Government Responses to Private Sector Proposals in the 2006/07 National Budget and Implications for the Private Sector: Government Responses to Private Sector Proposals in the 2006/07 National Budget and Implications for the Private Sector Chancellor L. Kaferapanjira Chief Executive MCCCI


The Context - Major Challenges to the Malawi Economy: The Context - Major Challenges to the Malawi Economy The major challenge facing the Malawi economy is instability, which creates uncertainty. Factors that create this instability are present at both macro and micro levels. The ‘helicopter’ perspective, however, points the dependency on primary commodities as the most important single challenge to the Malawi economy. Long-term efforts therefore should focus on building a solid and sustainable manufacturing base.


Macro-Level Challenges: Instability in GDP growth: Macro-Level Challenges: Instability in GDP growth GDP growth depends on agriculture sector performance, which contributes 40% to total GDP. Particularly relevant is level of maize production. Agriculture production depends on rain, hence prone to erratic weather patterns.


Rising Inflation: Rising Inflation Inflation is largely influenced by movements in exchange rate Other factors include weather patterns and money supply.


High Interest Rates: High Interest Rates Interest rates are largely influenced by Government borrowing to finance its deficits


High Interest Rates, cont’d: High Interest Rates, cont’d Interest rates are also influenced by: Rising inflation. Oligopolistic nature of the money market in Malawi (2 banks control 58% of assets Only 20 MFI.


Fluctuating Exchange Rate: Fluctuating Exchange Rate Performance of exchange rate is influenced by mainly two factors: Tobacco sector performance, which in turn depends on weather patterns. Donor aid inflows


Micro-Level Challenges: Micro-Level Challenges The MBCS 2006 results indicate that cost of doing business in Malawi is influenced by factors such as: Fluctuation of exchange rate; Poor supply of utilities services; Lack of market information. Lack of affordable & reliable information; Poor road infrastructure; etc. This is supported by the World Bank Doing Business Report 2006 which indicates that the cost of doing business in Malawi is one of the highest in the world as characterized by: High cost of credit; High tax burden at 56.5% of gross profit; High export facilitation costs; Too many business licenses costing 244.7% of per capita income; Low recovery rate on closing business (12.3 cents out of every dollar invested); etc


Micro-Level Challenges – MBCS 2006: Micro-Level Challenges – MBCS 2006


Private Sector Proposals in the 2006/07 National Budget & Responses: Private Sector Proposals in the 2006/07 National Budget & Responses Improving Agriculture Production: Formulation of policy to ensure affordability of improved technologies (irrigation, etc). Price cap on maize to be removed and Government to allow full participation of private sector in fertilizer subsidy prgm. In response, agriculture and irrigation were given the highest allocation in the development budget. Fertilizer subsidy extended to all four types of fertilizers to encourage production of other crops e.g cotton. Allocation to extension services (training and bicycles). Allocation for Lilongwe University of Science and Technology. Rehabilitation of farm institutes at Thuchila, Chitala and Mbelwa to revive short courses to smallholder farmers. Resuscitation of dormant irrigation schemes


Encouraging Exports: Encouraging Exports Proposals Implementing a more flexible exchange rate. Review of 40% compulsory conversion of foreign exchange proceeds. Government to implement reforms to bring efficiencies and allow skills migration in the core sectors, i.e. tobacco, etc. Responses No direct response to the proposal but subsidy program and improved extension services relevant.


Fiscal Management, Taxes and Tax Administration: Fiscal Management, Taxes and Tax Administration Raising incomes for increased revenues from taxes Broadening the tax base by capturing most of the informal sector (through amnesty, lower tax rates for small businesses, etc). Implement policies to raise incomes of people from which taxes can be raised, i.e. creating a middle income class through PPP; preferences in public procurement; establishment of a development bank, etc. The minimum tax to be abolished. Government has started process to establish MDB. Zero-rated band of income tax increased to K72,000/annum and top rate reduced to 30% to encourage savings and investments. Minimum business taxes were abolished.


Cont’d: Cont’d Taxation of Capital Gains Introduce indices in taxation of capital gains and implement them. An asset subject to capital gains tax provisions will now be eligible for tax adjustment. However, private sector is of the view that comprehensive indexation allowances be introduced. Rollover Relief Clear rollover relief need to be introduced to encourage investors to modernize their production facilities. Rollover relief was introduced. However, taxpayer is obliged to acquire the qualifying replacement asset during the year the disposal occurred.


Cont’d: Cont’d Transfer Pricing Develop and publish transfer pricing regulations Alternatively MRA to allow companies to ask for advance rulings or guidance on transactions being contemplated by them. The issue is still outstanding. Withholding taxes Meaningful thresholds where withholding taxes are applicable. Start-up businesses to apply for WHTEC. The issue is still outstanding.


Cont’d: Cont’d Capital Allowances Capital allowances to be used as the main incentive to investors as they are non-discriminatory. Mining investments will enjoy more generous capital allowance regime. Other areas are yet to be considered. Mortgage Interest Government to introduce relief on mortgage interest to promote building of decent houses. This remains an issue for the future. Fringe benefit tax Increase threshold and special consideration be made for estates/farms where provision of certain basic amenities is not a benefit but only way of ensuring that employees stay close to the estate/farm. This issue was not addressed.


Cont’d: Cont’d Allowance for Pension Contributions Re-introduction of allowances for individuals and increase those for companies. Introduce relief on premiums paid for life policies of at least 10 years. These are yet to be addressed. VAT VAT rate to be reduced to 15%. Relief for bad debts to be introduced. Pharmaceuticals to be zero-rated. VAT on hotel bills and spare parts for saloon vehicles to be allowed as input tax. VAT on bad debts is now deductible. Pharmaceuticals are now zero-rated. Petrol powered goods carrying vehicles now exempt from VAT. Mining Investments to enjoy special exemptions on VAT.


Cont’d: Cont’d Customs & excise duty Customs duty on buses of minimum size should be removed to be in line with trucks. Duty on spare parts for trucks and buses should be removed. Treatment of equipment for duty purposes should depend on the final use. Generators with capacity of 375 KVA and above now regarded as industrial equipment, therefore custom duty removed. Excise duty on passenger carrying vehicles with seating capacity of 12 passengers or more, now excise duty free. Mining investments will enjoy special exemptions from import duties.


Cont’d: Cont’d Tax administration Pre-shipment Inspection (PSI) system should be reviewed. Taxation Act should be reviewed rather than amending it piecemeal. The Customs & Industrial Rebate schedule is being expanded to include electricity generating and gas distribution industry; public sewage and disposal works industry; and public water supply industry. MRA will take up the responsibility of PSI after appropriate training and other logistical arrangements are concluded next financial year.


Infrastructure: Infrastructure Reducing Transport Costs Road network in Malawi must be upgraded to all weather roads. Government must prioritize where there are core economic activities and ensure that infrastructure is maintained on time. Investment in Nacala railway line must be a priority. Mzimba-Kafukule-Ekwendeni-Njakwa road to commence construction during 2006/07. Lumbadzi-Dowa-Ntchisi road to commence construction during 2006/07. Comprehensive pre-feasibility and feasibility study for Shire-Zambezi waterway. Public works program – additional K1/litre of petrol and diesel.


Cont’d: Cont’d Key Utilities to function better Adequate resources for investment to be allocated to key utilities, i.e. water boards and ESCOM. Appropriate electricity tariffs to be levied on industry. Electrification of 27 trading centres under MAREP. Tedzani I & II being rehabilitated to restore 40 mega watts of electricity. ESCOM to sign Power Supply Agreement with HCB of Mozambique. Government is discussing with donors for resources to finance rehabilitation of the water boards.


Conclusion: Conclusion The 2006/07 national budget has attempted to include most of the private sector proposals. For the first time all tax measures are either revenue neutral or reductions, which is commendable. This was achieved mainly because of the fruitful pre-budget consultations with the Minister of Finance. Consultations and dialogue with the Minister of Finance and other cabinet ministers should continue to ensure that proposals that were not included in the budget be considered in future.