Private sector incentivised for tax waive if it invests in construction of hostels for tertiary students

University of Malawi Chancellor College campus, one of tertiary institutions that need private sector assistance on accommodation 

* As part of the Tax Policy Measures of the 2024/2025 National Budget under discussion in Parliament

* Which was presented on Friday by Minister of Finance & Economic Affairs, Simplex Chithyola Banda

* “The private sector can also play a crucial role in complementing the Government’s efforts”

By Duncan Mlanjira

While acknowledging and committing to close the gap over deplorable living conditions of students in tertiary education institutions because of inadequate decent accommodation, the government is incentivising the private sector with tax waive if it wishes invests in construction of such hostels.

This is contained in the Tax Policy Measures of the 2024/2025 National Budget under discussion in Parliament, which was presented on Friday by Minister of Finance & Economic Affairs, Simplex Chithyola Banda, saying “the private sector can also play a crucial role in complementing the Government’s efforts”.

“Accordingly, as an incentive to the private sector to venture into the business of providing hostels to students in tertiary education institutions, the Government will start waiving import duty and import excise tax on building materials, furniture, and fittings specifically for the construction of hostels for students in tertiary institutions.

“Necessary safeguards will be established to avoid abuse of this facility, details of which will be available in the subsequent Government Gazette Notice.”

In 2022, during the graduation of 1,444 students from its three former constituent colleges — Kamuzu College of Nursing, the Polytechnic, the College of Medicine and Chancellor College — University of Malawi (UNIMA) Vice-Chancellor, Prof. Samson Sajidu said they were planning to increase its enrolment from the current 8,000 to 15,000 students by 2026.

Thus this needs to expand the accommodation base of the Chancellor College campus and Sajidu said the current intake of students did not match with the demand for higher education, noting that the only solution to this problem was to increase the intake while also expanding its infrastructural and technical development.

This is according to UNIMA’s strategic plan, which has a number of things to achieve by 2026 — some of which is to improve the university’s visibility internationally, improve infrastructural development by constructing more classes as well as hostels.

Chairperson of UNIMA Council, George Partridge challenged the University to look for other means of increasing its financial base other than relying on subvention from government, saying a university must always strive to grow and that such growth could only be attained if there are multiple sources of income.

“The University must increase its intake to meet the daily increasing demand. In addition, there must be numerous ways of delivering education with some studies being delivered online,” said Partridge then.

Meanwhile, effective on Friday midnight, Customs & Excise tax measures went into force, while value added tax (VAT), income tax, and administrative measures will take effect on April 1, 2024 upon the passage of relevant Bills by the august House and assertion by the President.

On the Customs measures, the Minister said in the 2024-2025 fiscal year, the Government removed import duties and taxes on electric motor vehicles and materials used for the construction of electric motor vehicle charging stations to reduce demand for fossil fuels and its negative impact on climate.

“I am pleased to report that we already have some investors importing electric motor vehicles and constructing charging stations. Encouraged by this good response, the Government is extending this facility to electric motorcycles.

“Specifically, the Government is removing import duty and import excise tax on electric motorcycles. However, standard rate of VAT will be applicable on both the electric motor vehicles and the electric motorcycles in line with good practice in VAT administration.”

On returning Malawians from the diaspora after a period exceeding one year, the law allows them to import personal household items and passenger motor vehicles duty-free.

However, Chithyola Banda says the current law excludes duty-free importation of motor vehicles with a capacity of more than five people, saying: “This legislation has proved discriminatory against some returning residents who import passenger motor vehicles with a capacity of more than five people.

“We are, therefore, amending the law to accommodate all passenger carrying motor vehicles for returning residents that they were using while living outside the country.”

And as one way of encouraging value addition and promoting local manufacturing, the Minister said the Government is allowing the Malawi Defence Force, Malawi Police Service and Malawi Prisons to import duty-free fabrics and accessories for making uniforms under the Customs Procedure Code (CPC) 421.

It is also increasing import duty on finished iron sheets of tariff subheading 7210.49.90 from 15% to 25%; increasing import duty for sacks of tariff subheading 6305.33.00 from 20% to 25%; and introducing a surcharge of 10% on sacks for cement packaging.

Also to be introduced is the legislation that would allow the use and transmission of electronic certificates of origin — to align with international best practice.

“To align with the taxation of other petroleum products such as petrol, paraffin, and diesel, the Government is increasing import duty from 20% to 25% and introducing 10% import excise duty on automotive lubricants.

Broadening the Tax Base

The Government is introducing import duty of 5% and 10% Excise Duty under tariff subheading 8802.30.00 which covers airplanes and other aircraft of an un-laden weight exceeding 2,000 kg but not exceeding 15,000 kg and similarly petroleum jelly under HS code 2712.10.00 will now attract excise tax of 10%.

“To ensure that tax benefits are enjoyed within a specific period and prevent abuse, the Government is restricting the duty-free importation of building materials under CPC 442 for the tourism sector to 3 years, subject to an extension of 2 years at 50% rate of the normally applied Import Duty & Excise Duty while VAT will be paid at the normal rate of 16.5%.

Having noted of abuse of duty-free institutional motor vehicles or other motor vehicles that are cleared at concessionary rates by some individuals who are not beneficiaries, the Government is introducing a new note to control this abuse — that all institutional motor vehicles that are cleared under any Customs Procedures Code of the Customs and Excise (Tariff) Order (CPC) should conspicuously and indelibly bear the name of the institution on both sides of the vehicle before issuance of a Customs Clearance Certificate (CCC).

The CPCs to be affected by this change are 422 for lorries, pickups and vans specifically acquired for church and other religious institutions use; 437 for passenger carrying motor vehicle for educational, health, tourism institutions and NGOs; 438 for Goods carrying motor vehicles for horticultural enterprises, educational, health and tourism institutions and NGOs.

And also 439 for passenger carrying vehicle for NGOs; 450 for passenger carrying motor vehicles for hotels, inns, lodges and conference centres; 451 for specialized vehicles for safaris, hotels, lodges and Inns; and 452 covering one bus of seating capacity of 26 or more for churches and similar religious institutions.

Amendments to the Customs & Excise (tariffs) Order to improve clarity, correct some errors, prevent abuse and overlapping of some privileges and broaden the tax base, include:

i. Create notes 1 and 2 under CPC 419 that allows Cabinet Ministers to import three motor vehicles duty free, to clarify that the entitlement under this CPC only applies to a serving Cabinet Minister.

Where a serving Cabinet Minister, who is also a Member of Parliament (MP), and has already benefitted from the entitlement under CPC420 — that allows MPs to import two vehicles duty free, the Cabinet Minister may be allowed to import only the remaining motor vehicle(s);

ii. Amend note 2 to CPC 420 to clarify that where an MP, who is also a Cabinet Minister, has imported two or three motor vehicles duty-free under CPC 419, the MP shall not be entitled to duty-free provision under CPC 420 even after the Member ceases to be a Cabinet Minister but continues to be an MP;

iii. Amend ‘special requirement’ under CPC 4053.000 governing clearance of motor vehicles imported under temporary import permits (TIPs), to indicate that fines charged by the Commissioner General for failure to re-export motor vehicles under this facility will be reduced from 50% to 20% of the duty payable;

iv. Amend CPC 422 (c) to include prayer mats so that they can be imported for use in the mosques specifically for prayers just as pews are procured duty free for use in churches;

v. Create new CPC to cater for duty-free clearance of vehicles purchased under Customs sale and locally manufactured vehicles; and

vi. Create a new CPC to cater for duty free clearance of election materials by the Malawi Election Commission.

Income Tax Measures

To cushion employees in formal employment from the effects of the currency alignment, the Government has increased the zero pay-as-you-earn (PAYE) bracket from K100,000 to MK150,000 — the first K150,000 (0%); next K350,000 (taxed at 25%); next K2.05 million 30%) and excess of K2.55 million at 35%.

The Budget also recognizes the assistance the private sector provides to people who have been affected by various calamities in the country and as one way of appreciating “this noble gesture and encouraging wide participation in providing the basic needs in times of disasters, the Government will allow 100% deductions for monetary donations to calamities made through the Department of Disaster Management (DODMA)”.

“In the same spirit, Madam Speaker, the Government will amend Section 39A of the Taxation Act to include the cost for provision of water supply as an allowable deduction at 50%. Thus, if the private sector drills a borehole, 50% of the cost of the borehole will be an allowable deduction.”

The Government is also reducing the withholding tax (WHT) for mobile money agents from 20% to 1% — this being done to align with the prevailing WHT rate for banks and insurance agents, which is at 1%.

“In addition, most of the mobile money agents do not make enough money to pay personal income tax as their income falls below the minimum threshold of paying personal income tax.”

On banks, Chithyola Banda said the Government has introduced an additional 10% corporate income tax for bank profits above K10 billion, saying this was done to generate additional revenue for reconstruction works in areas that were catastrophically damaged by Cyclone Freddy.

“However, the Government recognizes that other sectors make similar profits as the banking sector. Accordingly, the Government is extending the application of the additional 10% corporate income tax on profits above K10 billion to all businesses that make such profits to ensure equal and fair treatment of super normal profits.”

He also said it has been noted of the confusion regarding withholding tax on foodstuff and withholding tax on services for taxpayers that provide prepared or processed foodstuffs.

“The Government is therefore introducing a note to the Fourteenth Schedule defining foodstuff as ‘edible farm produces in their raw state’ in order to distinguish the 3% withholding tax rate for the supply of foodstuff from the 20% withholding tax for the supply of prepared or processed food, which is a service.”

To align with the 15% tax rate on investment of pension funds, the Government is reducing the withholding tax on interest realized from investments of life assurance from 20% to 15%. Further, the Government is amending paragraph (i) of the Eleventh Schedule to clarify that the 15% income tax rate on pension funds only applies on the return on investment of pension funds and not on the income of the Pension Fund Managers, which attracts 30% corporate income tax.

Through Malawi Revenue Authority (MRA) to encourage tax compliance, the Government is introducing a Tax Clearance Certificate (TCC) as one of the requirements for the processing of every export permit issued by the Ministry of Mining.

Similarly, a TCC will be required for both registration and renewal of Industrial Rebate licenses for the manufacturing sector and finally a TCC will also be required on the clearance of explosives. The Fifteenth Schedule will therefore be amended accordingly.

He also had a take on public commuter minibuses, saying currently, minibus owners pay a flat rate of Presumptive Tax as part of their Income Tax obligations, regardless of the seating capacity of the minibus.

“For instance, minibuses with a seating capacity of 14-16 seats pay the same amount of income tax. The seating capacity of any commercial motor vehicle is a more logical variable of calculating income and therefore the amount of tax obligation.

“Accordingly, Government will amend Section 91B of the Taxation Act to change application of Presumptive Tax on commercial passenger motor vehicles to be based of seating capacity. Consequently, Commercial Passenger Motor Vehicles under the Presumptive Tax regime will be required to pay a tax of K5,000 per seat per year.

“I must emphasize that this is not an increase of the income tax for minibuses but rather an improvement on its application to encourage fairness,” he said, while encouraging MRA and the Department of Road Traffic & Safety Services (DRTSS) to collaborate on enhancing tax compliance in this sector.

Under the Income Tax Amendments, the Government will amend the Fringe Benefits Tax (FBT) schedule to clarify that 50% of the value of data and airtime is a taxable value as a fringe benefit.

Value Added Tax Measures

“We have noted that some taxpayers are only issuing VAT fiscal receipts when they sell taxable supplies, and no VAT receipts are issued when they sell VAT exempt products.

“However, this practice opens up opportunities for abuse. To mitigate against tax avoidance, the Government is introducing a requirement to issue tax invoices by VAT registered taxpayers even when they sell exempt supplies by amending Section 25 (1) of the VAT Act.

“You will agree with me that taxpayers have been complaining on the costs associated with the use of electronic fiscal devices (EFDs). In order to reduce compliance costs and ease administration of VAT, I am pleased to announce that the EFDs will be phased out to allow for the introduction of a new electronic billing system for the effective implementation of the VAT Act.

“Importers of services were not required to register as VAT taxpayers although they were required to remit the VAT they collect. However, for better reconciliation of VAT revenue, the Government is introducing the requirement for VAT registration of importers of services. All necessary requirements for VAT registration will be followed before registration is effected.

Non-Tax Revenue

“Our commitment to the digitalisation agenda of the business processes and the payment systems remains the Government’s priority in order to improve on revenue collection across Government entities.

“As I conclude on the tax and non-tax measures, Madam Speaker, I want to emphasize that these measures reflect our unwavering dedication to fiscal prudence, equitable taxation, and sustainable economic growth.

“I urge this august House to consider and support these policies, which are pivotal to our nation’s recovery and prosperity.”

In his final conclusion to the budget, Chithyola Banda assured fellow Malawians that the economy “is getting back on track recovering from the economic and climate related shocks that the country experienced”. “However, the country’s fiscal position remains challenged by the expenditure pressures that far outpace our revenues. Nonetheless, the 2024/2025 budget aims at accelerating economic recovery by boosting production.

“Let me take this opportunity to thank our development partners for the enormous support rendered to foster the country’s development agenda including management of shocks. I, therefore, look forward their continued support as we implement the 2024/2025 budget.”

He emphasised that economic recovery is indeed happening following the recovery efforts the Government has been implementing, whose six signals that are demonstrating that recovery is indeed taking place include:

* fuel shortage being a story of the past;

* forex availability greatly improving;

* food prices have started to stabilise and are expected to reduce even further;

* The extended credit facility (ECF) programme with the IMF materialised;

* The labour export programme has commenced; and

* resumption of direct budget support.

“I wish to urge my fellow honourable members to constructively deliberate on this budget. I call upon all Malawians to work together to ensure the attainment of our development aspirations in the spirit of one Malawi, one People and one Nation.”