ENHANCEMENT OF VAT COMPLIANCE MANAGEMENT IN MALAWI By Use of Electronic Fiscal Devices

Content Introduction Brief Background to VAT in Malawi VAT enhancement measures Electronic Fiscal Devices (EFDs) Problems Relating to VAT Prior to EFDs EFDs Statistics in Malawi Taxpayer Acquisition Status Challenges relating to EFDs Way Forward in Mitigating the Challenges Penalties Conclusion

Introduction The republic of Malawi is a landlocked country in southeast Africa bordered by Zambia to the northwest Tanzania to the northeast and Mozambique on the east, south and west. Malawi is over 118,000 square km making it one of the smallest countries in Africa. It has an estimated population of 17.7 million. Lilongwe is the capital which is also Malawi’s largest city. The second largest is Blantyre and the third is Mzuzu. The name Malawi comes from the Malavi, an old name of the Nyanja people that inhabit the area. The country is also nicknamed "The Warm Heart of Africa

VAT Administration in Malawi VAT is administered by the Malawi Revenue Authority (MRA). MRA was established by Act of Parliament enacted in 1998. It started operations in 2000. MRA is a quasi government institution which acts as an agent of the Malawi Government in tax administration.

Brief Background to VAT in Malawi Malawi introduced a sales tax, surtax, in 1970 at 5% on sales price of domestic manufactures and the duty value of imports. The rate of surtax was increased to 10% in 1971 and 15% in 1977. Malawi introduced VAT in 2002 at 20%. Then it was revised to 17.5%. The rate currently stands at 16.5%

VAT Enhancement Measures One of the measures adopted by the Government of Malawi to enhance VAT Compliance Management is the introduction of Electronic Fiscal Devices (EFDs). EFDs which are used by VAT registered taxpayers aim at increasing the contribution of VAT revenues to domestic revenues.

Electronic Fiscal Devices (EFDs) This term can be use to describe a wide variety of technological devices that revenue administrations can use to help monitor business transactions There are three types of EFDs: 1. Electronic Tax Registers (ETRs) Theses are used by retail businesses that issue receipts manually. 2. Electronic Fiscal Printers (EFPs) These are used by businesses with point of sale systems 3. Electronic Signature Devices (ESDs) These are used in computerized environments.

Electronic Tax Registers (ETRs) These are appropriate and commonly used by retail business that issue receipts manually. Examples of ETR

Electronic Fiscal Printers (EFPs) Commonly used by computerized retail outlets. It is normally connected to the computer network and store every transaction in its memory. Suitable for supermarkets. Examples of EFP

Electronic Signature Devices (ESDs) Electronic Signature Device (ESD) used in conjunction with the PC system of a business that is running the accounting software that issue letter-headed (pre-printed) financial document such as invoices.

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Problems Relating to VAT Prior to EFDs Over declaration of purchases by traders; Non-issuance of tax invoices / receipts; Maintenance of multiple set of books (parallel records). Issuance of ‘fake’ receipts Associated / related businesses & branches Claiming of Non – deductibles Lack of &/or incomplete tax records

EFDs Statistics in Malawi Electronic fiscal devices type Estimated target Total Acquired (May 2016) Acquisition Rate Electronic Tax Registers (ETRs) 12000 7119 59.3 Electronic Fiscal printers (EFPs) 1500 1239 82.6 Electronic signature devices (ESDs) 1109 73.9 Overall   15000 9467 63.1

Taxpayer Acquisition Status Estimated taxpayers target Total acquisition to May end Variance Acquisition Rate (%)   7,500 4,570 2,930 60.9%

Challenges Relating to EFDs Main Challenge Voluntary Acquisition of EFDs. Some registered VAT operators have still not acquired EFDs Other challenges Some users not issuing fiscal receipts Misclassification of taxable supplies shown as exempts Undercharging on fiscal receipts the value Change in business trading hours i.e. trading before and after the normal working hours to avoid issuing of fiscal receipts. Delivering goods without fiscal receipts Using of old receipts on new transactions Obstruction of officers on duty by taxpayers Change/ closure of businesses without informing MRA

Way Forward in Mitigating the Challenges Frequent spot checks to ensure that taxpayers issue fiscal receipts with correct amounts. Educating taxpayers on operation of EFDs. Deployment of officers to monitor/check business premises that operate at odd hours. Roadblocks to monitor movement of goods and ensure goods moved have fiscal receipts. Authentication of receipts against goods purchased Charging of heavy penalties on all VAT offences including obstruction of officers on duty, undervaluation, non issuance of fiscal receipts and closure or change of business without informing MRA.

Some VAT Non Compliance Penalties EFD offences attract penalties stipulated in the Malawi VAT Act (2005). Two of the penalties are: MK 500,000 (US$700) for non issuance of fiscal receipts or usage of the EFD. Upon conviction, to a fine of MK1 million (US$1400) or imprisonment for two years. MK 5 million (US$7000) for taking defrauding steps in manipulating information sent to MRA through the EFD. Upon conviction to imprisonment for 2 years. (US$ = MK715)

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