2010

Policy Brief No 1
Expanding Tax base in Malawi
What should be done?

Malawi Knowledge Network

The Polytechnic
P/Bag 303
Blantyre

www.maknet.org.mw

MAKNET
12/2/2010
 EXPANDING THE TAX BASE IN MALAWI: WHAT SHOULD BE DONE
Moderated by Collins Namakhwa
View synthesized by Martha Khungwa, MAKNET Programme Officer

MAKNET POLICY BRIEF SERIES NO. 2010-1

1.0 Introduction
Government announced plans to broaden tax base in its fiscal budget for 2010/11. This
move is welcome as it will ensure more revenue collection to finance government
operations. Malawi’s fiscal budget is financed by tax and non tax revenue and
supplemented by domestic and external loans. Generally, It is a wish of the
governments to finance its operations by the domestic revenue which can be raised
through taxation or other non tax revenue sources, however when the tax base is
small, government is forced to either borrow from internal or external sources
thereby incurring interest or raise tax rate or broaden the tax base.

With growing population and growing needs, it is imperative that at certain point tax
have to be increased or broadened in order to finance the needs of a growing
population. Research shows that, broadening tax base has never been an easy task as
the cost of collecting the additional tax has to be taken into consideration. For the case
of Malawi, taxes are already seemingly high and whether to broaden or increase the
tax base, it is very critical to consider such. The discussion on MAKNET online
platform attempted to find out what could be done in expanding the tax base in
Malawi.

This policy brief is the product of the synthesis of the discussion on MAKNET on line
forum and seeks to draw attention of the policy makers mainly those in taxation areas,
planning agencies and its stakeholders on what could be done on expanding tax base
as well as increasing revenue to finance budget operations without hurting business
and taxpaying individuals.

2.0 Objective of the Discussion

Tax policy plays a great role in most economies and importantly in developing
countries such as Malawi since it is the major source of source of government revenue.
Tax helps in financing government operations but if taxes are very high, they act as
deterrence to investment hence negatively affecting the development of a country. The
discussion was organized with a view to provide forum members with a platform to
discuss on what should be done on expanding the tax base for Malawi.
3.0 Why expand tax base?

Government needs resources to finance its operation. Taxes as well as other non tax
revenue have been the traditional way through which the budget is financed. However
when expenditure are higher than the revenue government goes into borrowing to
supplement the budget. This is either through grants or loans. It is always desirable to
finance operations through taxes however, sometimes the tax base maybe small to meet
the needs of the government hence policy makers may have an option of either increasing
or expanding taxes. Increasing tax rates for the case of Malawi may not be desirable as tax
rates are deemed moderately high hence the option maybe to broaden the tax base. Thus
the discussion was centred on how tax base can be increased without hurting the some
parts of the economy.

If the tax-base is expanded, it means more assets or economic activities will be taxed and
this will lead to an increase in the money going to government coffers to finance its
operations. In the same way, it can be implied that if tax base expands, government would
find more money domestically for social and economic development without borrowing.

4.0 Complexity of tax administration and the challenges

It is the wish of every government to be able to finance its budget through domestic
resource. In an event of deficits government is forced to either increase taxes or
borrow from internal or external sources. The option has been to broaden the tax base
by widening the activities and assets that have to be taxed, however, this does not
necessarily mean more revenues will be collected as the cost of collection must be
considered. Any attempt to broaden the tax base needs to take into account whether
the extra revenues outweighs the collection costs. This then calls for tax efficiency in
which the revenue collecting body needs to make sure that administrative cost do not
surpass the revenue collected.

For the tax collecting body to enforce tax payment it needs resources and issues of
efficiency comes into play. Furthermore, stories of rampant corruption by tax
collectors have been disheartening to the populace and all this pauses challenges in tax
collection. It is therefore of paramount importance that the issue of corruption among
tax collecting officials be addressed comprehensively if government is to collect
maximum tax.

It is a general knowledge that there are still some sectors which are not paying tax
most of the eligible taxes such the informal sector which is very large in Malawi.
Though there are efforts to formalize the informal sectors there is still a long way to go
and collection taxes in this sector is very challenging. One commentator said that
‘there is a huge potential loss of revenue from the informal sector,’ however there are
big challenges in collecting taxes from this sector as its players lacks stability and
identification and even record keeping remains a problem. With the lack of
enforcement of business registration and also lack of national IDs, most SMEs escape
paying tax. This brings into mind the need to finalize the national IDs for the citizen of
Malawi. This will aid in the identification of Malawian in many aspects including tax
payments. In the long run government will be able to benefit through increased tax
paying.

One member advocated for re introduction of ‘Msonkho’ for all men above 18 years of
age. Though the ‘msonkho’ was abolished at the dawn of democracy, it was the view of
the members that it encouraged as well as instilled in the citizens a sense of
responsibility towards their country and with that they could also be able to demand
accountability from government through improved service delivery. With the growing
informal sector, the idea of ‘msonkho’ could be helpful to capture population working
in the informal sector who do not pay taxes yet receive social public services at the
expense of few people. One member commented had this to say,

“it seems a formally employed person is suffering

with high tax from being known and registered
while someone raising chicken reaping
fruits for being informal’

However, the challenge remains on how this exercise can be enforced since parties
which were campaigning for multiparty demonized ‘msonkho’ as oppression. For any
government to reintroduce it, it will fear possible backlash from voters from its
followers. On the other hand the cost of collecting that tax may be too

Another important element highlighted in the discussion was about enhancing tax
compliance in the citizen. Most members felt this would require intensive education
and incentives to the tax payers to convince them about the importance of taxes. The
taxpayer must be convinced to pay the tax through receiving improved local services
and perceiving that the taxes and fees are being administered fairly. The first priority
must therefore be to improve service delivery—since people are always more willing
to pay taxes and fees if in return they receive some tangible benefits or services. As
earlier alluded to corruption among the tax collecting officials remains a thorn in fresh
of tax payers

From the discussion, it was strongly put forward that government should not
introduce new taxes as a way of broadening tax base but should focus on how to
capture more on the tax net. There are few tax exemptions in Malawi as such
increasing may lead to more people trying to find ways of making sure they ran away
from paying the tax.
5.0 Suggestion solution
In the discussion the following suggested solutions have been put forward to
government and its stakeholders for possible consideration:

1. Investigate other sources of revenue.

a. Government need to formalize areas which could be paying income
tax. There are several business that are operating in town with the
knowledge of government which could be incorporated in the tax
base as long as effective ways of collecting the revenues are devised.
Areas such as rent income, proceeds from minibus owner and taxi
owners, kaunjika sales etc.
b. Reintroduction primary school fee. If in 1990 poverty level was at 60
percent and now at 40 percent (WMS 2008) this would suggest that
people are better off than before. One commentator went ahead to
calculate the amount government would collect annually if primary
school fees is pegged at MK100.00 per term . it was found out that it
will be MK300 per year and with 3,200,000 pupils in school it
translates to MK960,000, 000 enough to buy drugs in a few health
centers.

2. Effective communication by government authorities to show the citizen on

how their tax is contributing to specific public programmes. MRA need to
mount an intensive civic education about taxation in Malawi now that we
have infrastructure that has been built using domestic resources. This is
envisaged that it could help improve compliance.

3. Revise tax holidays. Malawi is extracting several minerals and of late is the
Uranium. Need to consider revisiting tax holidays so that the country
maximizes the benefits from investment by multinational companies.

4. Increasing tax on luxuries such as like cigarettes and beer.

5. Introduction of user fees.

a. Government could also look at other services which fees could be
introduces in order to maximize tax collection.

6. MRA and its stakeholders should carry out an in depth study of the informal
sector in Malawi and how best tax collection be done from that sector.
 6.0 Conclusion

The MAKNET forum recognizes the challenges that tax collecting agencies face to
administer tax and furthermore how to deal with the informal sector which is
seemingly not contributing its deserving tax share. Nevertheless, through strategic
interventions and understanding of the informal sector, some possible means
could be found to make sure players participate in sharing the ‘tax cake’. It is clear
that various aspect of the economy can be identifies to broaden the tax base as
opposed to increase the tax rate.

MAKNET forum is very grateful for the contribution received during the discussion
on this topic. Regular contributors included Mike Chilemba, Khumbo Shawa, William
Nkholongo, Andrew Khumbo Chidothe, Chiza Wakhama, Roland Masi, Kelvin
Tsamwa, John Chipeta, Hope Chavula, Charles Yamikani Tambala and Hope Azizi
among many other contributors.

For more information on this series please contact

The Programme Officer
Malawi Knowledge Network
The Malawi Polytechnic
P/Bag 303
Blantyre, Malawi
Email: admin@maknet.org.mw,
website www.maknet.org.mw

Malawi Knowledge Network (MAKNET) is hosted by the

Malawi Polytechnic and sponsored by the Africa Capacity Building Foundation.