Tuesday, May 8, 2012
VAT on bank charges, a growth reducing policy tool.
It must be removed.The Malawi government, through its tax collecting agency, Malawi Revenue Authority has started collecting a Value Added Tax, rated at 16.5 percent on bank charges. It is obvious that this is another desperation by the government of Malawi to balance its budget after major donors froze budgetary support citing human rights violations and poor economic governance. Malawi’s financial institutions have accordingly include the VAT in their charges. In short, VAT on bank charges will not enhance economic growth, over tax Malawians, increase the cost of doing businesses and strengthen informal channels through which foreign exchange comes into this country. It is an ill-conceived tax policy tool in a country where a majority of people do not have a bank account, and consequently cannot meaning fully save. Besides a high withholding tax rate on personal savings income still exists. Worse still some foreign companies enjoy tax breaks/holidays while the average poor folk has face the music. We can examine the various channels of how economic growth unfriendly the VAT is below.Almost all services that banks offer are charged somehow and mostly explicitly. If you maintain a current account, one often pays a monthly fee of around MK500. And if you use an internet banking facility with the same bank that also comes at roughly the same MK500, your monthly charge now will come to MK1000 plus 16.5% VAT to MK1165. If your relation happens to send some much needed cash from overseas like USD1000 into your Malawian kwacha account, the bank charges 1 percent commission which is USD10. Because there is now a VAT, the bank will deduct around 12USD. Similarly, if you want to have your ATM card replaced either through loss or expiry add 16.5% to the cost. If you want to procure goods abroad, the bank will add 16.5% to what they normally charge. Even buying forex from the banks will attract an extra cost. We can think of this for private businesses as well. The list is endless but the implications are many, unfortunately not very good. If you add all these up, one notes that it is costly to keep money in a bank account. It looks like the government of Malawi has now become a silent shareholder of all banks and making a killing through commissions masquerading VAT.Firstly, we need to understand that Malawi has a very low savings rate, to be precise negative savings rate. The Malawi government has been saying a lot policy wise to encourage a savings culture and we have seen banks open up and reach many parts of the country to reach the unbanked masses. Banks too have becomes so innovative and introduced various products beyond traditional savings-cheque accounts. However, the VAT, in my opinion militates against the very policy objective of encouraging people to save. Malawians, especially those that have a regular income, don’t earn enough and it will remain economic foolishness for someone who earns an MK10000 to put it in a bank and pay 16.5% on various services. This is besides customers paying a withholding tax on their interest income on savings account. Factor in, people who do not have a regular job or women groups that get loans and have to open up accounts. It kind looks a policy of desperation.Secondly, in terms of major businesses that import, costs of doing business are likely to rise . Bank charges on lines of credit, in which foreign suppliers are guaranteed payments from Malawian importers now attract VAT. Such importers are likely to feel a pinch as the VAT clicks in. This is besides commissions they have to pay whenever they undertake normal forex related transactions like purchases of foreign exchange. Under normal circumstances, businesses are likely to scale down, and the situation will get even worse as Malawi’s credit rating is sliding to dog level. This is compounded by the harsh environment that the businesses operate such power outages. Lack of foreign exchange and overvaluation of the Malawi kwacha.In short, the impact is a likely shrinkage on savings in the official banking system and a rise financial transactions through informal channels. Has the Malawi government ever wondered why the total value of official imports is much lower than the sales of foreign exchange from the banking system even if valued at the so called black or parallel markets? It has become so common amongst Malawians to ask their friends or family in the diaspora to buy things on their behalf and make payments to their local accounts or even give Kwachas to their families. This a very big informal bank at the moment operating amongst Malawians here and across borders. It has kept Somalia and Zimbabwe afloat. While it has been fuelled by the overvalued Malawi kwacha and consequently depriving the banking system of foreign exchange, introduction of VAT on bank charges, is only strengthening such channels of informal finance business. Not long ago the governor of the Reserve Bank was in DC, trying to convince Malawians in the diaspora to remit their money. The fact is many do, but are not using the banks due to many charges and the over- valued exchange rate. The VAT is one of them and the banks will soon tell us the impact it has on their balance sheets. Whoever might have been crafting this policy or conceived the idea of VAT on bank charges, fell short of giving appropriate advice to authorities that maybe. The economics is bad. It is nothing other than a treasury decision to collect revenue without due to how that revenue is generated: businesses and individuals that are heavily taxed. In earnest, the Malawi government budget has ceased to be a tool for economic growth but a channel for revenue collection. Being one of the poorest countries on earth, worse still without civil strife, we need to learn that nationalistic and protectionists policies will lead to a path of more chronic economic decline. Time to reflect on our relationship with our donors and the IMF otherwise we are doomed for a catastrophe. Our economy will continue to shrink. I don’t believe in the growth numbers.