Abstract

Malawi’s national budgets show that the country relies heavily on tax revenue. Malawi enforces the Taxation Act (1964), the Customs and Excise Act (1969) and the VAT Act (2005) to collect both direct and indirect taxes for financing both recurrent and capital expenditure. Despite such enforcement of tax laws, the country collects less revenue than what is required leading to budget deficits. Consequently, the government is compelled to resort to borrowing. Given that government borrowing has undesirable consequences, there is an urgent need to expand the tax base and widen the tax net for increased tax revenue. Imported services constitute a potential source of huge VAT revenue for Malawi. This is due to increased international trade in services resulting from great technological advancements that have made the world a global village. Unlike in the past, people nowadays find it easy to import both digital and non-digital services into the country. The potential of imported services to produce huge VAT revenue may face stumbling blocks considering that the VAT Act (2005) requires importers of these services to compute VAT on the value of imported services and remit it to MRA. This provision in the law is likely to encourage most importers of services to evade VAT on the services. As a result, the country is likely to suffer tax revenue losses leading to an exacerbation of budget deficits and, by extension, government borrowing. Therefore, the current study set out to assess the impact of imported services on VAT revenue in Malawi. The study employed GDP, exports, foreign exchange rate and inflation rate as control variables. Considering the nature of time-series data, the study employed the zivot-andrews unit-root test. Furthermore, the study employed the Gregory-Hansen co-integration test in order to test for long-run relationships while accounting for structural breaks in the data. Results of the zivot-andrews unit-root test led to the ARDL model being adopted for the study. ARDL model regression results show that while imported services have a significant impact on VAT revenue in the short run, they have no impact on VAT revenue in the long run. This is a sign of inefficiencies in strategies employed to collect VAT on imported services. Therefore, as a policy recommendation, government should amend the VAT Act (2005) to require foreign companies exporting services to Malawi to register for VAT in Malawi.

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School	: School of Law, Economics and Government
Issued Date	: 2023

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