VAT removal won’t trigger price drop

Taxation experts say the removal of 16.5 percent value added tax (VAT) on cooking oil and tap water does not guarantee an automatic drop in prices of the commodities.

In separate commentaries on Wednesday on the tax measures in the proposed 2022/23 National Budget, taxation analyst Misheck Msiska and assurance and tax advisory firm EY argue that the removal of VAT on cooking oil and water could trigger price increases as the input VAT will now be a cost to the local cooking oil manufacturers and water boards.

In his 2022/23 National Budget Statement delivered last Friday in Parliament in Lilongwe, Minister of Finance and Economic Affairs Sosten Gwengwe said government has exempted cooking oil from VAT, hoping that the gesture will be reciprocated by manufacturing companies by reducing prices.

But in a virtual presentation on Wednesday at a seminar on the proposed 2022/23 Budget organised by Institute of Accounts in Malawi (Icam), Msiska, who is managing partner at MM Tax Advisory Service, said expectations should not be too high following the removal of VAT on the two items.

He said: “There are misplaced expectations on the impact of the VAT exemption on cooking oil and tap water.

“What is going to happen is that the companies which were claiming input VAT will now absorb that as part of their cost. In the end, the producers will have to price the products to correspond with the cost of production.”

In its commentary, EY observed that government has not considered the fact that the input VAT that was incurred by the cooking oil industry was claimed on VAT returns and could, therefore, not form part of the cost base.

Reads the commentary: “Importers of cooking oil for resale will be at an advantage unlike the local manufacturers who will not be protected from foreign competition.”

The firm further argued that while VAT on water was advantageous for water boards which could no longer regard input VAT as a cost, removal of VAT on tap water will now increase the cost base for water boards as they will no longer claim input VAT incurred.

Malawi Revenue Authority head of corporate affairs Steve Kapoloma said they are there to enforce the laws and it will be up to other bodies to ensure fair trading. In an e-mail response on Tuesday, Oilseeds Producers and Processors Association president Peter Ngoma described the removal of VAT on cooking oil as a progressive move for consumers, but indicated that the rise in global prices of raw materials could induce a rise in local prices.