people who might not put them to productive use to people who can do so. This, therefore, means that banks play a crucial role in improving the efficiency of the economy. Without banks, capital, which is a very scarce productive input in developing countries like Malawi, would remain idle and, hence, become underutilised. 

However, banks play their financial intermediation role with a profit maximisation goal in mind. To achieve this, they tend to be very innovative by bringing up various services (products) which are grouped into banking and non-banking services. According to the Banking Act, the banking services include the business of receiving deposits or deposit substitutes from the public that are (a) payable, with or without interest, on demand or after the expiration of a stated period; and (b) transferable by cheque or by other means.

On the other hand, according to the Malawi Revenue Authority (MRA), non-banking services are those services that are essential for completing banking services, but are not banking services on their own. The fact of the matter is that, being profit maximisers that they are, Malawian banks have been charging VAT inclusive of charges, fees and commissions on their customers as they access banking services.

However, from the government’s perspective, the problem was that some banks saw it necessary not to remit the VAT to government as per the dictates of the law. As a consequence, the noncompliance by some banks with the law prompted the government to introduce an amendment of the VAT Act of 2021 so as to clarify on what constitutes banking services and non-banking services.

That is why after enforcing the 2021 VAT Act the public was alarmed by a notice from the Bankers Association of Malawi (BAM) announcing the introduction of a 16.5 percent VAT on non-banking services on first November, 2021. This announcement brought a lot of panic to the public so much so that many thought about joining villages banks.

The danger with these suggested means of keeping money is that, besides being risky as they are prone to theft, they are not amenable to the control by the monetary policy authorities. They make banks fail to appropriately perform their financial intermediation role thereby rendering the economy unproductive as investors fail to get capital to invest. 

Therefore, following the reaction of the public, one is left with more questions than answers. In fact, the following questions still remain unanswered. First, was BAM not aware of the impact the announcement of the introduction of the VAT on banking services would have on their customers? Second, if it was aware, why did it go ahead and announce without cross-checking with MRA? Third, did BAM deliberately twist the facts so as to turn the public’s anger against the government? 

One thing that is crystal clear is that government, through MRA and the Minister of Finance, tried to shed more light on VAT. MRA emphasised that, contrary to the announcement by BAM, VAT had been introduced on non-banking services. Additionally, the Minister of Finance even went a step further by encouraging customers that if they will be charged the 16.5 percent VAT in the course of accessing the banking services they should report the concerned banks to the Reserve Bank of Malawi (RBM) as the regulator of the financial institutions in the country.

On the other hand, except for the announcements by certain banks that their charges had not changed following the introduction of VAT, there has been no official communication from BAM to clarify its earlier announcement, a thing that has created a lot of uncertainty in Malawi’s banking sector. It is this lack of information from BAM that raises suspicion regarding the behaviour of banks in Malawi. 

It is not clear as to whether BAM really failed to fully understand the dictates of the amended VAT Act or it was a ploy to twist facts so as to incite the public’s anger against the government so that, through the public’s reaction, government should halt its enforcement.

However, going by the behaviour of Malawian banks, the latter’s assertion seems plausible. This is so because banks are used to making supernormal profits every year despite facing hostile macroeconomic conditions. For example, despite several industries such as tourism making losses last year due to the Covid-19 pandemic, almost all commercial banks in Malawi registered huge profits in the period. Hence, one can speculate that banks in Malawi have a lot of market power that enables them to earn the supernormal profits.  That is to say, banks in Malawi act as monopolies such that they exploit consumers to make supernormal profits.

Therefore, one can speculate that following the amendment of the VAT Act, banks felt that they will no longer be able to earn the supernormal profits that they had been earning, hitherto. And may be that explains why they decided to deliberately twist facts about the tax so as to incite the public’s anger against the government so that it should stop implementing the amended VAT to continue exploiting the public through making supernormal profits. 

It has to be mentioned that there are some goods called public goods or social goods such as roads and public hospitals, that banks, being private companies, cannot provide.  That is why government intervenes in the market through the imposition of taxes to collects as much revenue as possible for the provision of the social goods. 

To achieve this, every government tries to widen its tax base. Therefore, owing to the yearly supernormal profits the Malawian banks earn, the banking sector proved to be an excellent sector where the government could introduce the new tax so as to maximise its revenue. So despite the huge outcry from the public and the subsequent hide-and-seek act demonstrated by the banks, the introduction of 16.5 percent VAT on non- banking services was neither wrong nor ill-timed. It came at the right time when banks were making supernormal profits.