VAT COMPLIANCE & THE CASH ECONOMY: THE CASE OF MALAWI Presented by:

PRESENTATION LAYOUT VAT BACKGROUND IN MALAWI DEFINITION & OVERVIEW OF CASH ECONOMY THE CASH ECONOMY - CHALLENGES (MALAWI PERSPECTIVE) TAX COMPLIANCE STRATEGIC FOR CASH ECONOMY IN MALAWI CONCLUSION

VAT BACKGROUND IN MALAWI Previously known as Surtax up to 2005 In 2005, the VAT Act was enacted From 2005 to 2007, VAT was being administered under VAT Division. In 2007 Income Tax & VAT Divisions were merged to form Domestic Taxes Division (DTD) Over the past decade, there has been significant nominal growth of VAT revenues Despite numerous tax compliance interventions, there are still challenges in VAT administration including the cash economy management

VAT SHARE TO DOMESTIC TAXES (2005 to 2016)

WHAT IS A CASH ECONOMY ? Is an economic system, or part of one, in which financial transactions are carried out in cash rather than via direct debit, standing order, bank transfer, or credit card (Collins dictionary) With respect to revenues, the cash economy forms a large & in many countries, growing share of GDP & thus represents a potentially significant source of tax revenues.

OVERVIEW OF THE CASH ECONOMY Although difficult to quantify with any degree of accuracy, the cash economy is a significant area of tax risk & tax revenue leakage. The Cash Economy poses many challenges including: Economic transactions are difficult to detect, given the relatively large number of participants involved, the informality of the economic activities concerned, & the deliberate steps taken to conceal transactions; Participants rarely maintain adequate books & records of their economic activities,

OVERVIEW OF THE CASH ECONOMY (cont’d) Making it a difficult & time- consuming task for revenue administrations to quantify unreported income; & Amounts of tax involved/ quantified are relatively small; however, given the large number of players involved, the aggregate tax revenue at stake is sizeable.

CASH ECONOMY: MALAWI PERSPECTIVE According to United Nations Capital Development Fund (UNCDF), 18% of Malawi’s adult population is financially included (i.e. have an account at a formal financial institution). The report further indicates mobile penetration of economically active population is at 35%. It can be concluded from the report that 82% of adult population is financially excluded & that 65% of economically active adults have no access to mobile money services hence the massive use of cash as a means of transacting.

CASH ECONOMY: MALAWI PERSPECTIVE (cont’d) Since most of the transactions in the economy are cash based and VAT is transaction based, the tax administration faces the following challenges; Non issuance of tax invoices Issuance of tax invoices with values lower than actual transactional value Issuance of fake tax invoices Low usage of available electronic payment systems Difficulties in tracking down VAT purchases from suppliers (including non registered suppliers) which can be linked to determine cost of VAT sales

CHALLENGES OF THE CASH ECONOMY IN MALAWI Difficulties in tracking sales to determine threshold for possible tax registrations (VAT etc.) If already registered, such businesses prefer to remain under Turnover tax (TOT) regime Due to its ‘underground’ nature, the cash economy negatively affects the whole tax regime (from Income tax to WHT etc) hence erodes tax revenues at each stage of taxation Lack of business records & improper record keeping Difficult to reconcile cash transactions for Refund management. High possibility of refunding dubious claims

CASH TRANSACTIONS vs ELECTRONIC TRANSACTIONS IN MALAWI 2015) (source: FinScope survey

TAX COMPLIANCE STRATEGIES IN MALAWI Because of the high volumes of cash transactions and its related challenges in Malawi, the Malawi Revenue Authority is implementing the following strategies; Introduction of the Electronic fiscal devices administration in 2014 Taxpayer education services to various key stakeholders including schools Tip off anonymous scheme in partnership with Deloitte Introduction of Compliance risk management principles & practices (setting up of a Compliance unit)

INTRODUCTION OF ELECTRONIC FISCAL DEVICE (EFDs) The project aims at enhancing Value Added Tax (VAT) compliance through acquisition, installation and use of electronic fiscal devices by VAT registered taxpayers. An Electronic Fiscal Device (EFD) is a “trusted” device that records all sales transactions and transmits the same to MRA server for monitoring purposes It is a legal requirement for all VAT registered taxpayers to use EFD machines.

INTRODUCTION OF ELECTRONIC FISCAL DEVICES Benefits of EFDs It has improved record keeping for wholesalers & retailers whose transactions are mostly on cash basis. It has made it easier to estimate VAT due for non filers by using information transmitted to MRA by fiscal devices. It has reduced incidents of non issuance of tax invoices Has improved planning for audits due to availability of information on sales. It has minimised parallel invoicing It has reduced taxpayer compliance costs

TAXPAYER EDUCATION SERVICES TO VARIOUS STAKEHOLDERS There are several initiatives to sensitize taxpayers and the general public about taxation in general and the cash economy in particular. The initiatives include; The ‘Demand a Receipt’ campaign launched in 2016 National wide tax education outreach programme Introduction of Taxation in school curriculum Use of TV, Radio, print media, website & social media Publications (brochures, posters, school pamphlets, leaflets)

TAXPAYER EDUCATION SERVICES TO VARIOUS STAKEHOLDERS Managing MRA’s online presence through MRA’s website and social media to ensure quick, cost effective & easy access to tax information.

TAXPAYER EDUCATION SERVICES TO VARIOUS STAKEHOLDERS Conducting tax clinics in school to inculcate a culture of voluntary tax compliance among the youth. Introduction of a Primary & Secondary school curriculum on Taxation from 2017

‘DEMAND A RECEIPT’ CAMPAIGN RAFFLE DRAW To commence end 2017 SMS EFD POS receipt number to toll free number *915# Weekly draws to be conducted at regional level Weekly Prizes such as Bicycles, Cellphones, Solar lamps, T-shirts and Grand Prize MK1 million Develop Malawi, Pay Taxes

‘DEMAND A RECEIPT’ CAMPAIGN Mobilizing taxpayers to demand EFD invoices / receipts

TIP OFF ANONYMOUS SCHEME IN PARTNERSHIP WITH DELOITTE The Tip Off Anonymous scheme allows members of the general public to ‘anonymously’ report to Deloitte suspected cases of tax fraud and tax evasion. Deloitte refers the cases to MRA for investigation. Informants may also report directly to MRA through walk ins or in writing. Once the cases have been investigated, concluded & revenues recovered, the informants are rewarded

COMPLIANCE RISK MANAGEMENT Malawi Revenue Authority has adopted the principles & practices of Compliance Risk management The setting up of Enterprise Wide Risk Mgt Department & the Compliance Risk Mgt Unit under Domestic Taxes Division. Managing compliance of the cash economy has to use ‘Risk based approaches’ Compliance risk strategies and use of risk analytical tools are being introduced in Domestic taxes Divisions operations

CONCLUSION The Cash economy is a potential tax revenue base though cost of collection & compliance may be ‘high’ Effective Compliance Risk management is key in improving voluntary compliance There are still a lot of challenges to tackle the cash economy VAT is the ‘tax of the future’ Revenue administrations needs to give it utmost priority