IMPLEMENTATION OF ELECTRONIC FISCAL DEVICES, BENEFITS AND CHALLENGES – CASE OF MALAWI

1. BACKGROUND COMPLIANCE CHALLENGES AFTER INTRODUCTION OF VAT IN NOVEMBER 2002. Non-issuance of tax invoices / receipts; Maintenance of multiple set of books (parallel records). Issuance of ‘fake’ receipts, Over declaration of purchases to reduce VAT payable; Poor reporting of sales from associated / related businesses & branches Claiming of Non – deductibles Lack of & / or incomplete tax records

1. BACKGROUND Cont’d… EARLIER SOLUTIONS In order to deal with some of those challenges especially suppression of sales MRA depended very much on the following: Audits/ verifications, Sit in exercises, Mock buying.

1. BACKGROUND Cont’d… Exploration Of Use Of Electronic Fiscal Devices (EFDs) In order to deal with the compliance issues and enhance efficiency of VAT system, the Malawi Government approved the introduction of Electronic Fiscal Devices (EFDs) in 2010. Preparations for implementation commenced late the same year.

2. STUDY TOURS Prior to implementation study tours were done to Revenue Authorities in countries that had already implemented the system. Countries visited were Kenya, Tanzania and Ethiopia

3. PREPARATION FOR IMPLEMENTATION OF EFDs The following were major activities in preparation for implementation of EFDs: Development of project plan i.e. concept paper and budget Amendment of the law and development of EFD regulations. Development of devices and electronic fiscal devices’ management systems specifications Selection of manufacturers, local distributors, and other service providers

3. PREPARATION FOR IMPLEMENTATION OF EFDs Cont’d… Sensitization activities for internal and external stakeholders. Awareness campaigns to the general public; Using Consumer Association of Malawi, MRA Campaigns (Lisiti Langa / My receipt). Development of working documents and manuals Recruitment of staff. Training for staff and local suppliers’ technicians Updating VAT taxpayers’ register

4. SYSTEMS OPERATING IN COUNTRIES VISITED DURING STUDY TOURS Revenue authorities’ visited were implementing one of the two systems below: One system is where devices operate as standalone systems. Summaries of transactions are generated by devices each day known as Z reports which taxpayers use as basis for declarations of sales on their VAT returns. The second one is where devices are connected to the Revenue Authorities’ systems and transmit summaries of sales known as Z reports on a daily basis. Malawi has implemented the latter system as it gives advantages of getting the information before returns are submitted which provide checks.

5.SPECIAL FEATURES OF ELECTRONIC FISCAL DEVICES FOR MALAWI Fiscal memory Use of GPRS to transmit reports. Automatically self-enforcing issuing of daily “Z” report after every 24 hours; Irreversible date mechanism; Issues uniquely identifiable fiscal receipts/invoice; Allows online firmware upgrades from the main server  

6. TYPES OF ELECTRONIC FISCAL DEVICES IMPLEMENTED Electronic Tax Register (mostly used by taxpayers using manual cash sales and invoices or ordinary electronic cash registers.) Electronic Signature Devices (mostly used by taxpayers with computerized systems or accounting packages and customized invoices or cash sales) Electronic Fiscal Printers (mostly used by taxpayers with point of sales systems)

7. IMPLEMENTATION STRATEGY Malawi Revenue Authority took a phased approach implementation strategy based on taxpayers’ segmentation. Taxpayers were segmented into two categories or groups. The segmentation was based on systems used to issue cash sales or invoices and compliance difficulties.

7. IMPLEMENTATION STRATEGY Cont’d… First phase - targeted taxpayers operating manually and those using ordinary electronic cash registers. This is the group that forms the majority of taxpayers with major compliance problems. Taxpayers in this category are using Electronic Tax Registers (ETRs). Second phase - targeted taxpayers with accounting packages, those with point of sale and computerized systems. Taxpayers in this category required more time of preparations as the devices have to be integrated with their software. Most of these are large taxpayers regarded as not very risky with minimal compliance problems.

8. MOTIVATION TO TAXPAYERS Taxpayers were allowed to claim costs of the devices through their VAT returns as part of input VAT. This was done to enhance compliance. Claiming was however restricted to devices bought within a stated grace period of 3 months for each phase.

9. BENEFITS OF EFDs There have been improvements in VAT collection. The average nominal growth rate this fiscal year (July – Oct) is 55.52% (see table below). One of the factors is definitely EFDs Month VAT Colln 2016 VAT Colln 2015 Growth % growth July 7,941,410,685 4,485,797,406 3,455,613,279 77.03% Aug 8,209,997,212 7,064,446,638 1,145,550,574 16.22% Sept 9,252,511,001 5,277,931,313 3,974,579,688 75.31% Oct 9,109,072,622 5,363,832,202 3,745,240,419 69.82% Total 34,512,991,520 22,192,007,560 12,320,983,961 55.52%

9. BENEFITS OF EFDS contd It has improved record keeping for Wholesalers and retailers on sales. It has made it easier to estimate VAT due for non filers. Has improved planning for audits due to availability of information on sales. It has minimised parallel invoicing It has simplified justification of input VAT claims. NOTE: The Authority through Policy Planning and Research is currently quantifying the exact benefits from EFD by isolating other factors.

10. CHALLENGES Challenge Mitigation Strategy being employed   Challenge Mitigation Strategy being employed Unwillingness of Taxpayers to procure EFDs . continued orientation of taxpayers on operation of the system and its benefits continued awareness campaigns Fraudulent Practices (issuance of under declared fiscal receipts, Non-use of the fiscalised EFDs etc.) Institution of internal controls in the system and strong legal framework e.g. high penalties. Putting in place Enforcement programs Capacity Building for users and tax officials Continued training of technicians, users and staff on EFD operation and administration Technical challenges with devices (firmware, specifications, hardware issues) despite devices performing well during pilot. Enforcement of licenses’ requirements with manufacturers.

10. CHALLENGES Cont’d Challenge Mitigating Strategy Being Employed Challenges from Local distributors: low stock levels of devices and spares, low staffing levels, slowness in maintaining devices, in adequate training of taxpayers, Non adherence to timelines for reporting.   Serious enforcement of local distributors’ obligations. Integration of Accounting systems with Fiscal Printers and Point of Sales (POS) Only one manufacturer has a working ESD (with some challenges) other manufacturers are still working on development of ESDs. Local distributors working with software providers on integration solutions. Manufacturers and local distributors are slow in providing after sales services. Strict enforcement of contractual obligations by manufactures local distributors Shortfalls in services provided by other stakeholders i.e. network providers for connectivity and power supply Handicapped by lack of contracts with some of the stakeholders. Changing of trading tactics by taxpayers Designing of flexible enforcement programs (mock purchases, special operations, normal audits)

11. CONCLUSION EFDs have contributed to improved levels of compliance. Optimal utilization of benefits of EFDs require optimal use of information generated by EFD system in enforcing compliance especially during audits, processing of returns and monitoring of non-filers.

Thank You for Listening Comments, Observations, Questions. 12. END OF PRESENTATION Thank You for Listening Comments, Observations, Questions.