ICAM proposes bringing all SMEs into the tax net to broaden tax base

ICAM Chief Executive Officer, Noel Zigowa

* There was the need for MRA to collaborate with local Councils to rope in the SMEs and to improve on registration of SMEs

* MRA should aggressively follow up on those who have been subjected to withholding tax on provision of goods or services

By Duncan Mlanjira

Local Councils collect market fees daily and annual rates effectively and thus Malawi Revenue Authority (MRA) can leverage on this existing system by bringing all small & medium enterprises (SMEs) into the tax net to broaden the tax base.

This was suggested by Institute of Chartered Accountants in Malawi (ICAM) on Monday at the first of three Pre-budget consultation meetings which Minister of Finance & Economic Affairs, Simplex Chithyola Banda has arranged with essential stakeholders, which continue on Wednesday in Lilongwe and Friday in Mzuzu.

The stakeholders included those in the business community, NGOs, faith-based organizations and the academia where they presented their views and proposals on the 2024/25 National Budget and the high table included Minister of Information & Digitalisation, Moses Kunkuyu; Malawi Revenue Authority (MRA) Commissioner General, John Biziwicki; Director General of National Planning Commission, Thomas Munthali; MCCCI president, Lekani Katandula; BAM president Zandire Shaba, among other high profile delegates.

In its presentation, ICAM said there was the need for MRA to collaborate with local Councils to rope in the SMEs and to improve on registration of SMEs, MRA should aggressively follow up on those who have been subjected to withholding tax on provision of goods or services.

“Withholding Tax should generally not be regarded as a final tax but a means of bringing entities into tax net,” said ICAM’s Chief Executive Officer, Noel Zigowa. “Enforce taxation on informal businesses by implementing simplified tax regimes or enhancing presumptive taxation for small-scale enterprises.”

However, at an interface with the media in November last year, MRA indicated that it has registered over 5,000 new tax payers, majority of whom are SMEs through the introduction of the Block Management System (BMS) — which physically maps and identifies taxpayers and breaks them in manageable blocks to allow MRA visit them personally to educate and encourage tax compliance.

Meanwhile, ICAM advised the government to offer tax holidays or other incentives to foreign investors who invest in export-oriented industries by “encouraging more foreign direct investment (FDI) in these sectors”.

“Exporters, aiming to avoid mandatory conversion, might resort to under-reporting income to lower their tax liabilities — resulting in reduced income tax collections for the government.

“RBM should consider revising the mandatory conversion policy of 30% forex to provide incentives or benefits for exporters who bring in foreign exchange through legal channels without mandating a specific percentage conversion.”

Other tax incentives included introducing measures that “encourage legitimate exports without imposing restrictions that inadvertently promote illicit practices, striking a balance between revenue collection and export promotion”.

“The imposition of mandatory conversion of export proceeds has inadvertently created incentives for exporters to consider smuggling goods or bypassing official channels.

“Offer tax rebates or credits for exporters based on the amount of foreign exchange they bring into the country, thereby incentivizing legal export transactions and consider tax incentives for those converting their foreign currencies with ADB rather than imposing restrictions on them.

On tax administration, ICAM maintains that value added tax (VAT) remittal should be on cash basis for all, adding that VAT implementation on invoices creates a lot more debts to taxpayers.

“There are situations on the market where you issue an invoice. At that time EFD machine has to be used to issue the receipt. You create a VAT debt but the receivable is not received. Some even take so many years yet VAT is due and payable at invoice.

Other tax matters were protecting the plastic manufacturing industry, saying: “Excise Duty should be increased for imported plastic products such as plastic plates which can be produced locally and decrease tax for plastic raw materials.

“Promote production and value addition of agricultural products that are produced in large quantities. Government should revise income tax on companies and individuals involved in primary agriculture from 30% to 10% — this will encourage investment in the agriculture sector, a major source of forex.

“Withholding taxes on mobile money transactions should be made as final tax. Mobile money agents are mostly small businesses who cannot afford an accountant to prepare their books for proper tax return that could include allowable expenditure.  Let them be considered a reduced percentage and that should be finale tax.”

ICAM also advised the government on public debt management by prioritising renegotiation of high-cost debt to reduce interest payments and ease the burden on the budget.

Debt tracking and management systems is also to be improved to ensure efficient allocation of borrowed funds and minimize mismanagement.

“Explore concessional borrowing options with international organizations to secure funds with lower interest rates and longer repayment periods.”

Corruption was also touched, saying there was need for meaningful fight against the vice, emphasising that “corruption has distorted the distribution of wealth”.

“Wealth is limited to those that are politically connected. Corruption discourages voluntary declaration of taxes from some tax payers — blacklist suppliers involved in corruption.

ICAM, who also contributed towards previous pre-budget consultations, made reference to what their previously proposed for further consideration, sayingSection 46 should be replaced and to repeal Section 46E to ensure that penalties reflect revenue loss to MRA.

“Amend Section 54(1) and (2) of the Taxation Act and Section 50 of the VAT Act in order to specify the type of accounting records to be kept by taxpayers.

“Strengthen legislation by introduction of Controlled Foreign Corporations (CFC) to counter tax avoidance. Consider in embracing both the G20 Base Erosion and Profit Shifting (BEPS) project.

“Review exemptions in the First Schedule to the Taxation Act, more especially for non-governmental organisations and not-for-profit organisations. These no longer rely on donor aid and generate their own business income for sustainability.