Capital Gains Tax: A Barrier to Equity Investment Growth in Malawi’s Economy

Key Business Points

• The newly amended capital gains tax in Malawi will apply to all share disposals, regardless of the length of time they have been held, which may discourage long-term investment on the stock market and threaten market growth.
• Investors may weigh other investment options due to the amended tax, which could lead to stagnation in the short to medium term, according to financial expert Brian Kampanje.
• The tax change is part of broader revenue enhancement measures announced in the recent mid-year budget review statement, aiming to ensure fairness in taxation as trading in shares has become a significant income-generating activity.

The Malawian government’s decision to amend the capital gains tax has sparked concerns among analysts and investors, who believe it may discourage long-term investment on the stock market. The amended tax, as announced in the mid-year budget statement, will now apply to all share disposals, regardless of the length of time they have been held. Previously, shares held for more than one year were exempt from capital gains tax. Minister of Finance, Economic Planning and Decentralisation Joseph Mwananvekha justified the move, saying it ensures fairness as trading in shares has become a significant income-generating activity for companies and individuals.

Capital market analyst Benedict Nkhoma warned that if taxation is set too high or implemented without supportive incentives, it may discourage investors from investing on the Malawi Stock Exchange (MSE). Nkhoma suggested that the policy could contribute to a stronger, more transparent, and mature capital market if applied with moderate rates, clear thresholds, protection for small investors, and incentives for long-term and productive investment. However, stock market investor Purity Chitaro described the levy as a "bad tax" that must be reconsidered, as it may suffocate participation in the capital market and discourage both local and foreign investment.

Financial expert Brian Kampanje noted that the waiver of the capital gains tax was very attractive to insurers and pension houses, but the move to apply the tax to all share disposals could depress the prices of shares, leading to stagnation in the short to medium term. Capital gains tax is not a separate tax but is included as part of the entity’s or individual’s total income and taxed at the relevant income tax rate, which is 30 percent for companies incorporated in Malawi and 35 percent for branches of foreign companies. As the business community in Malawi navigates this change, it is essential to consider the potential impact on investment and economic growth, and to explore opportunities for zinthu zodziwika (growth) and chilemba cha mpango (business planning) in the face of these developments.

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