VAT on electricity to push up prices

Post was last updated: April 12, 2017

Several economists have pointed to an increase in the prices of goods and services if the Electricity Supply Corporation of Malawi (Escom) goes ahead with its decision to charge Value Added Tax (VAT) on its services.

Escom has said the tax measure is in compliance with the VAT Act of 2006 and services that have now become Vattable include gross amount paid by customer, reconnection fees and penalties. Escom Spokesperson, Kitty

Chingota, has confirmed that the charges are with immediate effect.

In separate interviews, economists, Ben Kalua, Henry Kachaje and social commentator, Rafiq Hajat said consumers should expect to pay more to access various goods and services as electricity is a major input in the production processes of many industries.

While observing that the measure is one way for the government to enlarge the resources envelope, Kalua, who works as a professor of economics at Chancellor College, said consumers need to adjust to the new reality as the introduction of VAT on electricity is likely to push up prices.

“Electricity is a necessary input for most industries and so the likelihood of prices going up is very high. Consumers need to adjust because when such policy changes take off, then the likelihood of that being scrapped off is almost zero,” he said.

Government has pegged the 2017/2018 national budget at K1.2 trillion, a large chunk of which will be financed using local resources.

And social commentator, Hajat said vulnerable sections of the society are the ones that are hardest hit by policy measures such as the introduction of VAT on basic goods and services.

According to Hajat, although the economy has been showing signs of recovery, the benefits are not trickling down to ordinary citizens.

“Just imagine the man on the street who is earning K30,000 a month, how does he survive? This is the tragic divide in Malawi where you have islands of prosperity and affluence floating in the sea of poverty. And unfortunately, the people who make the decisions live in the sea of affluence and so they have no idea what it feels like to live in the sea of poverty,” he said.

The decision to apply VAT on electricity services is coming barely six months after government approved changes to the VAT Act consequently removing exemptions and zero rating on basic commodities such as bread, piped water, milk and laundry soap.

Finance Minister, Goodall Gondwe, justified his proposals on the basis that the measures will expand the tax base and restore the integrity of the tax system by removing distortions that favour some products against others.

Since then, our snap surveys have shown that the prices of the affected goods have since gone up.

In an earlier interview, a tax consultant, Emmanuel Kaluluma, who previously worked for the Malawi Revenue Authority as a Commissioner for the Customs and Exercise Division, said while ideally such measures aim to make businesses more competitive and reduce their production costs by allowing them to claim input VAT, most businesses do not pass on the benefits to consumers.

Kaluluma said businesses take advantage to exploit the system and charge higher prices for goods and services that should otherwise be offered at a lower price.

“It needs proper costing otherwise the consumer cannot benefit. It is unfortunate that we do not follow the proper procedures and businesses take advantage of the system to exploit consumers,” he said.

But Gondwe is still optimistic that consumers will benefit from low prices following a reduction in inflation over the past few months.

NSO figures show both food and non-food inflation declining over the past two months.

Headline inflation for January 2017 stood at 18.2 percent compared to 23.5 percent for the same period last year, a decline of 1.8 percent from December 2016.

As it stands, inflation is at 16.1 percent as of February.

Gondwe is expecting the trend to continue in the months to come with the possibility of hitting single digits at some point.

“We want to restore the integrity of the tax system and we cannot have electricity excluded from the other services that are Vattable. But we anticipate a major drop in inflation and consumers will benefit from that,” he said.

For a long time, Malawi has been leading other 25 countries that form the Common Market for Eastern and Southern Africa (Comesa) with the highest inflation.

As of October, 2016, Malawi’s inflation was recorded at 22.8 percent, the highest in the regional block.

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