MALAWI COLLEGE OF

ACCOUNTANCY

TAXATION MANUAL

MALAWI INCOME TAX

2012/2013 Tax Year

BY BEATRICE ELNESS B MTAMBO

Dip. Bus. Studies, B.Com (Accountancy), ACCA (Affiliate)

REVIEWED AND UPDATED

BY PIOUS KASIMBA CHAVULA FCCA, BAC, CPA (MW), TAX

ADMIN CERT. (MRA)
& LISTER KANYENDA, BAC

CONTENTS

INTRODUCTION
CHAPTER

TOPIC

PAGE

1.

Introduc
tion to
taxation

2.

Administ
ration of
Taxes

14

3.

Personal
Liability
Computa
tion

19

4.

2
 Taxation
of
Employ
ment
Income

31

5.

Fringe
Benefit
Tax

40

6.

Taxation
of
Investme
nt
income

49

7. Gains and Losses

53

8.

Taxation
of
Unincor
porated
Business
es
68

3
9. Capital Allowances
81

10. Partnerships 95

11.
Taxation
of
Incorpor
ated
Business
es
101

12.

Special
Trades
and
Cases

106

13.

Collectio
n of
Taxes

114
- Pay As You Earn
- Non-Resident Tax
- Withholding Tax

14. Provisional Tax 120

15. Returns and Assessments

4
 123

16. Appeals
129

17. Customs Duty 131

18. Excise Tax 145

19. VAT Credit System 150

APPENDICES

A Exemptions
162

B Rates of Tax 164

C List of countries with double tax agreement

165

D Annual capital allowance rates

166

E Approved Charitable Organisations 167

F Withholding Tax Rates 168

5
INTRODUCTION
This manual serves to assist Malawi College of Accountancy students studying Malawi
Business Taxation. The manual has been produced for use by students studying Paper TC10
(B) - Taxation of the Public Accountants Examination Council - Technician Stage and ACCA
Professional Fundamental Skills Level for Paper F6 – Business Taxation (Malawi Variant).

In this manual “the Act” is the Taxation Act Chapter 41:01 of the Laws of Malawi and any
references to sections and schedules should be construed accordingly unless otherwise stated.
The “Commissioner” is the Commissioner General of Malawi Revenue Authority and the
“Minister” is the Minister responsible for Finance.

The student is encouraged to refer to the Act as she or he is going through this manual. In
addition, students should refer to the VAT Act (2005) to increase awareness of provisions in
respect to Value Added Tax.

CHAPTER ONE
6
 INTRODUCTION TO TAXATION
WHAT IS TAXATION?

Taxation is defined as impositions made by governing bodies on the income and wealth of
persons under their jurisdiction. Governing bodies include state, local authorities and central
government.

THE FUNCTIONS OF TAXATION

a. To raise revenue for the government, local authorities and other similar bodies: The
revenues are used to provide goods and services that the free market economy does
not provide at all (e.g. defence) or does not provide sufficiently (e.g. health, education)
and to pay for the upkeep of government administration.

b. To redistribute wealth: The higher rates of income tax were designed to transfer wealth
from the better off to the state - the state would then use the wealth to provide certain
services to everyone.

c. To protect industries from foreign competition. The government levies duty on

imported goods to make the prices of such goods higher so as to make the public buy
domestically produced goods, in a way also preserving foreign reserves.

d. To discourage the consumption of certain commodities which are considered

undesirable e.g. levying excise duty on cigarettes.

e. To make adjustments to the economy by adjusting tax rates to deal with certain
economic conditions: in times of inflation the rates may be increased to reduce
spending power. If the economy is in recession the tax rates may be reduced to
increase spending power and thus stimulate the economy through demand created by
additional disposable income.

THE CANONS OF TAXATION

Adam Smith, the famous economist set out four major essential elements a good tax system
must have. These are:

a. EQUITY

A tax system should be designed so that its application is fair to all taxpayers. Taxes
should be fairly based on an individual’s ability to pay. Equality of sacrifice is often
subject to conflicting interpretations but it is usually agreed that a progressive element
to income tax is fair in that the better off can bear a higher tax burden than those with
low incomes. Therefore income tax is a good example of equity in taxation.

b. CERTAINTY

7
 When a tax is imposed, the government should be fairly certain of the amount of tax it
is likely to yield; this involves examining:

Incidence of taxes - this refers to who finally

pays the tax, for example, sales tax is finally borne by the
final consumer.

Liability - the rules governing the amount to be paid

by taxpayers should be clear and unambiguous, i.e.
people should be aware of what is expected of them in
terms of what, when, how and where to pay. In this way
the system operates efficiently and evasion is minimised.

c. CONVENIENCE

The payment of taxes should be related to how and when people receive (and spend)
their incomes. For example, PAYE is deducted when wages/ salaries are paid (and
VAT) is charged when goods or services are purchased.

d. ECONOMY

Government seek taxes which are cheap to collect -, i.e. the cost of collection should
be small in relation to the yield.

OTHER CANONS include:

a Flexibility

It should be easily possible for the authorities to revise the tax structure both with
respect to its coverage and rates, to suit the changing requirements of the economy.
With changing time and conditions the tax system needs to be changed without much
difficulty. The tax system must be flexible and not rigid.

b Simplicity

The tax system should not be complicated. That makes it difficult to understand and
administer and results in problems of interpretation and disputes.

c Diversity

This principle states that the government should collect taxes from different sources
rather than concentrating on a single source of tax. It is not advisable for the
government to depend upon a single source of tax, it may result in inequity to the

8
 certain section of the society; uncertainty for the government to raise funds. If the tax
revenue comes from diversified source, then any reduction in tax revenue on account
of any one cause is bound to be small.

FORMS OF TAXES

1. INCOME TAX - These are taxes that are levied on income/earnings.

2. RATES - These are generally assessed on the value of property. They are used by
local authorities such as city and town councils to raise revenue to finance the
provision of services such as cleaning and sewage

3. POLL TAX - This type of tax is collected on the basis of a fixed amount per individual
due to pay tax. It is called poll tax because it is payable by individuals who have a
right to vote. In Malawi this has been phased out.

4. SALES TAX- This form of tax is based on the sales value of goods or services sold.
The seller is responsible for collecting the tax and passing it to the imposing authority.
e.g. Value Added Tax (VAT).

5. WEALTH TAX - These are taxes imposed on the wealth of individuals either when
they die or during their lifetime on the transfer or sale of an asset. e.g. Estate Duty,
Capital Gains Tax.

6. CORPORATION TAX- This is a tax imposed on the profits of companies and other
corporate bodies.

7. CUSTOMS DUTIES - These are imposed on imported goods - the taxes are based on
invoiced value of goods imported.

8. EXCISE DUTIES - These are levied on certain specified locally manufactured goods
to discourage the consumption of such goods.

CLASSIFICATION OF TAXES

Taxes can be classified in two different ways.

- Direct and Indirect Taxes

- Progressive, Regressive and Proportional Taxes.

9
1. DIRECT AND INDIRECT TAXES

a DIRECT TAXES

Direct taxes are generally based on a taxpayer’s income/wealth.

A direct tax is one, which is paid by a person on whom it is legally imposed and the
burden of which cannot be shifted to any other person.

Examples
Income tax, wealth tax, property tax, estate duty, capital gain tax, corporate /
company tax.

ADVANTAGES OF DIRECT TAXATION

-Taxes are fair and equitable. There is social justice in the allocation of tax burden in
case of direct taxes as they are based on the principle of ability to pay. Persons in a
similar economic situation are taxed at the same rate. Persons with different economic
standing are taxed at a different rate. Hence, there is both horizontal and vertical equity
under direct taxation.

-There is certainty. The tax payer is certain as to how much he is expected to pay, as
the tax rates are decided in advance. The Government can also estimate the tax
revenue from direct taxes with a fair accuracy.

-Direct taxes have an educative value. Taxpayers are made to feel directly the burden
of taxes and hence take keen interest in how public funds are spent. The taxpayers are
likely to be more aware about their rights and responsibilities as citizens of the state.

-Direct taxes tend to stabilise the economy automatically taking more money out of
system during a boom and less during depression.

-Direct taxes are less inflationary than indirect taxes.

ARGUMENTS against direct taxes include:

- It is easier for the taxpayers, especially businessmen to evade direct taxes. The tax
evasion is due to High tax rates, documentation and formalities, Poor and corrupt tax
administration. Business men may suppress correct information about their incomes by
manipulating their accounts and evade tax on it.

10
 -It is argued strongly that taxation of income acts as a disincentive to the work effort
and risk taking.

-The direct taxes can affect savings and investment. Due to taxes, the net income of
the people gets reduced. This in turn reduces savings. Reduction in savings results in
low investment. The low investment affects capital formation in the country.
-High marginal rates of taxation will cause a migration of higher skilled and therefore
highly paid workers to countries with favourable tax.

b. INDIRECT TAXES

An indirect tax is one in which the burden can be shifted to others. The tax payer is not
the tax bearer. The impact and incidence of indirect taxes are on different persons. An
indirect tax is levied on and collected from a person who manages to pass it on to
some other person or persons on whom the real burden of tax falls. For e.g. y taxes or
sales tax, excise duty, custom duties, etc. are indirect taxes.
In case of direct tax, there is a direct relationship between the taxpayer and the revenue
authorities. A tax collecting agency directly collects the tax from the taxpayers,
whereas in case of indirect taxes there is no direct relationship between the taxpayers
and the revenue authorities. They are collected through traders and manufacturers.

ADVANTAGES OF INDIRECT TAXATION

- Indirect taxes are “hidden” and the taxpayer is unaware of the amount of tax he or she
is paying. This has a considerable advantage from the government’s point of view.

- Indirect taxes are convenient. Taxes are imposed on production, sale and movements
of goods and services. These are imposed on manufacturers, sellers and traders, but
their burden may be shifted to consumers of goods and services who are the final
taxpayers. Such taxes, in the form of higher prices, are paid only on purchase of a
commodity or the enjoyment of a service. They are also convenient because generally
they are paid in small amounts and at intervals and are not in one lump sum. They are
convenient from the point of view of the government also, since the tax amount is
collected generally as a lump sum from manufacturers or traders.
-Indirect taxation can be used to discourage production or consumption of particular
goods and services and hence affect the allocation of resources e.g. goods that produce
environmental pollution may be taxed so as to raise the price in order to reduce the
demand and output.

-Unlike direct taxes, the indirect taxes have a wide coverage. Majority of the products
or services are subject to indirect taxes. The consumers or users of such products and
services have to pay them.

-The indirect taxes may not affect the motivation to work and to save. Since, most of
the indirect taxes are not progressive in nature, individuals may not mind to pay them.

-Indirect taxation is a flexible instrument of economic policy. The rate of indirect tax

11
 may be changed easily and quickly.
-Indirect taxes have in built safeguards against tax evasion. The indirect taxes are paid
by customers, and the sellers have to collect it and remit it to the Government. In the
case of many products, the selling price is inclusive of indirect taxes. Therefore, the
customer has no option to evade the indirect taxes.

DISADVANTAGES

-Indirect taxes tend to be regressive since the members of the community pay a larger
fraction of their incomes than the rich people.
-Indirect taxes affect consumption of certain products. For instance, a high rate of duty
on certain products such as consumer durables may restrict the use of such products.
Consumers belonging to the middle class group may delay their purchases, or they may
not buy at all. The reduction in consumption affects the investment and production
activities, which in turn hampers economic growth.

-Indirect taxes are completely disproportional in their application. The differential

taxes moreover prevent resources from being distributed optimally according to
consumer preference.

-Excessive indirect taxation on commodities will reduce demand for them.

2. PROGRESSIVE, REGRESSIVE AND PROPORTIONAL TAXES

a) PROGRESSIVE TAX

This makes a higher proportion of income in tax as income rises that is the tax rates
increase as the tax base (income) increases. Income tax is progressive since the rates
of tax increase as the incomes increase. In the Malawi Income Tax system, the first
K180, 000 is taxed at 0%; the next K60, 000 at 15 % and so on.

12
 ARGUMENTS in favour of Progressive Tax include:

- Progressive taxes are equitable and fair since they are levied according to the
ability of person to pay. Taxpayers with higher incomes are more able to give
up a greater proportion of their incomes than the low income earners who need
a greater proportion to obtain the basic necessities of life.

- Taxes that are progressive make it possible for the government to redistribute
wealth from the rich to the poor in society.

ARGUMENTS against Progressive Taxes include:

- When the wealthy are taxed at a very high rates the taxes will act as a deterrent
to initiative; for example, high rate of tax on extra earnings will deter
individuals from working harder to earn more money or to win promotion since
the money advantages will not justify the effort.

- Tax payers who suffer from high taxes might try to find loopholes so as to
avoid paying taxes, they might even try to evade taxes by withholding
information from tax authorities.

b) REGRESSIVE TAXES

A regressive tax takes a higher proportion of a poor person’s income than of a rich
person’s that is tax rates increase as the taxable income decrease. All indirect taxes are
regressive since the poor and the rich pay the same amounts of tax.

ARGUMENTS in favour of regressive Tax include:

- Convenient: These taxes are paid in the shape of price of commodities. People
pay these taxes when they buy commodities.

- Taxes are relatively easy to administer and collect.

ARGUMENT against regressive Taxes

- The main disadvantage of a regressive tax is that it is not equitable because the
poor suffer a greater tax burden.

c) PROPORTIONAL TAX

All taxpayers pay the same proportion of their incomes as tax i.e. the tax rates do not
change with levels of income. Income tax payable by companies in Malawi is a good
example of a proportional tax. People have argued that a proportional tax system is
fair since everyone pays the same proportion of his or her income in tax.

The main disadvantage of proportional tax is that it does not contribute to the
redistribution of wealth in a society.

13
 SELF TEST QUESTIONS

1. ADAM SMITH set out four canons of taxation. List and explain two of his canons
and two others.

2. Explain the following so as to distinguish them form each other:

a. Progressive Tax
b. Regressive Tax
c. Proportional Tax

3. a (i) What is the primary purpose of taxation?

Explain its significance from the point of view of the tax payer?
(3 marks)

i) Explain what is meant by “equity” in relation to taxation

(4 marks)

b. (i) Explain the difference between direct taxes and indirect taxes.
(3
marks)

i) Give two examples of direct taxes and three examples of indirect taxes
used in Malawi and briefly explain them.
(5 marks)

ii) List five reasons that may contribute to non-compliance with tax laws
(5 marks)
(Adopted from PAEC June 1998 examination)

4. The Malawi tax system has been seen to fall short of certain cannons of taxation.
This has been used as an attractive as well as discouraging factor for investors.
Critically examine the statement from internal or otherwise investors highlighting some
improvements towards a better system. (25 marks)

(Relevant to paper F6 Business Tax (Malawi) ACCA)

(Adopted from BAC 4 September 2001 Examination)

Note: This question may be better approached after substantial coverage of the
syllabus

5. In almost every economy of the world, people complain about making contributions to
the government which most of them think it’s very unfair. Your friend, an Engineer is

14
currently employed with an Engineering firm and has asked you to explain some terms
and rationale for the following.

i) Taxation
ii) Equity in relation to taxation
iii) Direct tax and indirect tax
iv) Source of income

15
 CHAPTER TWO

ADMINISTRATION OF TAXES

RULES AND POWERS OF THE COMMISSIONER

ADMINISTRATION OF TAX

Income Tax legislation is set out in the Tax Act. CAP 41:01 of the Laws of Malawi.
The Malawi Revenue Authority (MRA) is an Agency of the Government of Malawi
responsible for assessment, collection and accounting for tax revenues. MRA was established
by an Act of Parliament in 1998 and was launched in February 2000. It was formed to improve
on the functions previously carried out by Departments of Customs and Excise, and Income
Tax in the Ministry of Finance.
The MRA is overseen by a Board of Directors and headed by a Commissioner General to
provide leadership, strategic direction and control. In pursuance of these duties and to
accomplish the mandate of MRA, functional departments and divisions are in place.
MRA has two revenue divisions of Customs and Excise and Domestic Tax Divisions. It also
has supporting divisions and departments namely Finance, Administration, Legal, Information
&Technology, Tax Investigations, Policy Planning & Research, Internal Audit, Security and
Public Relations & Taxpayer Education.
The Customs and Excise Division administers and enforces the Customs and Excise Act. The
division collects Import and Excise duty and Import VAT, trade statistics, protects the
community from entry and exit of prohibited goods and facilitates trade.
The Domestic Tax Division administers the Taxation and VAT Acts. The Division collects
direct Income Taxes from individuals and corporations. These are in form of Pay As You Earn
(PAYE), Provisional Tax, Fringe Benefit Tax and Withholding Tax. The division also collects
domestic VAT and domestic excise.
MRA has three regional offices in Blantyre Lilongwe and Mzuzu, it has 32 offices spread
across the country from Nsanje to Chitipa.

THE MALAWI TAX SYSTEM

The Malawi tax system is a mixture of direct and indirect taxes. There are five main groups of
taxes.
DIRECT TAXES

1. Taxes based on income - Income Tax - This is a direct tax based on the income of a
taxpayer (individual or corporate body)

2. Tax based on wealth - Estate Duty - This too is a direct tax which is based on the
wealth of an individual at the date of death.

INDIRECT TAXES

3. Sales Tax - A sales Tax is an advalorem duty based on the value of goods or services
that have been purchased. Sales tax in Malawi is known as VAT.

4. Customs Duties - This tax is levied on the value of goods that have been imported.

5. Excise Duties - these duties are imposed on selected locally manufactured goods to
discourage the consumption of such goods.

SECRECY - Section 6

Any person carrying out duties under the Taxation Act is required to observe secrecy i.e. a
person is not supposed to reveal any matter that comes to his knowledge in the performance
of his duties under the Act.

Before taking up office under the Act every officer (including the Commissioner) is required to
take an oath of secrecy before a magistrate or a Commissioner for oaths.

Anyone who takes office before taking an oath of fidelity or secrecy shall be liable to a fine of
K20. If a person who has taken an oath of secrecy or fidelity reveals any matter to any person
which has come to his knowledge in the course of carrying out duties under the Act, he will be
liable to a fine of K1, 000 and to imprisonment for two years.

Exceptions to the Secrecy Rule

The duty to observe secrecy can be waived in the following circumstances:-

1. Where the information is required by the Auditor General or any officer duly
authorised by him for the performance of official duties;

2. Where information is required by authorised government officers of another country

which has a double tax treaty with Malawi to enable it to assess the tax position of a
taxpayer;

3. Where the information is required by a taxpayer or a duly authorised agent of the

taxpayer;

4. Where the Commissioner wishes to compile and publish statistics about the total
amount of income received by any class of persons as declared in returns to the
 Commissioner; and

5. Where information is required for the purposes of carrying the Act into effect or for
the purpose of any prosecution for an offence committed in relation to any tax on
income.

Each company is required to appoint a public officer who is responsible for ensuring that all
taxation matters are properly dealt with. All notices, assessments and returns by the tax
department are delivered to the Public Officer at his specified office.

Any notice or document is regarded as served upon a person sufficiently and effectively if:-

a. Personally served upon him;

b. Left with some audit person who is resident at, occupying or employed at his last
known place of abode, office or place of work.
c. Sent by post addressed to such last known place of abode whether inside or outside
Malawi, office or place of business.

d. Affixed at the last known place of abode office or place of business and a person shall
be deemed to have received the notice on the 14th after the affixing.

NOTE:
The above points shall not apply if the officer is satisfied that such a person would not
understand the meaning of notice due to illiteracy or infirmity. The officer then may direct that
the substance of such document be communicated to such person in such a manner as he may
deem fit.

POWERS OF THE COMMISSIONER GENERAL

The administration of legislation such as the Taxation Act demands constant use of “Common
sense”. When regulations are set as to what is assessable, what category of expenditure is
deductible and so on, it is almost impossible to envisage various circumstances which may be
met in everyday affairs? The Commissioner’s job to oversee the implementation of the Act
would be very difficult if he was not given authority to exercise discretion in certain specific
areas.

The Act gives the Commissioner discretionary powers to exercise in certain areas. The
discretionary powers address matters of fact than points of law.

SOME EXAMPLES OF EXPRESSLY STATED DISCRETIONARY POWERS OF THE

COMMISSIONER

SECTION POWER

24 To decide whether timber has been grown as timber for

sale
35 Approval for deduction of bad debts

36A Determination of taxable income from which Export

Allowance is deducted

38 (a) (I) + (ii) Determination of allowable deductions against assessable

income arising from the sale of timber.

43 (1) To decide whether a change in the shareholding of a

company has been effected to take advantage of assessed losses.

48 - Proviso Acceptable basis of stock valuation

55 (I) Accepting accounts prepared to a date other than 30

June for assessment.
59 Determination of taxable income of a non-exempt
producer’s cooperative.

84E Reduction or waiver of penalty for non-payment of

provisional tax.

105(6) Extension of time to pay tax; remission of penalty.

SCHEDULE POWER

Second Par 3(2)c Determination of rates of Annual allowance for certain

qualifying assets.

END OF CHAPTER QUESTION

Secrecy is required of all officers performing duties under the Taxation Act

a. What is the preliminary step that officers must take before taking office under the Act?

b. When is the duty to maintain secrecy waived?

c. What are the penalties and fines for breaching the duty to observe secrecy?

d. Why is the Commissioner vested with discretionary powers?

ADMINISTRATION OF TAXES (TABLE 1)

MIN. OF FINANCE (Presents proposals)

PARLIAMENT (Passes proposals and they

become finance Act
of that year)

MALAWI REVENUE AUTHORITY

Under Commissioner General of Taxes
(For implementation)

Commissioner of Domestic Commissioner of Customs

Taxes (Direct Taxes) and Excise (indirect taxes)
 CHAPTER THREE

PERSONAL LIABILITY COMPUTATION

Income Tax is chargeable on all assessable incomes that have been derived from a Malawian
source during a period of assessment (i.e. Tax Year). The tax year in Malawi runs from 1st
July to 30th June the following year.

Assessable income is defined in Section 11 of the Taxation act as:

“The total amount in cash or otherwise including any capital gain received by or
accrued to or in favour of a person in any year or period of assessment from a
source within or deemed to be within Malawi and the person’s assessable income
will be that excluding any amount exempt under the Act.”

ASSESSABLE INCOME

Income is assessable to tax regardless of whether it has actually been received or not. For
example, income that has just been accrued in favour of a person would still be assessed to tax
even if such a person has not actually received the income.

Furthermore, it is important to understand that only incomes received, accrued or given in

favour of a person in a particular period of assessment( i.e. tax year for most persons) is
taxable in that year, and therefore, a careful split must be done in situations where an exam
question contains incomes of more than one tax year(period of assessment).
Assessable income may be Earned or Investment income.

Investment income is also known as Unearned income

EARNED INCOME

Earned income is broadly income from employment and self employment. Pensions from
past employment or self employment are earned income. i.e. Income arising as a result of an
individual’s activities of that particular moment in time. An individual is actually working to
earn that income.

INVESTMENT INCOME

Investment income includes all income other than earned income. Examples of investment
income include Interest, Rent, Dividends, etc. Interest and rent are always received net of
withholding tax but the gross amount will be included in assessable income.

SOURCE

Income is assessable as long as it is from a source within or deemed to be within Malawi

regardless of where payment takes place (S27). For example, any amount received by or
accrued to or in favour of a person as remuneration for any services rendered in Malawi is
from a source within Malawi regardless of where payment for the services takes place. This is
indeed very relevant for those individuals employed and working in Malawi, such as
expatriates who may be receiving their remunerations or part of it from outside the country.

INCOME EXEMPT FROM INCOME TAX

Certain items, though classified as income, do not come within the scope of income tax. It is at
least important to know which items of income are exempt so as to know what is not exempt.
Exempt incomes must not be included as part of an individual/organisation’s assessable
income. The FIRST SCHEDULE has a list of incomes which are exempt from tax. See
APPENDIX 1.

THE RATES OF INCOME TAX

Income tax liability is calculated by applying relevant income tax rates on the taxable income
for the period. The income tax rates are subject to annual reviews as part of the budget
sessions where the Taxation Act is reviewed.

Once the income tax rates have been adjusted following a budget session, the new rates
become applicable as directed by the Finance Minister, but only become examinable(both
PAEC and ACCA students) after six(6) months have elapsed since their Parliamentary
approval. For example, income tax rates adjusted in the June-September 2012 Parliament
budget session, which were scheduled to be implemented from 1 July 2012 (in the case of
PAYE and domestic VAT), will only start being examined in June 2013 exam diets and apply
up to the December 2013 exam diet.

The Income tax rates for the 2012-2013 tax year are provided here as follows:

Annual taxable income Applicable rate

First K180, 000 0%
Next K60, 000 15%
Excess over K240, 000 30%

When calculating the monthly tax liabilities, the income tax rates applicable are as follows:

Monthly taxable income Applicable rate

First K15, 000 0%

Next K5, 000 15%
Excess over K20, 000 30%

EXAMPLES ON CALCULATION OF TAX

1. Mr Chiwemi earns K4800 a month. Calculate his annual tax liability.

Solution

Annual income K4800 x 12 = K57, 600

From the tax tables the first K180, 000 is taxed at 0% - so Mr Chiwemi does not pay
tax.

2. Alinafe has an annual income of K280, 000. Calculate Alinafe’s tax liability.

Solution
Annual income K280, 000
Tax is determined as follows:
First K180, 000 at 0% = 0
Next K60, 000 at 15% = 9,000
Balance 0f K40, 000 at 30% 12,200
21,600

3. Mhlabase has an annual income of K320, 000. How much tax is she liable to pay?

Solution

It is easier and faster in this case to use the simplified table (which can be found under
appendix II at the end of the manual).

Tax on the first K240, 000 is 9,000

on the rest (K80, 000) at 30% 24,800
33,200
S71 gives authority for the levying of income tax on the total income of any individual
received by or accrued from a source within or deemed to be within Malawi.

AGGREGATION OF INCOME

All the income of an individual is aggregated when determining his/her tax liability for a given
period of assessment.

MARRIED TAX PAYERS

Under S12 (2) “income other than earned income (as defined in S73 (4) received by or
accrued to or in favour of a married woman shall be deemed to be income received by or
accrued to or in favour of her husband.”

The husband is required to include in his return of income the income that is deemed to be his
under s12 (2).

EARNED INCOME OF THE WIFE - S73 (4)

Wife’s earned income is defined as:-

a. income derived from a business carried on by the wife in her own right in which the
husband is neither an employee nor a partner;

b. emoluments from employment received by or accrued to or in favour of the wife where

the employer is not:

i. Her husband;

ii. a partnership in which the husband is a partner,

iii. a company in which the husband is a director who controls directly or indirectly
more than 5% of the voting rights attaching to all classes of shares of the
company;

iv. a company in which the wife is a director who controls directly or indirectly
more than 5% of the voting rights attaching to all classes of shares of the
company and in which the husband is employed or is also a director.

It is important to have a clear understanding of this definition as it is frequently examined as

part of PAEC Taxation Paper and plays a very key role when computing the tax liabilities of a
married couple. All incomes received or accrued by a married woman not meeting this
definition must be shown and will suffer tax in the hands of the husband, where such a couple
have elected to submit a joint return of income tax.

COMPUTATION OF TAX

S73 (3) Where a married couple has elected to submit a joint return of income and the
 wife’s income comprises of both earned and unearned income (or earned
income only), the couple’s tax liability is going to be the sum of.

(a) Tax on all the income excluding wife’s earned income, and
(b) Tax on wife’s earned income.

FORMAT

The following format illustrates how the tax liability will be determined where a couple has
elected to submit a joint return of income:-

ALL OTHER WIFE’S EARNED T CREDITS***

INCOME* INCOME**

Salary
xxx
xxx

xxx
Bonus
xxx
xxx

xxx
Capital gains xxx

xxx
Rent
xxx

xxx
ASSESSABLE
INCOME xxx xxx

Less: Deductible
Expenses****
Donations (xxx)
Repairs (xxx)

TAXABLE ___
INCOME xxx xxx

* ALL OTHER INCOME - this includes the husband’s income and the
unearned income of the wife.

** WIFE’S EARNED INCOME - all the income of the wife which meets
the definition of wife’s earned income under s73 (4).

*** TAX CREDITS - taxes which have already been paid on the income
 against which the tax is indicated; for example under the PAYE system.

**** DEDUCTIBLE EXPENSES - the amount of income in each column

will be reduced by the amount of the allowable expenditure that relates to the
production of such income. If expenditure is not in respect of production of
income. (e.g. donations), the deduction should be made where the tax relief is
higher.

EXAMPLE

John and Judith Gundumulani have been married for 10 years. They have elected to
submit a joint return of income for the 2011/2012 tax year. Their financial details are
as follows:-

JOHN JUDITH

INCOME
Salary 600,000 260,000
PAYE on salary 117,000 15,000
Bonus 20,000
PAYE on bonus Nil
Commission

30,000
Capital Gain 8,000
Rent (gross) 36,000
Bank interest
- Stanbic Bank 6,000
- NBS Bank 3,700 5000

EXPENDITURE
Pension Contributions
4,200
3,360
Donations - MAP 1,000
- Red Cross 150
- Parks Club 250
Repairs 700
Insurance 200
Mortgage Repayments 8,000
NOTES
1. John works for an IT company as a sales executive; his wife is a sales executive for a
stationery supplier.

2. The capital gain was realised on the sale of the family car.

3. Withholding tax had been deducted from rent income and paid to MRA by the tenant.

4. Both John and Judith contribute to approved pension funds.

5. Repairs, insurance and mortgage repayments relate to the house in respect of which
John received rent. The mortgage repayment is made up of K6, 000 interest and K2,
000 loan repayments.

REQUIRED

Compute the couple’s tax liability for the year ended 30 June 2012, giving brief explanatory
notes where necessary. (Come back and have another attempt at this example after you are
through with your syllabus)

SOLUTION
MR AND MRS GUNDUMULANI

INCOME TAX LIABILITY COMPUTATION FOR THE YEAR ENDED 30.06.09

All other Wife’s earned
Notes income

income
Tax Credits

Salary 1 600,000 260,000

132,000
Bonus 20,000
Commission 1 30,000
Rent 2 36,000 5,400
Interest 3
4,700

ASSESSABLE INCOME 660,700 290,000

Less: Allowable Deductions:
Donations 4 (1,000)
Repairs 5 ( 700)
Insurance 6 ( 200)
M. Interest 7 (6,000)
TAXABLE INCOME 652,800 290,000

TAX LIABILITY (W1) 158,040 49,200

TAX REMAINING
TO BE PAID (W2) 21,240

NOTES

1. The salary and commission of the wife is earned income since the source is not related
to the husband.

2. Rent has been received net of 15% of withholding tax. The tax credit is 15% of K36,
000.

3. First K10, 000 is exempt under the First Schedule and therefore only K 4,700 is
taxable, i.e. K 14,700-K 10,000.

4. Donations: MAP and Red Cross are approved charitable organisations in terms of S39
(d). The only donation allowable relates to MAP Red Cross Society donation is not
deductible because the amount is less than K250. Parks Club is not a charitable
organisation.

5. Repairs and insurance are deductible because they are incurred in respect of property
which is generating some income - S32 and S28.

6. Mortgage interest is an allowable deduction because it has been incurred in respect of a

house from which John is deriving some income - S28.

W1 Tax liability
All other income Wife’s
earned income

First K240, 000

9,000

First K
240,000

9,000
Next K 412,800 @ 30% 123,840 Next K 50,000 @ 30% 15,000
132,840 24,000

W2 Tax remaining to be paid:

Total Liability 156,840
Less: Tax credits

PAYE
 132,000

Withholding Tax

5,400
(137,400)

19,440

TAXPAYERS WITH PENSION INCOME

Tax payers receiving pension income are not supposed to pay tax.

a. An employee’s contribution to pension fund is calculated on gross earnings i.e. when

pension contribution by the employee is calculated, tax has already been levied in form
of Pay As You Earn.
b. On cessation of employment through termination, retirement or otherwise, pension
fund releases pension sums free of tax to beneficiaries hence the amounts being
received tax free.

INCOME OF MINOR CHILDREN AND OTHER BENEFICIARIES

One becomes a taxpayer upon birth (i.e. regardless of age). A minor child is a taxpayer in his
or her own right provided that the source of income is not related to his/her parent(s).
Who is a minor child?
A minor child is a child who is under twenty one years of age and is unmarried.

S73(6) Every parent is required to include in his return of income any taxable income received
by or accrued to or in favour of or deemed to have been received by or accrued to or in favour
of any of his minor children either directly or indirectly from the parent.
Section 72

1. GIFTS FROM PARENTS

If a parent makes a gift, donation, settlement or other disposition on which taxable

income accrues to or in favour of his minor child (legitimate or illegitimate), the
taxable income shall be deemed to be that of the parent.

e.g. Mr Filipo opened a savings account in favour his one year old son, Philip. The
interest accruing on this account should be included in Mr Filipo’s return since
it is deemed to be his.

2. RECIPROCAL GIFTS

If a person makes a gift, donation, settlement or other disposition on which taxable

income accrues to or is paid to a minor child (legitimate or illegitimate) of some other
person and the parent or near relative of the parent of the minor child makes a gift,
donation, settlement or other disposition or given some other consideration to the
person or near relative of the person who makes the disposition to the minor child, the
taxable income so accruing shall be deemed to be that of the parent of the minor child.

e.g. Mr Mtawali makes a gift to Tinyade, Mr Zedi’s minor child. Mr Zedi’s brother,
John makes a similar gift to Tiyenkhu, Mr Mtawali’s only daughter.

The taxable incomes arising on the gifts will be treated as follows:-

- Mr Mtawali will include in his income tax return the income arising on the gift made by
John to Tiyenkhu.

- Mr Zedi will include the taxable income from the gift made to Tinyade by Mr Mtawali.

3. CONDITIONAL SETTLEMENTS

If any person has made in any deed of gift, donation, settlement or other disposition a
stipulation to the effect that the beneficiary of the disposition shall not receive the
income or part of it until the occurrence of some event whether fixed or contingent
such taxable income shall be treated as that of the donor until the occurrence of that
event or the death of the person (donor); whichever takes place earlier.

4. RETENTION OF POWERS OF REVOCATION

If any deed of gift, settlement, donation or other disposition contains a stipulation that
the right to receive income under deed may be revoked under the powers retained by
 the person by whom the right is conferred, the taxable income arising on the
disposition shall be deemed to be that of the person retaining the powers of revocation
for as long as those powers are retained.

NOTE: For Paper F6 Business Tax (Malawi) – The topic on married tax payers
has frequently appeared in your paper. Practice is therefore needed on
its principles and presentation

SUMMARY

- Tax is levied on aggregate incomes i.e. total income received by or accrued to

or in favour of the taxpayer in question.
- A married woman’s UNEARNED income is treated as that of her husband; she
is at liberty to submit a joint return with the husband.
- “Earned” income of the wife that income from the business of the wife in which
the husband does not take part or from employment if the husband is not
connected to the employer.
- A person who makes a gift on which taxable income accrues may be liable to
tax depending upon the status of the donee or the conditions attached to the
gift.

QUICK QUESTIONS

1. If a taxpayer (single) received salary, bank interest and rent, how would his tax
liability be determined?

2. What type of income of the wife is deemed that of her husband?

3. Define ‘earned income’

4. A minor Child is not a taxpayer. True or false?

5. A donor who retains powers of revocation in respect of a disposition he makes

is liable to tax on that income .True or false?

6. Mr. Banda works for MCA at a salary of MK40, 000 per month. Calculate his tax
payable to the government monthly. (3 marks)

7. Calculate the tax payable and amounts received (after tax) by Mr. Phiri for the year 1
July 2011 to 30 June 2012 given the following:

- gets a salary of K6,500 per month

- gets a salary of K16,500 per month
- gets a salary of K65,000 per month
- gets a salary of K615,000 per 3 months
- gets a salary of K13,650 per month (20 marks)
EXAM STYLE QUESTIONS

1. Miss Hara’s income details for the year to 30 June 2012 are as follows:-
K
Salary
950,000
Pension from previous employment 80,000
Bank interest received
-from Standard Bank Malawi 24,000
Cash donation from son 15.000

REQUIRED

a. Compute the income upon which Miss Hara’s tax liability for the year to 30 June 2012
is to be based.

b. Calculate Miss Hara’s annual tax liability for the year ended 30June 2012.

2. Mr George Hausi is employed as branch accountant with Ulendo Ltd., a transport

company. He is married and has one child, Chikondi, 10 years old. His wife Beatrice is
a teacher at a government school.

The following details have been provided in respect of their financial transactions for
the year to 30 June 2012.

(i) GEORGE HAUSI

K
Salary 2,000,000
Proceeds from sale of a personal car 210,000
Bank Interest: - National Bank 2,000
- Standard Bank 6,000

(ii) BEATRICE HAUSI

Salary 1,200,000
Bank Interest - Malawi Savings Bank 9,000
Rental Income 240,000

(iii) CHIKONDI HAUSI

Bank Interest - NBS Bank 6,000

NOTES:

1. The car which has been sold is a Peugeot 405 which he bought second hand 4
years ago for K800, 000.
 2. Mr Hausi contributes 5% of his salary to a tax approved pension fund.

3. All the Bank Interest has been stated at their gross amounts.

4. Chikondi’s interest is from her savings account which Beatrice, her mother,
opened on her 10th birthday.

5. The rental income has also been stated gross although it was received net of
withholding tax. Outgoings on the property which is yielding the rentals, during
the year were as follows:-
K
City rates 1,000
Mortgage repayment 60,000
Insurance 10,000
Repairs 2,000

6. Included in the Mortgage repayments is K6, 000 interest charged during the
period.

7. PAYE deducted during the year was duly remitted to MRA.

REQUIRED

a. Prepare a detailed tax computation for Mr Hausi for the year to 30th June, 2012.

b. Explain your understanding of the term “wife’s earned income” in

terms of the provisions in The Taxation Act Cap 41.01.

c. Explain your treatment of income which has been realised from

the disposal of the personal car.

CHAPTER FOUR

TAXATION OF EMPLOYMENT INCOME IN MALAWI

Employed persons form quite a large proportion of the taxpayers in Malawi. Employment
income includes, among others, salaries, wages, housing allowances, fees, bonuses,
commissions and fringe benefits. It also includes pensions from past employment and certain
terminal payments.

1. SALARIES, WAGES, BONUSES, FEES etc

These are taxable in the year that they are due to be received regardless of whether or
 not they have been received. The employer is required to withhold tax from such.

2. HOUSING ALLOWANCES

Housing allowances, like the above emoluments, are taxable in the year they are
receivable. Housing allowance is fully assessable to tax (previously, up to K200 per
month used to be exempt from tax).

3. LEAVE PASSAGES

Amounts paid by the Government to any of its employees in respect of or in

connection with leave passages to any country outside Malawi and any comparable
amounts paid by any other employer under a contract with an employee which has
been approved by the Commissioner will not be treated as assessable emolument in the
employee’s hands. Grants or aid programmes to individuals seconded abroad by the
country or organisation are also exempt from tax.

4. FRINGE BENEFITS

Although these arise from employment and are “emoluments”, they are not taxable in
the hands of the employee. The employer is the one who pays tax on fringe benefits
provided to employees. The taxation of fringe benefits will be discussed in the next
chapter.

5. LUMPSUM PAYMENTS

Employees may be given lump sums on cessation of employment. These may be some
gratuities, pay in lieu of leave or a terminal benefit.

A. CONTRACT GRATUITY

In Malawi there are some people who are employed on a fixed term contract. This is
indeed true in modern employment scenarios, where instead of being employed on a
non-term employment contract basis, one is offered a fixed period employment
contract, such 24 months, 36 months employment contracts.

Such employees do not normally contribute to a recognised pension scheme. To

replace pensions, these employees receive a gratuity at the end of the period of the
contract.

The Act in s16 defines “contract gratuity” as “gratuity paid under any written contract
of employment upon expiry, termination, renewal or extension of such contract to an
employee who is, during the contract, not a member of a pension scheme other than a
voluntary contributor and in respect of which no contributions are paid by the
employer.”

The whole amount of gratuity paid by other employers other than the government is
taxable.
 All gratuities paid by the Government are tax free.

B. TERMINAL BENEFIT - (FOURTH SCHEDULE)

Terminal benefits are given to employees whose employment has come to

an end prematurely for various reasons. On termination of employment, the employee
is given terminal benefits made up of various sums such as pension, notice pay,
severance allowance and leave pay based on prevailing circumstances.

Pension is set aside and given to the employee free of tax regardless of surrounding
reasons to termination of employment.

Notice pay and leave pay are fully taxable regardless of the reasons for termination of
employment.

Severance allowance is given special tax treated based on the reasons for termination
of employment.

(i) If termination of employment is as the result of redundancy or

retrenchment then up to K 50,000.00 of severance allowance is tax free.
The rest of the severance allowance is fully taxable. If the severance
allowance is less than K 50,000.00 then the whole sum is tax free.
(ii) If the reason for termination of employment is anything other than
redundancy or retrenchment then the full amount received as terminal
benefit, including severance pay but excluding pension, is taxable
(remember pension is set aside and given tax free!).
PAY IN LIEU OF PAID LEAVE

On cessation of employment an employee may have accumulated leave days; the

employer may choose to pay a sum of money to such an employee instead of (in lieu)
granting him paid leave. This payment is assessed to tax as if it relates to the period
immediately following cessation.

S17 (2) provides that a single terminal payment in lieu of paid leave shall be
assessed
to tax as if such leave had been taken by the employee immediately after cessation of
employment of that employee and he had been paid accordingly.

Example

Mr Malulu’s employment contract ceased on 31 March, 2012. What is the tax position
if he is paid K1, 200, 000 in lieu of paid leave if-

i. Accrued leave was three months?

ii. Accrued leave amounted to four months?

SOLUTION
 In both cases (with the tax year running from July to June) the amount will be assessed
to tax as if the leave was taken from 1 April, 2012.

In (I) the whole K1, 200,000 will be assessed to tax in 2011/2012 tax year since the
leave period will be deemed to be April to June 2012 falling within one tax
period.

In (ii) only three quarters of K1, 200, 000 which is K900, 000 will be assessed in
2011/2012 and the rest will be assessed in 2012/2013 (as leave for the four
months is deemed to end on 31st July 2012.

NOTE:

S 17 (2) is an anti-avoidance provision to prevent people from benefiting from lower

rates of tax in a certain tax year

6. INCOME OF EXPATRIATES
Emoluments from sources within Malawi are taxable on the expatriates during their
stay in Malawi except for countries which have double taxation treaties with Malawi
and for expatriates whose world wide incomes, are subject to tax in their country of
origin and for expatriates who may have stayed in Malawi for less than 183 days.

DEDUCTIBLE EXPENSES

A taxpayer is allowed to deduct “deductible expenses” from his or her assessable

income to determine Taxable income. Section 28 states the conditions which must be
met for expenses to be deductible from assessable income.

S28 reads as follows-

“For the purpose of determining the taxable income of any taxpayer, there shall be
deducted from the assessable income of such taxpayer the amounts of any
expenditure... wholly, exclusively and necessarily incurred by the taxpayer... in the
production of income.”

The phrase “wholly, exclusively and necessarily” in the context of allowable

expenditure is borrowed from UK Tax Law.

Necessarily implies that the expenditure was somehow unavoidable, without

which the trade would have been damaged or income reduced.
(Two tests are related with “wholly and exclusively”, “remoteness” and
“duality”)?

Expenditure is too remote when it is incurred for purposes peripheral or too

loosely connected to the trade - i.e. not exclusively for the trade.

Duality of purpose related to the word “wholly”. Expenditure which is in part

not related to the business has a dual (double) purpose. Whilst specific rules
 (e.g. apportionment of capital allowances. Fringe Benefits Tax) deal with
specific types of ‘dual’ expenditure, normally if there is any benefit, the whole
expenditure is disallowed.

There are specific rules relating to certain expenditure as explained below:-

a. TRAVEL EXPENSES
Travel expenses between work locations are deductible but the cost of travel between
home and work is specifically disallowed. (See s45)

b. PROFESSIONAL SUBSCRIPTIONS
Subscriptions to professional bodies are deductible provided that membership to such a
body is relevant to the employee’s job. For example an accountant’s subscriptions to
ACCA are deductible.

Some employers pay sums of money to employees to enable the employees to meet the
expenses, the employee is to include these amounts in his assessable income under s18.
A provision to s18 allows the employee to claim as a deduction the amount of any such
payment as is expected by him wholly and exclusively and necessarily in performing the
duties of his office
.
c. DONATION TO CHARITABLE ORGANISATIONS
An individual donation of at least K250.00 to a charitable organisation approved by the
Minister for tax purposes is deductible -s39 (d). (For the list of approved charitable
organisations, see appendix III).

d. DONATIONS TO NON-PROFIT MAKING ORGANISATIONS

Individual donations of not less than K500 made during any year of assessment by a
taxpayer to a non-profit making institution operated solely or principally for social
welfare, civic improvement, educational development or other similar purposes as the
Minister may approve are deductible - s39 (e).

SUMMARY

Employment income includes both periodic payments such as salaries, wages etc which are
taxable in the year they are received or receivable; and lump sum payments e.g. gratuities
which are subject to special tax rules.

The following are some of the exempt income as per first schedule of the Taxation Act:-

(i) Interest received by an individual of up to K10, 000 per annum from any institution
registered under the Bankings Act or the Building Societies Act.

(ii) Long service awards

(iii) Dividend income

(iv) Dividends payable to non resident shareholders whose countries of residence have
entered into tax treaties with Malawi which exempt dividends.
(v) Redundancy payments of up to MK50, 000.00

Deductible Expenses - Deductibility of expenses follows the general rule in Section 28 with
the exception of pension contributions and others which are specifically allowed under the
provisions of the Act.

EXAMINATION STYLE QUESTIONS

Question 1

Mr Dave Zonsezatha entered into an employment contract with an engineering firm on the
following terms and conditions:-

(i) Contract Details

Period of Contract

30 months from 1 July 2007.

Salary
K65, 000 per month to be increased by 10% after fifteen (15) months

Housing Allowance
K25, 000 per month payable throughout the period of the contract.

Leave
One day for each completed month of service.

Gratuity

20% of basic salary earned over the period of the contract and payable only upon successful
completion of the contract.

(ii) Mr. Zonsezatha retired from Government service in 1997 and is in receipt of a Pension
of K15, 000.00 per month.

(iii) Being an engineer by profession, Mr Zonsezatha makes annual professional

subscriptions of £40.00

(iv) In March 2009 he made donations to two charitable organisations, K175.00 to one
and K50, 000.00 to the other.
(v) In May 2009, Mr Zonsezatha was paid an amount of K100, 000.00 being a payment in
respect of a special assignment he was asked to undertake by his employer.

(vi) Mr Zonsezatha received bank interest from Nation Bank of Malawi on a fixed deposit
account as follows:-
December, 2008 – K40, 500, June, 2009 K45, 750, December, 2009 - K60, 000.

(vii) The following assumptions are made:

· The tax authorities for purposes of tax-free gratuity approved Mr Zonsezatha’s

employment contract. However, any gratuity.

- in excess of K40,000.00 is subject to income tax;

- Professional subscriptions are allowed in full;

- Mr Zonsezatha’s employment contract was successfully completed;

- The rate of exchange was £1 = K210 on 10 December 2008 when

professional subscriptions were paid;

- Both Charitable Organisations to which Mr Zonsezatha donated are approved for

income tax purposes.

Required:

a. Compute the taxable income of Mr Zonsezatha for the year of assessment to 30 June
2009;

b. Calculate the amount of income tax on the Government Pension during the year to 30
June 2009..

c. Explain how income in the form of pension is taxed in the hands of a tax payer who
has other income in a given year of assessment;

d. Calculate the amount of gratuity payable to Mr Zonsezatha at the end of his contract
indicating how much of such gratuity (if any) is subject to income tax.

(Source 1995 PAEC Exam modified)

Question 2

Jones Hauya is employed as a consultant with Dez Consulting Limited, financial consultants.
He is employed on a 36 months contract which commenced on 1 July 2006 and at the end of
which period he will receive a 25% gratuity on his total earnings. The contract is approved by
the Commissioner of Tax.

The following information is available for the fiscal year ending 30 June 2009.

K
Salary 2,600,000
Interest received
- National Bank of Malawi 85,500
- Treasury bills 8000

Dividends from Stanbic Bank of Malawi 450,000

Rent 720,000

Jones is married and has one child, aged 15.

During the year:

(a) His employer paid school fees for his child at Saint Andrews International School
amounting to K1, 500, 000.

(b) He proceeded on holiday to Zambia for which his employer paid K360, 000.

© He paid city rates of K120, 000, mortgage of K250, 000 of which K138, 000 relates to
interest payable on the loan to purchase the house. The property is let out to a tenant.
(d) Incurred the following expenses on the house he lets out:

K
Insurance 24,000
Repairs 45,000
New drive way 80,000
(e) He made donations to the following organizations:

K
Malawi Against Polio 600
Save the Children Fund 2,000

(f) He is a member of the Institute of Management Consultants (UK) to which he

 subscribes K10, 000. He purchased books from the Institute worth K6,000.

He received gratuity at the end of his contract based on the following salary structure:

K
First year 840,000
Second year 1,100,000
Third year 2, 600,000

(h) The company provided him with rent free unfurnished accommodation with a rental
value of K1, 200, 000 per annum.

(i) He had use of a company car with unrestricted mileage. The car is five years old and
cost K4, 600, 000 when new.

(j) The correct amount of PAYE was deducted from his salary by his employers and paid
over to the Malawi Revenue Authority on the due dates.

(k) Withholding tax was deducted from rental income and applicable interest. The amount
indicated is gross before deduction of withholding tax.

Required:

a) Calculate the tax liability of Jones Hauya for the year ended 30 June 2009, giving
reasons for the exclusion of any items of income or for the disallowance of any
expenditure. (14 marks)

b) Calculate any additional tax due by him at that date. (4 marks)

c) Explain how the benefits provided to Jones by his employer will be treated for taxation
purposes. (4 marks)

(TOTAL: 22 MARKS)
Source: ACCA Tax Framework June 2001 Modified
 CHAPTER FIVE

FRINGE BENEFIT TAX

Section 94 A (1) provides that every employer, other than the Government, who provides
benefits to any of his employees, shall be liable to pay Fringe Benefits Tax on the total value of
such benefits.

DEFINITION OF FRINGE BENEFIT

Section 2 defines a Fringe Benefit as any asset, service or other benefit in kind provided to an
employee if such benefit includes an element of personal benefit to the employee.

Fringe Benefits Tax is due in cases where the employer makes payments directly to third
parties in respect of goods and services provided to employees and not payments made
directly to employees. The employee will be liable to tax on all payments that are made
directly to him. Examples of such payments include:

 Housing allowances
 Car allowances
 Employer reimbursing employees for such expenses as electricity, domestic servants
etc.

An employer will also be liable to fringe benefit tax in respect of loans which the employer
grants to his employees. The fringe benefit will arise where the interest charged by the
employer on such loans is lower than the prevailing commercial banks lending rates.

An employer is however not liable to pay FBT on fringe benefits provided to employees
earning amounts not exceeding K180, 000 per annum. In addition, no FBT is levied in respect
of fringe benefits which do not exceed K15, 000 per month or K180, 000 per annum..

Fringe Benefits tax shall not be imposed on an employee in receipt of any fringe benefit in
respect of which his employer is liable to FBT.

REGISTRATION
Every employer is required to register with the commissioner 14 days after he begins to
provide fringe benefits to employees by completing form FBT 1 (Fringe Benefits Tax
Registration Form).

RATE OF FRINGE BENEFITS TAX

Fringe Benefits Tax is payable at a rate of 30% of the total taxable values of fringe benefits
provided.

DETERMINATION OF TAXABLE VALUES

1. HOUSING ACCOMMODATION
 A. PROPERTY OWNED BY THE EMPLOYER

If an employee is accommodated in property owned by the employer the taxable value

is:

i. Unfurnished housing accommodation:

The taxable value is the greater of:

a. The open market value of the use (rental value) of such

Property; and
b. 10% of employee’s annual salary.

ii. Furnished Housing Accommodation:

The taxable value is the greater of:

a. The open market value of the use (rental value) of such property; and
b. 12% of the employee’s salary.

The taxable value may be reduced by the amount of any contribution made by the
employee. It maybe further reduced by 50% where the accommodation is owned by
the employer and the property is situated within business premises.

“BUSINESS PREMISES” - includes the entire area comprised in the

estate of land on which business premises are
situated.

B. PROPERTY RENTED BY THE EMPLOYER

If an employer provides accommodation which he rents from someone, the taxable

value is the greater of:-

a. The rent paid by the employer; or

b. 10% of the employee’s salary if accommodation is unfurnished; or
c. 12% of the employee’s salary if furnished housing accommodation is provided.

EXAMPLE

Mr Manuelo, a sales representative of SL Limited, is provided with furnished

accommodation. SL leases the house for K30, 000 a month. Mr Manuelo’s salary is
K600, 000 p.a. What is the taxable value of the benefit?
 SOLUTION

The taxable value is the greater of

a. Rent paid by the

employer
K30, 000 x
12 =
K360, 000
b. 12% of employee’s salary 12% xK600, 000 = k 72,000

The taxable value is K360, 000

2. MOTOR VEHICLES
The taxable value of a motor vehicle provided to an employee (without restriction to
business use only) is 15% of the original cost of the motor vehicle.

This is applied every year the vehicle is in use by the employee. No Reducing balance
method is used.

Example
A motor vehicle which was bought on 30 June 2009 at K5, 000, 000 is provided to
Mrs Harawa, a sales manageress. Mrs Harawa is allowed to use the vehicle for private
purposes. Calculate the taxable value on which FBT will be based for 2011/2012 tax
year.

Solution
Taxable Value 15% of original cost
i.e. 15% of K5,000,000 = K750,000

The taxable value may be reduced by the amount of any contribution made by the
employee.

3. SCHOOL FEES AND OTHER RELATED EXPENSES

If an employer pays school fees and related expenses directly to an institution to enable
an employee’s children or dependants obtain educational qualifications, the taxable
value of such a benefit is 50% of the total cost to the employer.

4. LOANS TO EMPLOYEES

Taxable value on loans provided to employees will be found by taking the difference
between the interest charged by the employer and interest chargeable if bank lending
rates were used.
 However, the following listed loans will not attract FBT:
a. Educational loans
b. Emergency advances
c. Medical loans
d. Funeral expenses loans

5. OTHER GENERAL FRINGE BENEFITS

The taxable value of such benefits is the total cost to the employer.
These include, but are not restricted to:

- Cell phones
- Utilities such as electricity, water and telephone;
- Household items of any kind.
- Vacations, travel and any other provisions;
- *domestic servants of any kind such as gardeners, maids, guards and
watchmen.
*Where the employee is accommodated in property owned by the employer, the cost
of a gardener, security guard and watchman shall not constitute a taxable benefit.

In addition, where the employer meets the cost of medical, ration and uniform
expenses for its employees this will not constitute taxable fringe benefits.

NOTE:
Paper F6 Business Tax students should note that FBT plays a very important element
when considering tax planning issues especially when looking at options of rewarding
employees.

Also important to note for all students:

When calculating taxable values, pay attention to what the examiner is asking. For
instance, where you are required to calculate taxable values for a quarter, translate
the annual taxable value by dividing the amount by 3/12.

REDUCTION OF TAXABLE VALUES

The taxable value of any benefit as determined using the rules above should be
reduced:-
a. If the employee contributes towards the provision of the benefit, by the amount
of the employee’s contribution.

Example: Refer to the example under accommodation

If the employer (SL Ltd) deducts 5% from Mr Manuelo’s salary as rent for the
house, the taxable value will be:-

Taxable value as determined above K 360,000

Less: rent paid by Manuelo (K 30,000)
K 330,000

b. If the benefit is not provided for a whole year, the benefit is reduced
proportionally.
 Example: Refer to the example under Motor Vehicles. If the car was provided
to Mrs Harawa on 1st October, 2011, the taxable value would have been.
9/12 x K750, 000 i.e. K562, 500

PAYMENT OF FRINGE BENEFITS TAX

Fringe benefits tax which is levied at the rate of 30% of the total taxable values of
fringe benefits provided by an employer is due in quarterly instalments not later than
fourteen (14) days after the end of each quarter.

The quarters are:-

1 July - 30
September

1 October - 31
December

1 January - 31 March

1 April - 30 June

FBT due should be accompanied with a duly completed Form FBT2 (Fringe Benefits
Tax Quarterly Return and Remittance Form)

RECORDS TO BE KEPT BY THE EMPLOYER

Every employer is required to maintain proper records showing:-

a. The nature of fringe benefits provided;

b. Names of employees to whom fringe benefits are provided;

c. The taxable values of the fringe benefits as determined in accordance with the rules
discussed above.
These records must be available for inspection at any reasonable time by the Commissioner or
by any public officer duly authorised by him.

PENALTY FOR NONCOMPLIANCE WITH THE FRINGE BENEFIT TAX

REGULATIONS.

Any employer who

i) Fails to register within the month in which he starts to provide fringe benefits to an
employee; or
ii) Fails to pay fringe benefits tax due on the due date;

Shall be liable to a penalty of 20% of the FBT due. The penalty is payable together with the
FBT due.
SUMMARY
- Fringe benefits tax is payable by an employer if he provides fringe benefits to
employees whose annual salaries exceed K180, 000.00.

- FBT is payable at the rate of 30% of the taxable values of the fringe benefits.

- Taxable values depend on the nature of the benefit.

- There is penalty of 20% of the FBT due for non compliance with the regulations.

END OF CHAPTER QUESTIONS

1. What is a fringe benefit?

2. What is the rate of Fringe Benefit Tax?

3. When is FBT due?

4. If an employer provided benefits to an employee whose annual taxable emoluments

amount to K48, 800 he would not be liable to FBT, True or False?

5. What is the taxable value of furnished housing accommodation if the property is not
owned by the employer?

6. BUM Ltd’s FBT liability amounting to K20, 000 for the quarter ending 30 June 2012
was paid on 31July 2012. Calculate the penalty that BUM is liable to.

EXAM STYLE QUESTION

1. UPS Ltd has engaged the services of General Manager and an Engineer.

These two employees enjoy some benefits provided by their employer. The details
are:-

Free house with furniture - The company pays rent in respect of each property
at K40, 000 a month.

Motor Vehicles

- The General Manager drives a Benz 2300cc. The car was purchased at
K5, 550,000 in January, 2006.
 - The Engineer drives a Toyota Camry 2000 cc which cost K3, 400, 000
in July, 2005.

The employer also pays school fees for their children who go to school to Zimbabwe.
They has one child each and the school fees amount to K1, 00,000 per child per year.
Passages and other expenses (payable by the company) amount K550, 000 for both
children for the whole year.

The Company refused to be held responsible for their water, electricity and other bills.

The General Manager gets a salary of K250, 000 per month. The Engineer gets a
salary of K190, 000 a month.

REQUIRED

a. Calculate the total Fringe Benefits Tax to pay for the year.

b. Calculate how much tax is to be paid each quarter and indicated when the tax is
due.

c. Explain the circumstances that would give rise to penalties under the Fringe
Benefits Tax Provisions clearly indication what the penalties are.

(Adapted from Income Tax Planning School February 1995 Law and Practice
Paper)

2. What are the tax implications if an employer pays rent to an employee in respect of a
house belonging to and occupied by the employee?

3. The taxation (Amendment) Act 1991 introduced provisions which impose liability on
employers to pay Fringe Benefits Tax. These provisions and the subsequent
Regulations came into effect on 1st April, 1991.

a. Summarise the Fringe Benefits Tax Provisions concerning

i. Housing accommodation (4 Marks)

ii. School Fees (1 Mark)
iii. Other fringe benefits (excluding cars) (2 Marks)

b. Explain the circumstances that would give rise to a penalty under Fringe Benefit Tax
provisions clearly indicating what those penalties are.

c. Mr Emmanuel Nathiya is a senior manager in Tatopa Limited a Blantyre based trading

company. Mr Nathiya whose salary is an enviable K1,500,000 per annum is entitled to
 and has been provided with the following benefits since joining the company in 1994:-

1. Free accommodation - a house with four bedrooms fully furnished. The house
is rented by the company at K50, 000 a month.

2. Motor car - Toyota Corolla 1800cc, two years old, which had cost K5, 000,
000 when bought as new.

3. Electricity and water bills averaging K10, 000 per month are paid for by the
company.

4. The company provided and pays for the following domestic servants.

Cook K8,000 per month

Gardener K6, 500 per month
Watchman K5, 000 per month

5. School fees for Mr Nathiya’s children Gift and Mphatso amounted to K200,
000 for this year 2008/2009
REQUIRED

I. For 2008/2009 tax year calculate the Fringe Benefit Tax (if any) arising as a result of
the benefits provided to Mr Nathiya.
ii. Show how and when tax calculated in (I) above would be paid to the tax authorities.

EXAM FOCUS
For Paper F6 (Business Taxation) questions on fringe benefits tax are demanding. Usually you
will be given a number of employees getting different benefits. Therefore how you present
your computations is important. Make sure you find a time saving format e.g.

GM FC ACCOUNTANT SUPERV. TOTAL

TAXABLE
VALUES
Housing (i) x x x x x
M/v (15% x cost) x x x x x
Cell phones x x x x x
X x x x x

Tax liability 30% x a = x

 CHAPTER SIX

TAXATION OF INVESTMENT INCOME

RENT
Rental income is taxable in the year it is due. Under s23 “Rent” includes premiums received
from another person for the right to use or occupy land buildings, or right to use plant or
machinery; patent, design, trade-mark or other property which in the opinion of the
Commissioner is of a similar nature.

Deductible Expenses

Any expenditure incurred by a person receiving rental income is deductible provided such
expenditure meets the conditions stipulated in s28"... there shall be deducted from the
assessable income of such taxpayer, the amounts of any expenditure ...(not being expenditure
of a capital nature) wholly and exclusively and necessarily incurred by the taxpayer ... in the
production of income.”

Examples of deductible Expenses

- Rates
- Insurance
- Rent (if property is sublet)
- Repairs (also covered under s32)

Rent is normally received net of 15% withholding tax. The tenant (person making payment)
withholds 15% of the amount due which is paid to the Tax Department. The Landlord must
include the gross amount in his assessable income.
 e.g. K

Rent due 10,000

Tenant withhold 15% 1,500
Landlord receives 8,500

The landlord must include K10, 000 in his return of income as rent. The K1, 500 (withholding
tax) will be deducted from his total tax liability (as a tax credit).

INTEREST
Unless specifically exempt, residents and non residents are liable to tax on all interest income,
including interest income from a building society registered in Malawi (subject to a ) below).
Items which are exempt are as follows:

a. The first K10, 000 per annum of bank or Building society interest or from stocks,
bonds or promissory notes raised by or on behalf of the government.

b. Interest on certain investment accounts with the New Building Society (Subject to
certain limits) on savings certificates issued by the Government or on tax reserve
certificates.

c. Interest on public loans raised by the Government and specified as being exempt from
tax.

d. Interest on Government stocks or bonds directed by the Minister of Finance to be

exempt from tax.

e. Interest on Malawi Development bonds.

f. Interest on 4½% African Development loan issued 1/7/60.

NOTE:
The first K10, 000 exempt interest only apply to individual taxpayers and not companies or
organisations. The exempt interest is per annum and not per bank.

Bank Interest in excess of K10, 000 is received net of 20% Withholding Tax unless the whole
amount is exempt from tax. Withholding tax is calculated by firstly deducting K10, 000 of
interest received in excess of K10, 000 from any qualifying institution. Again the amount to be
included in assessable income is the gross amount.

NOTE: There are no deductible expenses in respect of Interest.

ANNUITIES - S14
An annuity is an investment yielding fixed annual payments. An individual may enter into an
agreement with an insurance company whereby on payment of a certain sum, the insurance
company will pay to the individual an annual income for a specified period or until the death of
that individual.

Annuities are taxable. In the case of purchased annuities there are two elements in the amount
received namely:-

a. The capital element - the amount invested.

b. The income element - the amount in excess of the investment.

The capital element may or may not be taxable at the time the annuity is received.
If the capital element is the “Under-ducted Purchase Price” it will not be included in
assessable income. (i.e. capital element which is not taxable).

S14 (4) defines the Under-deducted Purchase Price as

“So much of the purchase price of an annuity paid by the taxpayers as has not been
allowed and is not allowable as a deduction and in respect of which a rebate or
abatement of income tax has not been allowed and is not allowable in assessments for
income tax...”

That is, it is possible for a person to buy an annuity from his/her savings ( i.e. income which
has already suffered tax) or from other incomes which at first were exempt from tax. Under-
ducted purchase prices is that amount the taxpayer saved to buy an annuity, and as the
taxpayer was saving, that amount was not allowed as deduction for tax purposes.

The income element is taxable.

EXAMPLE

Mr Bisika paid K40, 000 to purchase an annuity from an established insurance company. This
entitles him to receive an annuity of K4, 000 for 20 years. What is the annual taxable income
in respect of the annuity if Mr Bisika

a. Purchase the annuity using part of a terminal benefit which he received from an
approved pension fund on retirement?

b. Used his savings to purchase the annuity?

SOLUTION
a. Total receipts over 20 years 80,000

Annual taxable income =

4,000 i.e. 80,000
 20yrs

The purchase price was allowed as a deduction against assessable income because Mr
Bisika used part of his Terminal Benefit (See Chapter Four) so it cannot be the Under-
deducted purchase price.

b. Total receipts over 20 years 80,000

Less the Under-deducted purchase price* 40,000
40,000
Annual taxable income 40,000
20
=K2, 000

*There was no tax relief for the purchase price in this case therefore the K4, 000 p.a.
includes the under-deducted purchase price which must be excluded from the
assessable income.

DIVIDENDS
Dividends are taxable at a final rate of 10% by the company giving them.

SUMMARY

- Investment incomes include interest, rent, dividends and annuities.

- All these except for dividends which are exempt, are taxable in the year they are
receivable.

END OF CHAPTER QUESTIONS

1. What is the basis of assessment for rental income and interest?

2. A taxpayer’s National Bank savings account was credited with K18000 (net).How
much is he supposed to include in his return of income as interest? How much is
taxable?

3. Define the following terms

in respect of annuities
A: income element
B: capital element.

4. What is the under-deducted purchase price?

 CHAPTER SEVEN

GAINS AND LOSSES

FOREIGN EXCHANGE GAINS AND LOSSES

S26 required that foreign exchange gains and losses that arise from a source within Malawi be
include in computing taxable income.

When are foreign exchange gains or losses said to be from a source within Malawi? Under S27
(6) foreign exchange gains or losses that are realised in connection with a permanent
establishment in Malawi or arising in connection with foreign currency assets or liabilities held
in Malawi are deemed to accrue from a source in Malawi.

Foreign exchange gains or losses are determined using the formula below.

ar1 minus ar2

Where

“a” is the amount of foreign currency received, paid or otherwise computed with respect to
a foreign currency asset of liability in the transaction in which the foreign currency
asset or liability is disposed of, converted, repaid or otherwise eliminated.

“rl” is the official rate of exchange for the foreign currency with respect to the Malawi
currency at the date on which the foreign currency asset or liability was obtained or
established by the taxpayer.

“r2" is the official rate of exchange for the foreign currency with respect to the Malawi
currency at the date of satisfying the transaction.

Foreign Currency Asset (Liability) means an asset (liability) denominated in or the amount
of which is otherwise determined by reference to a foreign currency and includes notes and
coins of such foreign currency.

Example

BPK Ltd sold goods to Nolte plc (a UK Company) worth £500 when the exchange rate was
£=K372.50 Nolte plc paid for the goods a month later when the rate of exchange was £=
K384.50. Calculate the foreign exchange gain or loss.
Solution:
Gain/Loss = ar1 - ar2
a = £500
r1 = K372.50
r2 = K384.50

Gain = £500 x K372.50 - £500 x K384.50

= K186, 250 – K192, 250
= K6, 000

This K6, 000 must be included in BPK Ltd’s assessable income.

DEDUCTING FOREIGN EXCHANGE LOSSES FROM ASSESSABLE INCOME

Foreign exchange losses are deductible from assessable income provided that such losses are
realised. Subsection 6 of section 28 limits the deduction of such losses in cases where the
taxpayer has unrealised foreign exchange gains in that the losses which will be deductible will
be the excess of such losses over the unrealised foreign exchange gains. The amount which is
not to be deducted because of this restriction will be carried forward indefinitely to be offset
against assessable income of subsequent years subject to the same restriction. Unrealised
exchange gains and losses are not taxable/deductible. However, the losses may be allowed
without the restriction:

1. Where there are no foreign currency assets and liabilities or

2. in the year of assessment in which the taxpayer dies or ceases to exist.

EXAMPLE 1

During 2011/2012 Mr Zeze had the following exchange gains and losses:
Realised foreign exchange gains 2,000
Unrealised foreign exchange gains 1,000
Realised foreign exchange losses 4,500

Only K3, 500 of the foreign exchange losses can be deducted from Zeze’s assessable
income. K1, 000 will be carried forward to 2012/2013 (and subsequent years (if
necessary).
EXAMPLE 2
For the year ended 30 June, 2012, Evelyn had the following results in respect of foreign
currency transactions.
K
Realised gains 15,000
Realised losses 10,000

Unrealised gains 3,000

Unrealised losses 1,000

REQUIRED
State the amount of foreign exchange gain which is assessable and the amount of loss
which is deductible and any losses to be carried forward.

SOLUTION

Assessable gain 15,000 (realised

gain)

Loss deductible 8,000*

Loss carried forward 2,000*

*the loss deductible is the excess of foreign exchange losses over the net of unrealised
gains and unrealised losses, i.e. 3,000 less 1,000 =2,000; the amount of realised loss
deductible is

Realised loss 10,000

Net unrealised gain ( 2,000)
loss deductible 8,000

the remainder of the loss is carried forward to 2012/2013

i.e. 2,000 is carried forward.

NOTE: Where unrealised losses are more than unrealised gains, the whole amount of the
realised losses will be allowable for deduction.

CAPITAL GAINS AND LOSSES

Section 11 includes capital gains in the definition of assessable income which means that all
capital gains that have been realised from a source within or deemed to be within Malawi are
assessable to tax.

Capital gains (or losses) are deemed to accrue from a source within Malawi if the gains (or
losses) are realised in respect of tangible property located in Malawi or property representing
an interest in company incorporated in Malawi.

WHAT IS A CAPITAL GAIN/LOSS?

A Capital Gain is the excess of the amount realised on the disposal of a capital asset over its
basis or adjusted basis.
A capital Loss is the excess of the basic or adjusted basis of a capital asset over the amount
realised on the disposal of the capital asset.

CAPITAL ASSET
This means all property held by the taxpayer whether or not connected with a trade or
business but excluding stocks in trade and accounts receivable.

DISPOSAL
The transfer of ownership of an asset by whatever means including (but not restricted to) sale,
gift, bequest, distribution or exchange.

AMOUNT REALISED
This refers to the disposal proceeds of a capital asset which may be cash received if the assets
is sold for cash, the market value of the other asset if the asset is exchanged for another or its
open market value if it is disposed of without consideration.

CAPITAL GAINS OR LOSSES

Capital gain is determined by taking the excess of the amount realised over the adjusted basis
of the asset.

ADJUSTED BASIS OF AN ASSET

In respect of assets on which capital allowances were claimed, the adjusted basis is their tax
written down value, i.e. Cost less capital allowances claimed on the asset to date. The
resulting capital gain calculated is fully assessable to tax.

For other assets on which no capital allowances were claimed, the basis is either the cost of
the asset as adjusted by any improvement costs or the open market value of the asset.
The Consumer Price Index as determined by the Commissioner General as at July 2012
were as follows:
e.g. 1
A company purchased a house in 1981 costing MK100,000.00 the house was sold on 28
November 2012 for MK18,500,000. Calculate the taxable gain.

Solution
First we calculate the adjusted basis
Since it was bought in 1981, we multiply the cost by the 1981 inflation factor to bring it to
1999. Thus MK100,000*31=MK3,100,000.
Then we adjust using the conversion factor of 4.976*Mk3,100,000=Mk15,425,600.00
Thus the capital gain is MK18,500,000-MK15,425,600=MK3,074,400.
This will be taxed in full.

E.g. 2
A house which was purchased in 2002 at Mk600,000 was sold at MK2,000,000 in October
2012. Calculate the capital gain (MRA modified).

Solution
The adjusted basis is MK600,000*2.728= MK1,636,800
Capital Gain= MK2,000,000-MK1,636,800= MK363,200

EXEMPT GAINS AND LOSSES

Gains and Losses arising on the following transfers shall not be recognised:
a. between spouses or former spouses:
b. to a spouse from an estate of a deceased spouse;
c. to a child from an estate of a deceased parent; and
d. on disposal of an individual’s principal residence; and more generally,
e. on the disposal of an individual’s personal and domestic assets not used in connection
with any trade.

EXAMPLE 1
Mrs Zalimba built a house in 1985 at cost of K500, 000. She transferred the house to her
husband in 2008. Before the transfer Mrs Zalimba opted to use the 1st April, 1992 market
value of the house as its basis which was K750, 000. The house has never been the couple’s
principal residence)

No gain/loss will be recognised because the transfer is between spouses. In this case Mrs
Zalimba’s basis is K750, 000.

CALCULATION OF CAPITAL GAINS AND LOSSES

- Assets subject to capital gains tax exclude stock in trade and property held primarily
for sale to customers and receivable accounts or notes acquired in the course of
business.
- Any gain or loss is the amount realised less the adjusted basis.

- The basis cost is

a. In the case of an asset purchased/constructed the cost of that asset.
b. In the case of any other asset the open market price when the asset was
acquired.
a and b may be increased by the cost of improvements (not repairs)

DEDUCTION OF CAPITAL LOSSES FROM ASSESSABLE INCOME

Under s28 realised capital losses are deductible from assessable income subject to the
following limitations:-
 S28 (4) restricts the amount of capital losses that can be deducted from assessable
income. Realised capital losses are deductible to the extent of either.

a. The realised capital loss; or

b. Any capital gain realised by the taxpayer in that year of assessment; whichever
is the less.
The above restriction does not apply to assets on which capital
allowances have been claimed.

Any capital loss not deducted from assessable income due to the restriction above is carried
forward to subsequent assessment periods and will be deducted from assessable income of
those years subject to the same restriction until fully deducted.

NOTE:
The restriction under s28 (4) and s28 (6) do not apply in respect of the year in which
the taxpayer dies or ceases to exist.

INVOLUNTARY CONVERSION

Section 2 defines involuntary conversion as “the conversion of an asset by whatever means

which, in the opinion of the Commissioner is beyond the control of the taxpayer, including, but
not limited to destruction in whole or in part, theft seizure, requisition, condemnation, or
threat or imminence of destruction, seizure requisition or condemnation.”

Section 15A - Where a taxpayer asset is involuntarily converted;

a. Into an asset which is similar to it or which is related in service or use to it, a capital
gain will not be recognised:

b. Into an asset which is different form the asset converted or into money any capital gain
realised will be recognised except where the taxpayer makes a valid or timely election
and timely acquires a qualifying replacement asset, in which case the gain which will be
recognised will be the excess of the amount realised on the conversion over the cost of
the qualifying replacement asset.

Gains derived from compulsory or involuntary disposal of an asset will not be subject
to tax where the disposal is in exchange with an asset of similar nature or related in
service or use. (i.e. warehouse exchanges with another warehouse.
 DEFINITIONS:-
Qualifying replacement asset - An asset similar to or related in service or use to the
asset converted.
Valid election - An election made in a timely filed return of income for the tax
year in which the conversion took place which.

-briefly describes the type of involuntary

conversion;

-identifies the asset converted;

-indicates the adjusted basis of the converted asset;

-states an intention to acquire a qualifying replacement asset;

A qualifying replacement asset is timely acquired if it is acquired within two years after
the end of the first year of assessment in which any part of the capital gain is
recognised..

For capital gains relief to apply the asset so converted has to be replaced by a
qualifying replacement asset (Similar asset) or an election should be made to the effect
that a qualifying replacement asset will be acquired within two years after the year of
assessment in which the capital gain is realised.

Where an asset is involuntary converted and is replace by a qualifying asset, a gain will
arise only to the extent that the amount realised from the conversion exceeds the cost
of the replacement asset. The relief arises from comparing the proceeds from the
conversion to the value of the replacement asset and not of the adjusted basis of the
replaced asset as per normal capital gains rules.

EXAMPLE 1
Tax written down value of asset involuntarily converted K100, 000 (it’s assumed that
capital allowances have been claimed on this asset)

Proceeds from involuntary conversion K400, 000

Amount reinvested in a replacement asset amounts to K300, 000
Calculate the Capital gain to be included in Assessable income.

a. Under normal Capital gains tax principles it will be as follows:-

Proceeds K400,000
Less TWDV of converted asset 100,000
Capital gain 300,000
b. Under involuntary conversion principles:-
Proceeds K400,000
Cost of replacement asset 300,000
Restricted Capital gain 100,000

There is a deferred gain of K200, 000 i.e. K300, 000 less K100, 000(K200,
000 deferred gain is relief for involuntary conversion).

Where the acquisition of a qualifying replacement asset will not happen in the tax year
in which the conversion occurs, the taxpayers should make a timely election and
acquire within two years a valid qualifying replacement asset to benefit from the relief.

EXAMPLE 2

Ram Limited purchase machinery at K200, 000 from BGM Associates on 30

November 1998 where the agreement was that should the machine breakdown
within 24 months; the latter would repair it or replace it with a new one. On 30
April 2000 the machine ceased to work and it could not be repaired. The seller
replaced the machine on 6 July 2000. Ram Limited prepares its accounts to 31
March each year. What is the basis of the new asset?
SOLUTION

Adjusted basis of the first machine:

1998/99 Cost

200,000
Investment allowance* ( 80,000)
Annual allowance* ( 20,000)
WDV at 31.03.99
100,000

1999/00 Annual allowance* ( 10,000)

WDV at 31.3.00
90,000
*Theses are discussed in detail in chapter 9

The written down value (WDV) at 31.03.00 is the adjusted basis of the first machine
which according to S15A (4) (b) (i) is the basis of the new machine.

EXAMPLE 3
Assuming in the example above BGM Limited repaid RAM Limited K200, 000 and
RAM Limited used K170, 000 to purchase another machine similar in use to the first
one on 21 December 2000. Calculate the basis of the replacement machine.
 SOLUTION
The amount of gain realised on the conversion:

Amount realised 200,000

Adjusted Basis 90,000
Gain realised
110,000
Only K30, 000 of this gain will be recognised (the excess of the amount realised over
the cost of the qualifying replacement asset i.e. K200, 000 less K170,000)

Gain not recognised:

Gain realised
110,000
Gain recognised ( 30,000)
Gain not recognised (deferred) 80,000

The basis of the new machine

Cost of the machine 170,000

Gain not recognised ( 80,000)
90,000

If the basis of the qualifying replacement asset exceeds the adjusted basis of the
replacement asset initial allowance or investment allowance (as may be appropriate)
can be claimed on the differences.

These provisions relating to involuntary conversion do not apply to motor vehicles except
those used in the business of transporting goods or passengers.

CAPITAL GAINS ON DISPOSAL OF BUSINESS ASSETS (ROLLOVER RELIEF)

Under s15B(1), subject to subsection(2), no capital gain shall be recognised on the disposal of
a business asset, if the gain has been used to acquire a qualifying replacement asset similar
to, or related in service or use to the asset so disposed.

Subsection (2) provides a condition for the roll over relief to be available. Under this
subsection, the qualifying asset should be acquired within 18 months from the date the
disposal occurred and should be declared in the income tax return.

NO GAIN NO LOSS ON CERTAIN CONTRIBUTIONS TO CAPITAL

No gain or loss is recognised upon the contribution of assets to the capital of a company
where the person making the contribution owns at least 80% of the shares in the company. In
such a case the basis of the contributed assets in the hands of the company shall be the
adjusted basis in the hands of the person immediately prior to the contribution.
Gains on the disposal of shares traded on the Stock Exchange are exempt from tax if those
shares are held by the taxpayer for at least one year.
DISTRIBUTION OF PROPERTY WITH RESPECT TO SHARES

According to Section 70B, If a company distributes property to a shareholder in respect of his

shares, there will be either be a gain or loss recognised in the same manner as if the property
was sold to that shareholder at its open market value.

BONUS SHARE ISSUES

Bonus shares are ‘free’ shares issued to shareholders without any cash being paid for them.
The reserves are utilised for this purpose. Thus, if before the bonus issue there were K20,000
share capital and K12,000 reserves, and then a bonus issue of 1 for 4 were made the bonus
would amount to K5,000. The Share capital then becomes K25, 000 and the reserves become
K7, 000.00.

Section 70c of the taxation Act states that when a company issues bonus shares:-

a. The distribution shall not be included in the income of the shareholders and shall not be
treated as a dividend.

b. The shareholders, following such an issue shall remain unchanged and,

c. The basis of the shares shall be allocated between the old and the new shares in
proportion to their respective values.

DISTRIBUTION IN COMPLETE LIQUIDATION OF A COMPANY

Section 70d states that if the company makes a distribution when it is being liquidated, the
shareholders will be treated as if they have sold their shares in exchange for the property or the
cash received. This shall not be treated as a dividend and a gain or loss shall be recognised.

REORGANISATION

According to the Taxation Act,

Reorganisation means:-
(i) a mere change in a company’s form
(ii) a recapitalisation of a company
(iii) a combination of two or more companies into a single company.
(iv) a division of a company into two or more companies;
(v) the acquisition of at least eighty percent of the equity interests in a company in
exchange solely for equity interests in the acquiring company: and
(vi) the acquisition of at least eighty percent, by value, of the assets of a company in
exchange solely for equity interests in the acquiring company.
QUALIFIED REORGANISATION

A qualified reorganisation means a reorganisation pursuant to a written plan undertaken for

valid business purposes and not for avoidance by any person involved in the reorganisation.

A transaction will be regarded as a qualified reorganisation with regard to its substance where
the form is inconsistent with the substance of the transaction.

In a qualified reorganisation the basis of the asset so acquired shall be determined with
reference to the adjusted basis of the asset immediately before reorganisation.

The acquiring company shall take into account the tax attributes of the acquired company
unless otherwise provided.

Distributions of equity shares between parties to a qualified reorganisation shall not be taxable,
but any other distributions of cash or other property shall be taxable in the hands of the
recipient as consideration received in a sale or exchange.

Any reorganisation which is not a qualified reorganisation shall be treated as a sale of the
company and all its assets.

TAX CLEARANCE CERTIFICATE

A tax clearance certificate shall be issued upon application in writing to an applicant who has
satisfied the Commissioner of Taxes that he:

- is a registered tax payer and is not subject to or exempt from income tax

- has filed all income tax returns due.

- has no tax liability

Any person concluding transfer of land and buildings without obtaining a tax clearance
certificate from the Commissioner shall be liable to a penalty of MK50,000 in addition to any
other penalties arising from the transfer.

In addition, the following transactions require the issuing of a tax clearance certificate;

a. Renewal of business resident permit

b. Renewal of certificate of fitness for commercial vehicles.
END OF CHAPTER QUESTIONS

SELF TEST QUESTIONS

1. Define
a. capital gain
b. foreign exchange gain
c. Basis of an asset.

2. Mr Zimveka gave his wife a painting which has cost him K65,000 on her 45th birthday
when its open market value was K77,000. The wife sold it two years later for K110,
000. What is the gain or loss on the sale by the wife?

EXAM STYLE

1. a. The taxation Act makes a distinction between “Realised” and

“Unrealised”. Define these terms in relation to foreign exchange gains and
losses.

b. The following information relates to foreign exchange gains and losses which
Gladys had in the three years to 30th June, 2009.

Realised Unrealised
Gains Losses Gains
Losses

2005/2006 8,000

5,000

2,000

2,500

2006/2007 6,000

7,500

3,000

4,500

2008/2009 10,000

12,000

6,000

4,500

You are required to show for each of the three years.

 (i) Foreign exchange gains assessable if any:
(ii) Foreign exchange losses deductible from assessable income if any;
(iii) Realised foreign exchange losses carried forward, if any.

2. a. Define the terms “ reorganisation” and “qualified reorganisation” for

purposes of the Taxation Act and state any two advantages that come as a
result of having a reorganisation approved by the Commissioner as a qualified
reorganisation.

b. State circumstances under which distribution of bonus shares of a company to

its shareholders would not be regarded as income and not be treated as a
dividend. To what extent is the basis of the shares affected after the bonus
shares have been issued?

c. A limited company’s issued capital is K20, 000 made up of 20,000 ordinary

shares of nominal value of one Kwacha (K1) each. The share ownership is as
follows:-

10,000 ordinary shares belong to shareholder A:

6,000 ordinary shares belong to shareholder B; and
4,000 ordinary shares belong to shareholder C.

A resolution was passed to issue one (1) bonus share for every four (4) shares held by
shareholders A, B and C.

REQUIRED:
Following the issue of the bonus shares, calculate the total number of bonus shares
issued and also calculate the proportionate ownership interest of each of the
shareholders A, B and C.
 CHAPTER EIGHT

BUSINESS TAXATION

TAXATION OF UNINCORPORATED BUSINESSES

SOLE PROPRIETORSHIPS
A sole proprietorship is a business owned and run by one person. The person is known as a
sole trader.

A sole proprietorship is not a separate legal entity from its owner such that it is not a taxpayer
in its own right. The sole trader is the one who pays tax on the profits of a business.

BASIS OF ASSESSMENT

If a sole trader prepares accounts to 30 June, the accounts will be assessed to tax on an actual
basis. If a sole trader’s accounting date is a date other than 30 June (e.g. 31 March), the
Commissioner may in his discretion accept such accounts for assessment in respect of the year
ending 30 June prior or subsequent to the accounting date - s55 (1).

Where a taxpayer’s accounts are prepared to a date other than 30 June, the taxpayer shall
continue using that accounting date unless the Commissioner agrees to a change.

On cessation a taxpayer is required to submit a return in respect of the period beginning

immediately after the closing date of last accounts which were accepted for assessment to the
date of cessation.

EXAMPLE
Masauko who has been preparing accounts to 31 March each year ceased to trade on 30
September 2012. What will be the basis of assessment for the final tax year?

SOLUTION
The final tax year is 2012/2013 and the basis period will be 1 April 2012 to 30 September
2012. Masauko should submit a separate return for the accounts for this period.

An assessment is based on accounts prepared for a period of 12 months. Where the

accounting period exceeds 12 months, separate accounts should be submitted for the first 12
months and for the balance of the period in excess of 12 months.

Where a taxpayer’s taxable income has been assessed to tax in more than one year of
assessment, the taxpayer will obtain a relief. The relief will take the form of a reduction in the
taxable income of the last year of assessment on cessation and the penultimate year if
necessary. The taxable income of the last year of assessment will be reduced by the amount of
taxable income which has been assessed to tax in more than one year of assessment; if that
year’s taxable income is not sufficient then the taxable income of the penultimate year will be
reduced by the excess.
BOOKS OF ACCOUNT

S54 Every person carrying on business shall maintain sufficient records of his income and
expenditure to enable assessable income and allowable deductions to be readily determined.
These records must be retained for at least seven years after completion of transaction to
which they relate. The taxpayer does not have to keep such records for the said period if the
Commissioner has given him notice that the preservation is not required.

ASSESSABLE INCOME

S11 defines Assessable income (refer to Chapter Three)

DEDUCTIBLE EXPENSES
The general rule of deductibility of expenses is contained in s28 of the Act which states that:

“For the purpose of determining the taxable income of any taxpayer, there shall be
deducted from the income of such taxpayer the amounts of any expenditure and losses.
(not being expenditure of a capital nature) wholly and exclusively and necessarily
incurred by the taxpayer for the purpose of his trade or in the production of the
income.”

Most business expenditure follows the above rule. These are provisions with the Act which
specifically allow or specifically disallow certain expenditure. These include:-

REPAIRS - S32

Sums actually expended by the taxpayer on repairs to business assets are allowable provided
the expenditure is not of a capital nature. Extending an existing building is expenditure of a
capital nature therefore not allowable while repainting a building is not of capital nature
therefore allowable provided the building is occupied for the purposes of the taxpayer’s trade.

CAPITAL ALLOWANCES - S33

Depreciation is not an allowable deduction. Depreciation is replaced by capital allowance

(“tax allowable” depreciation) which is determined in accordance with the Second Schedule.

PREMIUMS PAID S34

Premiums paid for the right to use or occupy land or buildings; or right to use plant or
machinery, patent trade mark etc. Where such things are used for the production of income,
are allowable. The premium is allowable by spreading the amount over the lower of:
a. The lease period over which the rights apply and
b. 25 years.

E.g. A farmer paid K21, 000 for the right to use land for 30 years. How much is the farmer
allowed to deduct in his profit and loss account?

Solution
The premium is spread over the lower of
a. 30 years; and
b. 25 years

i.e. 25 years

21,000/25

=K840 per year for 25 years.

If the farmer in the example above decided to purchase the land outright 5 years later,
the allowance would cease to be claimed in the year of purchase.

BAD DEBTS - S35

Debts which have been proved bad to the satisfaction of the Commissioner are deductible
provided that they were included in income in the current year of assessment or were included
in income in any previous year.

DOUBTFUL DEBTS S36 (1)

A provision in respect of a doubtful debt is allowable if it is a specific provision and that such
debts are included in assessable income. General provisions are not allowable.

BAD DEBTS RECOVERED - S36 (2)

If a taxpayer received an amount in respect of a debt which was declared bad, he should
include the amount in his assessable income of the year it is received.

EXPORT ALLOWANCE - S36 A

Under Section 14 of the Export Incentives Act, an exporter registered with the Malawi Export
Promotion Council is entitled to an export allowance of 25% of the taxable income derived
from export sales as long as the Commissioner is satisfied that such taxable has been
determined in accordance with the provisions of the Act.

The export allowance is given in respect of non-traditional exports only. The country’s
traditional exports include:
- Un manufactured tobacco and tobacco refuse
- Tea
- Coffee
- Cane sugar

An exporter can not claim export allowance if he exported any of the above.

NOTE:
A taxpayer who incurs international transport costs for his exports is allowed to deduct an
additional 25% of the international transportation costs. The cost must be in respect of the
non-traditional exports for the taxpayer to be given the additional allowable deduction - S41B

The following other benefits are available

- No duties on the imports of capital equipment used mainly in the manufacture of

exports;
- No VAT (valued added tax)
- No excise taxes on the purchase of raw materials and packaging materials made in
Malawi;
- No duties on capital items and raw materials.

PENSION CONTRIBUTIONS -S37

An employer is allowed to deduct amount contributed on an employee’s behalf to an approved
pension fund subject to the provisions of the Fifth Schedule.

Under the Fifth Schedule an employer who contributes on an employee’s behalf is allowed to
deduct 15% of the employee’s annual emoluments.

NOTE: Amounts contributed by employees are no longer allowable for deduction when
determining their taxable incomes.

RESEARCH EXPENDITURE, GRANTS etc AND DONATIONS - s39

The following are allowed as deductions:-

a. The amount of any expenditure incurred by the taxpayer on experiments and research
work relating to his trade provided the expenditure is not of a capital nature.

b. Any sums contributed by the taxpayer during the year of assessment to any scientific or
education society or institution approved by the Minister if the taxpayer has stipulated
that the sums will be used on research and experimental work connected with the trade
of the taxpayer.

c. Any sums contributed by the taxpayer during the year of assessment in the form of a
grant, bursary or scholarship to enable any other person to take a course of technical
education relating to the taxpayers trade at any institution approved by the Minister.

d. Individual donations of at least K250 each made during the year of assessment by a
taxpayer to any charitable organisation approved by the Minister for tax purposes. The
list of approved charitable organisation is in appendix III.

e. DONATIONS TO NON PROFIT MAKING ORGANISATIONS

Individual donations of not less than K500 made during any year of assessment by a
taxpayer to a non-profit making institution operated solely or principally for social
welfare, civic improvement, educational development or other similar purposes as the
Minister may approve are deductible.

ANNUITY ALLOWANCE OR PENSION - S40

If a taxpayer pays an annuity allowance or pension during any year of assessment to a former
employer who retired due to ill-health, infirmity, or old age, the amount paid is an allowable
deduction. The allowable deduction is restricted to K1,200 per former employee per annum if
such amounts are paid to dependents of the former employee (where the former employee is
deceased).

INITIAL BUSINESS EXPENDITURE -S41

Expenditure incurred not more than eighteen months prior to commencement of a
manufacturing business is allowed as a deduction provided that it would have been allowed as
a deduction had it been incurred after commencement.

SPECIFICALLY DISALLOWED EXPENDITURE -S45

S45 specifically disallows the following expenditure.

a. The cost of maintaining the taxpayer and his family or establishment

b. Domestic or private expenses of the taxpayer including the cost of travel between the
taxpayer’s residence and place of work.

c. Any loss or expense which is recoverable under any insurance contract;

d. Income Tax and interest thereon

e. Fringe Benefit Tax and interest thereon;

f. Any expenses incurred in respect of amount received or accrued which are not
included in the term income within the Act;

g. Contributions to unapproved pension funds;

DETERMINATION OF TAXABLE PROFITS
To arrive at the taxable profits the profit and loss account has to be adjusted to take account
of the provisions of the Act. The format for adjustment of profits (losses) is as follows:-
Net Profit (Loss) per accounts xxx
Add back: all expenses which have been deducted in the
profit and loss account but are not allowable-
e.g. - depreciation
xxx
- Capital expenditure
xxx
- Private expenses

xxx

xxx
Add: Taxable income which has not
been added to profit xxx
xxx

Less: Allowable expenditure which has not been

deducted in the Profit and loss account-
e.g. - capital allowance - xxx

Income which has been included in profit but

is not taxable e.g.
Profit on disposal of fixed assets xxx
(xxx)
Adjusted (Taxable) Profits

(xxx)

EXAMPLE
John who owns a manufacturing business drew up the following profit and loss account for
the year ended 30 June 2012:-
K’000 K’000
Gross Profit for trading 100,000
Add profit on sale of car 1,000
Discounts received
900
1,900
101,900
Less Rent and rates 1 2,400
 Light and heating 1 1,560
Travel Expenses 2,460
Wages and Salaries 2 60,000
Depreciation
15,000
Repairs 3 5,100
Bad and doubtful debts 4 1,080
Amortisation of lease 5 1,000
Legal expenses 6 150
Pension fund contributions 7 6,000
General expenses 8 800
Income Tax 3,000
98,550
Net Profit for the year

3,350

Notes to the profit and loss account:-

1. One third of rent, rates, light and heating relates to the flat in which John and his family
live above his workshop premises.
2. Salaries include K10, 000,000 that John draws for himself.
3. Repairs account: K,000
Extension to workshop 4,000
General maintenance 500
Repainting flat 600
5,100
4. Bad and doubtful debts account:
K’000 K’000
Trade debts

1,000

General
provision

800
Non-trade debts
100
at
1.7.11

General provision

Specific
provision
 400
at 30.6.12 980 at 1.7.11
Specific provision

Bad
debts w/off

at 30.6.12

600

Profit and
loss A/c

1,080
2,680
5. In 1999, John paid a premium of K30, 000,000 to acquire a 30 year lease on his
workshop. This is being written off in equal amounts over the 30 year lease period.

6. Legal expenses comprise of K100, 000 for debt collection and K50, 000 extension to
workshop.

7. Pension fund contributions relate to five employees for whom an approved pension
scheme is operated. Each employee earns a salary of K8, 000,000 per annum and
contributes 8% of this by way of his own contribution.

8. General expenses comprise K450, 000 college fees for Malawian employees, donations
of K200 to MACOHA K100, 000 to MALAWI CONGRESS PARTY and K150 to
MAP; and K249, 650 of other allowable items.

9. Capital allowance for the year has been agreed at K20, 000.

REQUIRED

Calculate John’s taxable income for the year ended 30 June 2012
(R E Mdeza’s Manual)

SOLUTION
JOHN
TAXABLE BUSINESS INCOME FOR THE YEAR ENDED 30 JUNE 2012
 Notes K’000
K’000
Net Profit per accounts

3,350

Add back: Rent and rates 1

800
Light and wages 1 520
Wages and salaries 2 10,000
Depreciation 3 15,000
Repairs 4
4,600
Bad debts 5
280
Lease amortisation 6 1,000
Legal expenses 7 50
Income Tax 8
3,000
General expenses 9

235

35,485
38,835
Less: Capital Allowances 10 20,000
Training costs allowance 11 225
Profit on sale of car 12
1,000
Lease Amortisation 6
1,200
(22,425)
Net profit (Taxable Profits)

16,410

NOTES

1. Expenditure of a private nature is specifically disallowed under s45.

2. Salaries to owner are drawings which are not deductible.
3. Depreciation is expenditure of a capital nature.
4. Extension of the workshop is expenditure of a capital nature and repainting flat is
domestic expenditure
5. Non-trade debts written off are not incurred for trade purposes and general provisions
are specifically disallowed under S36.
6. The premium should be written off over a period of 25 years and not 30 years - S34.
7. The legal expenses in respect of extension to workshop are of a capital nature.
8 Income Tax is specifically disallowed under s45
9 General expenses:
- The donation to MACOHA and MAP are disallowed because each is
less than K250 despite that both are approved charitable organisation.
- Malawi Congress Party is not a charitable organisation.
10 Capital allowances are allowable deductions - s33.
11 Under s41A there is an additional 50% allowable deduction in respect of training costs
that have been paid to enable an employee who is a Malawian to attain a qualification.
The assumption is that the said college is an approved institution.
12 Profit on sale of car - this is an accounting capital gain. The assumption made here is
that the capital gain/loss in tax terms has been included in capital allowances.

TRADING LOSSES

Any trading losses determined under the Act incurred by a taxpayer are deductible from the
taxpayer’s assessable income. Such losses can be carried forward and be available for relief
claim for a period of not more than six years in respect to trading operations other than
manufacturing, agricultural and mining industries.

Businesses within manufacturing, agricultural and mining industries will still be eligible to
carry forward trading losses indefinitely.

The taxpayer has two alternatives of relieving the loss:-

a. offsetting the loss against other income of the year in which the loss is incurred; and/or
b. carrying the loss forward to be offset against income of subsequent years of
assessment.

The right to carry forward losses is not available to any person who
i. has been adjudged or otherwise declared or become bankrupt or insolvent; or
ii. has made a conveyance or assignment of his property or estate for the benefit of his
creditors or an arrangement with his creditors releasing him wholly or partially form
his debts.

An assessed loss is reduced by the amount or value of any benefit received by or accruing to a
person whereby his creditors have agreed to have his aliabilities reduced or extinguished if
these liabilities arose in the ordinary course of business.

SUMMARY

- A Sole proprietor is liable to tax on the profits of his business. - The profits are added
to other income of the trader.
- Basis of assessment - this depends on the date to which accounts are prepared, thus on
the Accounting year of a business.

- Any person carrying on a trade is required to maintain proper records.

- Assessable income is defined in S11

- Expenses are deductible provided that they have been incurred wholly and exclusively
and necessarily in the production of income or for the purpose of trade (s28). The Act
specifically allows or disallows certain expenditure.

- Accounting profits have to be adjusted to take account of tax provisions in order to

determine the taxable profits.

- A Sole trader who has an assessed loss can deduct the loss against his other income for
the year of the loss and carry forward the excess, if any.

END OF CHAPTER QUESTIONS

QUICK QUESTIONS

1. What is the year of assessment for accounts which has been prepared to 30 September
2012?

2. What type of repairs are deductible under the Act

3. What conditions must be met for a debt declared bad to be allowed as a deduction?

4. What method of stock valuation is acceptable by the tax law?

5. List any four types of expenditure which are specifically disallowed under s45.

EXAM STYLE QUESTION

1. Boyizi Leze, a sole trader, trading as Mchiza Enterprises, has two major
divisions: a general farming division and a wholesale and retail division. The
profit and loss account for the year ended 30 June, 2012 is as follows:-

Notes K
Gross profit 1

130,140
Investment income
4,000
134,140

Less: Rent and insurance 16,200

Salaries 12,220
Light and heat 4,000
General expenses 3 1,800
Travel expenses 3,300
Depreciation 27,000
Loss on sale of motor vehicle 1,030
Bad debts 4 6,000
 Subscriptions and donations 5 8,000
Legal and accountancy fees 6 20,500
Bank loan interest 4,000
104,450
Profit/(Loss) for the year 29,690

NOTES

The following information relating to the accounting period above is also available.

1. Depreciation on the Plant and machinery is charged to the trading account. The charge
for the year ended 30 June 2012 was K14, 950.

2. Investment income was respect of dividend received from a local company.

3. General expenses were made of:

Calendars sent to customers

1,000
Bank overdraft interest 400
Medical aid contributions (for proprietor)
400
1,800

4. Bad debts is a general provision and is provided as 5% of total debtors.

5. Subscriptions and donations:

Malawi Congress Party 6,000
Malawi Red Cross

10
Chamber of Commerce 200
Save the Children fund 1,790
8,000

6 Legal and Accountancy fees include:

Proposed sale of farming division

2,000
Accountancy fees

6,000
Cost of action for failing to get spirit licence
5,000
Debt Collection

6,000
Renewal of short lease
1,500
 20,500

7. Capital allowances for the year were agreed at K20, 500.

REQUIRED

Calculate the adjusted profits for the year ended 30 June 2012.
(BACC 2 - Polytechnic 1994/95 Terminal Test, Modified)
 QUESTION 2

a) AB is an individual taxpayer whose business includes letting property. A summary of

the Profit and Loss Account of the business for the year ended 31st December 2011 is
given below:
TAXPAYER AB
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER 2011

NOTE K’000 K’000

Turnover 2,000
Less: Salaries 800
Depreciation 45
Gratuities (1) 150
Legal Costs (2) 40
Motor Vehicle Expenses 110
General Expenses (3) 50
Fringe Benefits Tax 20
Pension Contributions 50
Repairs and Maintenance (4) 100
Auditors Fees 25
Bad debts (5) 105
Rent Payable 145
Local Business Travel 60 1,700
Profit before taxation 3,000

Notes
(1) Gratuities K150, 000

The amount is made up of the following: K

Gratuity on completed contracts 125,000
Gratuity on uncompleted contracts 25,000
150,000
All contracts were approved for purposes of the Taxation Act.

(2) Legal Costs K40, 000

These have been incurred in respect of the following: K

Debt collection 15,000
Lease agreements 15,000
Loan agreement 10,000
40,000

(3) General Expenses K50,000

K
Office teas and other consumables 20,000
Church donation 6,000
Postage 10,000
Donation to street beggars 14,000
50,000
(4) Repairs and Maintenance K100,000
K
Completed repairs 25,000
Uncompleted repairs 25,000
New steel door protectors 50,000
100,000
(5) Bad debts K105,000
K
General provision 50,000
Specific provision 55,000
105,000
(6) Capital allowances

These have been computed and agreed to amount to K75, 000

Required

Compute the taxable income of the taxpayer for the year ended 31 st December 2011
(5 ½ marks)

b) Explain how you have dealt with the following expenditures under notes (1) and (4) in
(a) above:

i) Gratuities; (2 marks)
ii) Repairs and maintenance (3 marks)

c) i) What tax advantages are enjoyed by:

1) an employee on contract providing gratuity;

2) an employer who sets up a pension scheme for employees(5 marks)

ii) What precondition is necessary for the enjoyment of these tax advantages?
(1 mark)
 CHAPTER NINE

CAPITAL ALLOWANCES
Accountants provide for depreciation in accounts to indicate the loss in value of assets as they
are being used in trade. Depreciation is not an allowable deduction. This does not mean that
the tax law does not recognise that assets lose their values as they produce income. Under s33
the Act allows a taxpayer to deduct capital allowances determined in accordance with the
Second Schedule from his assessable income. This is a means of standardising depreciation.

DEFINITIONS

INDUSTRIAL BUILDING - Paragraph 8

A building is said to be an industrial building if it is used for any of the following:

a. The making of an article or part of an article;

b. the subjection of goods or materials to any process including the breaking up or

demolition of an article;

c. the adapting for sale of an article;

d. the generation of power,

e. transport, dock, inland navigation, water refrigeration, electricity hydraulic power

tunnel or bridge undertaking;

f. a hotel

g. Fish ponds and other buildings and structures used for fish farming

h. any activity which the Minister declares in writing to be making in important

contribution to national development.

Paragraph 8 specifically excludes dwelling houses, shops, showrooms, storehouses and offices
from the definition of industrial buildings.

NOTE:

Protective fencing enclosing any industrial building is also an industrial building.

COMMERCIAL BUILDINGS
From 2005/2006 fiscal year, onwards, an annual allowance at 2.5% is available on new
commercial buildings whose construction cost is K100m or more.
BUILDINGS WITH INDUSTRIAL AND NON INDUSTRIAL ELEMENTS

Where a building comprises of both industrial and non industrial elements and the cost of the
non-industrial element is not greater than 20% of the total cost of the building, capital
allowances will be available on the total cost otherwise; allowances can only be claimed on the
industrial element.

EXAMPLE

A building part factory and part office cost K100, 000 to construct. How much of the
cost qualifies for capital allowances if the cost of constructing the part is used as an
office is

i. K18, 000
ii. K25, 000
SOLUTION

i. K18, 000 is only 18% of K100, 000 which means allowances are available on K100,
000.
ii. K25, 000 is 25% of K100, 000; allowance can be claimed on K75, 000 only (i.e. K100,
000 less K25, 000)

STAFF HOUSING
Although dwelling houses are specifically excluded from the definition of industrial buildings,
“Staff housing” qualifies as industrial buildings.

STAFF HOUSING means any dwelling house erected for occupation by an employee
engaged in the business or farming operations of a taxpayer who is a manufacturer or a farmer.

If staff housing is occupied by an employee who is

a. not a full-time employee; and

b. able directly or indirectly to control more than 5% of the voting rights

attaching to all classes of shares of the company;
the allowances available will reduced to one-third.
MANUFACTURER
A manufacturer is the owner of a business carried on within industrial buildings and the owner
of a plantation growing tea, coffee, tobacco, sugar cocoa, or such other crop as the Minister
may approve.

FARM IMPROVEMENTS
Any building or structure or work of a permanent nature, including any water furrow which is
used in the carrying of farming operations but excluding staff housing, work of a permanent
nature to which s58 applies (e.g. drilling of boreholes and any building used as a dwelling
house by the taxpayer.

FARM FENCING
This refers to fencing which is used in the carrying on of farming operations.

RAILWAY LINES
This means the, sleepers and equipment pertaining thereto of any railway track, but does not
include ballast, embankments, bridges, culverts and other railway constructions.

TYPES OF ALLOWANCES
There are three types of allowances namely: Investment, Initial and Annual. Investment and
Initial allowances could be referred as First Year Allowance because they are only claimable in
the year an asset is purchased and/or brought into use.

An annual allowance is given to a taxpayer is respect of all assets that are used by a taxpayer
on the last day of a year of assessment.

A. INVESTMENT ALLOWANCES

Investment Allowance is claimable by a taxpayer who is also a manufacturer at the rate

of 100% of the cost of new and unused industrial buildings and plant and
machinery; and at 40% of used industrial buildings and plant and machinery
which.
a. is brought into use by the taxpayer during the year of assessment ; and
b. Is used by the taxpayer for the purpose of his business as a manufacturer.

The changes in the investment allowance rates were made as a way of providing
incentives to promote investments in tourism, agriculture and manufacturing sectors.

For the purposes of investment allowance the expression ‘plant and machinery’ does
not include motor vehicles intended for or adapted for use or capable of being used on
roads.

Staff Housing does not qualify for investment allowance.

An Additional 15% investment allowance used to be available to a taxpayer who was

eligible for investments allowance if the taxpayer invested in an area designated for the
purpose of the additional allowance by the Minister. This was removed in the tax year
2011/2012.

B. INITIAL ALLOWANCE

Initial allowance is claimable is respect of capital expenditure incurred by a taxpayer

during a year of assessment on assets purchased for the purposes of the taxpayer’s
trade. Initial allowance cannot be claimed on an asset on which investments allowance
has been claimed. No initial allowance shall be claimed on private passenger vehicles as
from July, 1998 financial year.

The rates of initial allowance are as follows.

Farm improvements 10%
Industrial buildings

of
cost
Railway lines
 Articles 20% Implements
Of cost
Machinery e.g. motor
vehicles, office equipment

Utensils e.g. furniture & fittings, computers etc

Farm fencing 331/3

Of cost
C. ANNUAL ALLOWANCES

Annual allowances are given to a taxpayer provided an asset is in use for the purposes
of a taxpayer’s trade at the end of the period of assessment regardless of when an asset
was purchased if it was purchased during that year of assessment. The allowances are
given on the reducing balance basis.

RATES OF ANNUAL ALLOWANCES 5%

Farm improvements
Industrial buildings
Railway lines
Farm fencing

10 %
Computers 40 %
For other assets the rates of annual allowances to be used are those determined by the
Commissioner as being appropriate in relation to the class of assets in question. Once
the rates have been determined they apply to subsequent years unless superseded by
any other determination by the Commissioner.

DISPOSAL OF ASSETS

If the disposal proceeds of an asset on which capital allowances have been claimed
exceed the tax written down value (i.e. the cost of the asset less capital allowances) -
the “adjusted basis’ there will be a CAPITAL GAIN which must be included in
assessable income.

A CAPITAL LOSS occurs where the written down value (adjusted basis) is greater
than the disposal proceeds. A capital loss is deductible in full from assessable income
(there are no restrictions on the deductibility of capital losses realised on the assets on
which capital allowances have been claimed.
 FORMAT FOR THE COMPUTATION OF CAPITAL ALLOWANCES

Asset pool 1 Asset pool 2

TOTAL
Tax written down
value at 1.4. x 0 A
B

A+B

Additions C

C+D

Disposals (E)

-
(E)

Sub-total A +C - E

B+D

A+B+C+D+E

ALLOWANCES

Investment
(%*C) -

(%*C)

Initial
(% *D) (%*D)

Annual
(F)
(G)

(F+G)

-------------- -------------
-- ----
-----------
Tax WDV at 31.3.x1 I
J
 K
--------------- -------------
-- ----
------------

SUMMARY OF CAPITAL ALLOWANCES

Investment %*C
Initial %* D
Annual F+
G
Capital loss ?
xxxx
Capital gain (?)
Xxxx

EXAMPLE

Mr Chirwa has a manufacturing business and had the following balances in his claim for capital
allowances for the year ended 31 March, 2011:-

Annual allow Tax WDV

as at 01.04.2011
K’000
Industrial building
5%

107,000
Plant and Machinery
10%

97,500
Cars

20%

24,000
Lorries

20%

14,000
Office equipment
10%

10,000

During the year the following transactions took place:

a. He purchased plant for K30, 000,000 of which K10, 000,000 was second hand.
b. Sold the industrial building for K250, 000,000 original cost of the building was K200,
000,000.

c. He purchased a new industrial building for K300, 000,000.

d. A lorry purchased on 1 January 2010 for K20, 000,000 was involved in a road accident
and totally written off. The insurance company has settled the company’s claim for the
loss of K10, 000,000.

e. He purchased two new cars for K8, 000,000 and K10, 000,000. He trades in a car in
part exchange which cost K6, 000,000 new on 6 February 2010. The trade in value
was K3, 000,000.
REQUIRED
Prepare Mr Chirwa’s claim for capital allowances for 2011/2012 assuming he claims all
allowances to which he is entitled. (R E Mdeza’s Tax Manual)

SOLUTION
MR CHIRWA
COMPUTATION OF CAPITAL ALLOWANCES FOR THE YEAR ENDED 31.03.2012

Indust.

Plant &
Cars

Office
Totals
Build

Machi

Equip.
K’000 K’000 K’000 K’000 K’000
Tax WDV at
1.4.2011

107,000

97,500
38,000

10,000
252,500
Additions 300,000
30,000 18,000
- 348,000
Disposals (107,000)
- (12,480)
-
 (119,480)
Sub-total

300,000

127,500
43,520

10,000
481,020
ALLOWANCES
Investment (300,000)
(24,000)
-
-
(324,000)
Initial

(3,600)
-

(3,600)
Annual

(12750)

(8,704)

(1,000)
(22,454)
WDV at 31.3.2012 -

90,750

31,216

9,000
130,966
 SUMMARY OF CAPITAL ALLOWANCES

K’000
Investment 324,000
Initial
3,600
Annual 22,454
Capital Loss -
350,054
Capital Gains (143,520)
Total Allowances 206,534

Workings
Disposals - WDV
CAR LORRY
K’000 K’000
Cost 2010 6,000
20,000
Initial Allow. (1,200)
( 4,000)
Annual Allow. (1,200)
( 4,000)
WDV at 31.3.2010 3,600 12,000
Annual Allow (720)
(2,400)
WDV at 31.3.2011 2,880 9,600

Capital Gains
Industrial Car
Lorry
Building
K’000 K’000 K’000
Proceeds 250,000
3,000
10,000
Written Down value 107,000
2,880
9,600
143,000 120
400
MINING ALLOWANCES

A person carrying on mining operations who incurs mining expenditure is entitled to an

allowance of 100% of the mining expenditure in the year the expenditure is incurred.

What is Mining Expenditure?

Paragraph 11 of the Second Schedule - Mining expenditure is capital expenditure incurred in

Malawi by a person carrying on or about to carry on mining operations in Malawi. Such
capital expenditure includes:

a. Searching for or discovering and testing or winning access to deposits of minerals.

b. The acquisition of or of rights in or over such deposits other than from a person who
has incurred mining expenditure in relation to such deposits.

c. The provision of machinery which would have little or no use at all if the mine ceased
to be worked.

d. The construction of buildings or works which would have little or no value if the mine
ceased to be worked.

e. The development, general administration and management prior to the commencement

of mining operations.

A provision to paragraph 11 specifically excludes from the definition of ‘mining expenditure’

the acquisition of the site of deposits or of the site of buildings or works connected with
mining operations. Mining expenditure incurred after 1 November 1969 before
commencement of mining operations is deemed to have been incurred on the day mining
operations commence. No mining allowances can be claimed in respect of expenditure
incurred prior to 1 November 1969.

A person engaged in mining operations shall not be eligible to claim any export allowance or
any transport allowance for goods, materials or products exported from Malawi.

Companies engaged in mining operations will be liable to an additional resource rent tax of
10% on profits after tax, if the company’s rate of return exceeds 20 percent. This is in
addition to the normal income tax charged on profits.
TRANSFER OF AN INTEREST IN A MINE

1. BEFORE MINING OPERATIONS COMMENCE

If a person who has incurred mining expenditure sells or transfers his interest in a mine
before commencement of mining operations the following are the tax implications:-

- the price paid by the purchase less any allowance expenditure is deemed to be
taxable income of the vendor;

- the vendor may request the Commissioner in writing to have such taxable
income apportioned over a period not exceeding six years.

- The purchaser is deemed to have incurred mining expenditure equal to the price
paid by him on which mining allowances will be given.

EXAMPLE

Robertburn incurred mining expenditure of K1, 500, 000 during 1995/96 expecting to
commence mining during 1997/98. Robertburn decided to transfer the interest in the
mine to Hamlet during 1996/97 because he thought mining would be too involving
since he had other matters to attend to. Hamlet bought the interest for K2, 700,000.
Hamlet commenced mining operations on 1 July 1997. What are the tax implications?
SOLUTION

ROBERTBURN
He is deemed to have assessable income of K2, 700,000 in 1996/97
He can apply in writing to have the income spread over 6 years i.e. over 1996/97 to
2001/02 - an assessable income of K450,000 each year.

HAMLET
He is deemed to have incurred mining expenditure of K2, 700,000.
He is entitled to mining allowances of K2, 700,000, being 100% of the mining
expenditure incurred.

2. AFTER MINING OPERATIONS COMMENCE

If an interest in a mine is transferred after commencement of mining operations, the

seller will have claimed mining allowances on prior mining expenditures incurred.

The buyer will also be eligible to claim future mining expenditures in full in the year in
which the expenditures will be incurred.
Mining allowances cannot be granted in respect of expenditure on which capital
allowances are due.

No capital allowances can be claimed on expenditure incurred on the acquisition or

provision of machinery, and industrial buildings, which would have little or no use if
mine ceased to operate; instead mining allowances will be given in respect of such
expenditure.
SUMMARY

- Capital allowances are claimable by a taxpayer on ‘qualifying’ assets. Capital

allowances replace depreciation which is not a deductible expense.

- The Act defines certain terms for purposes of capital allowances such as
Industrial Buildings, Manufacturer, etc.

- The allowances available are:

- Investment - claimable on plant and machinery and

industrial buildings only (excluding motor vehicles,
though machinery and staff housing) in the year an asset
is brought into use in a manufacturing business.

- Initial - claimable in the year capital

expenditure is incurred.

- Annual - Available every year as long as

the asset is in use for business purpose at the end of that
year on the reducing balance basis.
- Disposal of an asset on which capital allowances have been claimed may give
rise to either a capita gain or a capital loss.

- Mining allowances are available to a person who has incurred mining

expenditure in Malawi. These are available in full at 100% of the
expenditure in the year in which they are incurred.

- Mining expenditure is capital expenditure incurred in Malawi by a person who

is carrying on mining operations or intends to carry on mining operations in
Malawi.

- No mining allowances are available on assets on which capital allowance are

due.
END OF CHAPTER QUESTIONS

1. Who is a manufacturer?

2. When do dwelling houses qualify as industrial buildings? What types of allowances are
available in respect of such dwelling houses?

3. What type of machinery is excluded form the term ‘machinery’ under investment
allowances?

4. Define ‘Mining Expenditure.’

5. Explain the tax implications of the disposal by a person carrying on mining operations
of his interest in the mine.

EXAM STYLE
1
Liwadzi Tea Estates Limited is a company which is involved in the growing of tea in the
Northern Region of Malawi. It makes up its accounts to 31 August each year.

Its most recent results for the year to 31st August, 2012 show a net loss of K205, 000,000. In
arriving at these results the following income and expenses have been included. The turnover
was K1 million.

EXPENSES
K’000

Medical costs for staff 12,800

Pension costs
65,000
Professional fees:-

- Property revaluation
35,600
- Increase in share capital
32,000
- Audit fees
18,000
- Consultancy on cost restructure
22,800
Depreciation 185,000
Interest on bank loans 82,300
Subscriptions and donations:-

- Economics magazine 3,600

- Malawi Council for the Handicapped
1,500
- Malawi Red Cross 10,500
- Dwangwa Church
120
Write off of shareholders loan 8,000
Bad debts - all trade 18,000
Provision for doubtful debts - (general) 15,000
Interest on PAYE 8,600
Fringe benefits tax 12,800

Income

Interest on Malawi Savings Bank 12,800

Interest on staff loans 600
Interest on fixed deposit - National Bank
(Gross of withholding tax) 18,000
Profit on sale of fixed assets 28,600

During the year the company spent K210, 000,000 on land development and K100, 000,000
on irrigation equipment. The cost of this expenditure has been capitalised.

The following information is also available in respect of movements in fixed assets during the
year.

1. Carried out an extension to the factory building at a cost of K120, 000,000.

2. Purchased one lorry at a cost of K28, 000,000 and three second- hand saloon cars at a
cost of K8, 000,000 each.

3. Purchased computers for use in the accounting department at a cost of K180, 000.

4. The following additions were made to the plant and machinery;

Tea storage bin at a cost of K6, 000,000

An LTP beater at a cost of K20, 000,000
Tea sifting machine at a cost of K6, 000,000
A second - hand conveyor at a cost of K2,500,0000

Except for the conveyor all the other additions to plant were new and unused.

5. The company sold the following assets during the year to 31 August, 2012.

i. A motor lorry which had cost K7,000, 000 and had a tax written- down value of
K3,800, 000 at 31 August 2011 was sold for K6,000, 000

ii. An LTP beater which cost K7,500, 000 as new on 1 January, 2011 which caught fire
during the year was completely destroyed. The insurance company settled a claim for
K6,500, 000.

iii. One of the production machines which cost K30, 000,000 and had a tax written -down
value of K5, 500 ,000as at 31 August, 2011 was scrapped.

iv. Office furniture which cost K10, 000,000 and had a nil tax written- down value at 31
 August 2011 was sold for K6,500,000.

The tax written-down values of the fixed assets as at 1st September, 2011 were:-
K
Industrial building 650,000
Plant and machinery
750,000
Motor vehicles 25,000
Office equipment and furniture 35,000

REQUIRED

. a. Calculate the amount of capital allowances available, to Liwadzi Tea

Estates Limited for the year ended to 31st August, 2012.

b. Calculate the tax to be paid by Liwadzi Tea Estates Limited to 31 August,

2012.

c. State how Liwadzi Tea Estates would meet its tax liability.

2. a. What is the difference between Initial allowance and Annual Allowance?

b. Who determines the rate of annual allowances in respect of qualifying assets?

c. During the first year of trading to 30 September 2007, Mr Phiri who is engaged
in a manufacturing business, purchased and used the following assets:

Type of Asset Purchase Price in K

Industrial Building (second hand) 1,000,000

Plant and Machinery (new) 800,000
Motor Vehicles (second hand) 250,000

REQUIRED

i. State whether investment allowance is due on the three types of assets. If it is,
calculate the amount of the allowance.

ii. If Mr Phiri was using one of the motor vehicles for private purposes, what
effect would such private motoring have on the amount of capital allowance
claimable on the motor vehicle?

iii. What other expenses would be affected by the use of the vehicle by Mr Phiri in
(ii) above and state in what way they would be affected.

d. In relation to capital allowances, comment on the validity of each of the statements

listed below:-

i. In respect of the same asset, a taxpayer can claim investment allowance in

addition to initial allowance.
 ii. No capital allowances can be claimed or given in respect of motor vehicles
intended or adapted for use or capable of being used on roads.

iii. Capital allowances are given to taxpayers because of the use of assets in the
business of such taxpayer.
(PAEC Dec 1994, Modified)
 CHAPTER TEN

PARTNERSHIPS
A partnership is a relationship that subsists between two or more persons carrying on business
in common with a view to profit.

Certain people call it a ‘collection of sole traders’ who have decided to work together.

A partnership, just like a sole proprietorship, is not a separate legal entity from its owners and
as such it is not a taxpayer. The partners are liable to tax on the partnership profits in their
individual capacities.

S74 of the Act requires persons carrying on trade in partnership to submit a joint return of
income in respect of such trade and other particulars as may be required from time to time and
each partner is separately and individually liable for the submission of the joint return. The
partners are liable to tax in their separate individual capacities so that separate assessments will
be made on the partners.

DETERMINATION OF TAXABLE PROFITS

The procedure is the same for as those sole traders- adding back all expenses that have been
deducted from profit but are not deductible paying particular attention to items like partner’s
salaries, interest on capital and drawings, deducting allowable expenses which have not been
deducted such as capital allowances.

DISTRIBUTION OF PROFITS
Since each partner is separately and individually liable to tax the partnership’s taxable profits
should be shared among the partners. This is done using the profit and loss sharing
arrangements in the partnership agreement.

The first step is to allocate interest on capital and salaries (if any) to each partner. Secondly,
the balance is shared according to the profit and loss sharing ratios; then each partners
amounts are added up to get the total share of the profits for each partner.
EXAMPLE
D, E, and M who are in partnership trading as DEM & Co share profits equally. The
following is the partnership’ profit and loss for the year ended 30 June 2008:
Gross Profit
50,000
Less: expenses
General expenses
10,000
Advertising
5,000
Depreciation
5,800
Salaries D 4,000
E 3,200
M 2,400 9,600

Interest on capital: D1,500

E 2,100
M 2,300
5,900
(36,000)
13,700
REQUIRED
Compute the taxable profit for each partner using the information above.

SOLUTION
DEM & CO
TAXABLE PROFIT COMPUTATION FOR THE YEAR ENDED 30 MARCH 2012

K’000 K’000
Net profit per a/cs

13,700
Add: Depreciation 5,800
Salaries 9,600
Interest on capital 5,900 21,300
35,000
DISTRIBUTION OF PROFITS
Total D
E
M
K’000 K’000 K’000 K000
Salary
9,600
4,000
3,200
2,400
Interest on capital 5,900
1,500
2,100
 2,300
Balance 1:1:1 19,500 6,500 6,500 6,500
35,000 12,000 11,800 11,200
NOTE:
You may be required to calculate the tax liability of one of the partners. In this case you
should include the share of the partnership profits in the partner’s total income if he/she has
other incomes. For example if you were asked to compute E’s tax liability you would include
K11, 800 as business profits in his taxable income.

Trading losses - if the partnership has an assessed loss, the loss in share among the partners as
if it were a profit each partner can relieve the loss by offsetting it against his income of either
the year of the loss or the following year.

SUMMARY
- A partnership is not a separate legal entity from its owners i.e. the partners are liable to
tax on the profits in their individual capacities.

- The Profit and Loss a/c is adjusted in the same way as that of the sole trader and then
the profit/loss is shared in accordance with the profit and loss sharing arrangements.

- A loss once shared is at the disposal of each partner.

END OF CHAPTER QUESTIONS

QUICK TEST

1. What are provisions regarding partnership taxation as contained in Section 74 of the

Taxation Act?
2. If a partnership had an assessed loss how much tax would each of the partners be liable
to? And how would the loss be treated?

EXAM STYLE 1
Messrs Jere, Muhiwa and Miss Mkwanda have for the past six years jointly operated a
successful garment manufacturing concern in Lilongwe sharing profits in the ratio 2:3:5.

The following are details of the concerns financial affairs for the year ended 31 March 2008 as
presented by their bookkeeper.
NOTE K’000 K’000

Sales

2,800
Cost of Sales
-Raw Materials 1,120
-Labour
224
-Factory overheads 1

205
1,549
Gross Profit

1,251

Less Expenses

-Salaries and wages

280
-Depreciation 2
35
-Salary - Mr Jere
22.8
-Finance charges 85
-Other expenses 3 195
-Interest on Capital 4 80 697.8
NET PROFIT 553.2

NOTES
1. Factory overhead includes depreciation on factory plant and machinery of K120, 000.
2. Included in the depreciation charge is the sum of K10, 000 being depreciation of a car
belonging to the partnership but used by Mr Jere who manages the concern on a full-
time basis.
3. Other expenses comprise all sundry expenses including:-
a. Donations and gifts
- Malawi Red Cross
380
- Malawi Against Polio
250
- Commonwealth Ex- Services League 4,000
- Local Church 7,200

b. Provision made against specific

Doubtful debts 6,000
Bad debt written off - No provision was made
in respect of these debts before 3,500
c. Drawings
- Miss Mkwanda 29,000
- Mr Muhiwa 15,000
4. The interest on capital is levied at the rate 10% p.a. and the partners capital accounts
throughout the year stood at:
-Mr Jere 150,000
-Mr Muhiwa 250,000
-Miss Mkwanda 400,000
5. Capital allowance for the year was agreed with the Commissioner of Taxes at K83,
000.
REQUIRED
Calculate the distribution of profits among the partners and state who is responsible for
payment of the tax.

EXAM STYLE 2

Mwana , Wina and Wache are in parternership trading as general merchants trading as general
merchants. They make up their accounts each year to 30 September. The partnership
agreement states that profits are shared in the ratio of 3:2:1 respectively.

The following are the results of their operations for the year ended 30 September, 2012:
K K.
Gross profit from trading operations 250,000

Less: Depreciation 65,000

Salaries and wages 95,400
Rent and rates 15,000
Entertainment 4,000
Sundry expenses 3,000
Interest payable 2,516
Donations 10,200
Subscriptions 1,200
Provision for doubtful debts 2,800
Legal fees 7,000 206,116
 43,884
Other income
Profit on sale of fixed assets 22,500
Interest receivable 32,400
Sundry income 2,000 56,900
Net profit for the year
100,784

The following further information is available:

a. The tax-written down values of fixed assets as at 1 October, 2011 were as
follows:

Motor vehicles - K35, 200

Office equipment - K10, 000
Office furniture - K 5,100

During the year one of the motor vehicles with a tax written-down value of K10, 200
was sold for K30, 750. This vehicle cost K20, 000 and had a net book value of K8,
250.

The only addition during the year was a purchase of a saloon car costing K50, 000
which was new and unused.
b. Included in salaries and wages are salaries paid to partners as follows:

Mwana K12, 000

Wina K18, 000
Wache K36, 000
c. Sundry expenses include K250 being a penalty for the late payment of income
tax and also K1, 200 being the cost of gifts given to staff as Christmas presents.
d. Entertainment includes K450.00 relating to private entertainment by Wache
which was paid for by the firm.
e. Interest payable includes the following:
K

Bank overdraft interest 2,200

Interest for the late payment of account 316
2,516
f. Donations were made to the following organisations:
K
Malawi Congress Party
4,000
Malawi Council for the Handicapped 2,000
Save the Children’s Fund 200
Ndirande Church 4,000
10,200
g. Subscriptions are all to the Blantyre Sports Club for the partnership’s
employees which have been agreed as necessary for the conduct of the
partnership’s business.
h. Provision for doubtful debts is made up of:
 K

Amount owing by D Jere and Sons 800

2% of debtors balance at30 Septembers, 2012 2,000
2,800
i. Legal fees are in relation to the negotiation of the lease of the company’s
premises from C. Whitelock.

j. Interest receivable is from:

K
National Bank of Malawi 20,000
Malawi Savings Bank 12,400
All bank interest had withholding tax deducted at source; however the amount
is shown gross in the accounts.
(k) All sundry income is taxable.

YOU ARE REQUIRED:

(a) To compute the taxable profits of the partnership for the year to 30 September,
2012.
(b) Indicate the year of assessment when such profits will be assessed.
 CHAPTER ELEVEN

TAXATION OF INCORPORATED BUSINESSES

The Act uses the word ‘Company’ to mean any association regardless of where it was
incorporated. Unlike the sole proprietorship and partnerships, a company is a separate legal
entity from its owners; it is a person incorporated by law and liable to tax in its own right. The
rates of tax are 30% and 35% for companies incorporated in Malawi and those incorporated
outside Malawi respectively. For a company with no taxable income or with losses, a
minimum tax based on turnover is payable (see appendix II part III). From 2000/01 the rates
have been reduced to 30% and 35% respectively for those incorporated in Malawi and foreign
incorporated. Cell phone operators are required to pay tax at the rate of 33%.

DETERMINATION ON TAXABLE PROFITS

The procedure is similar to that for unincorporated businesses (i.e. adding back all expenses
that have been deducted in the profit and loss account but not allowable and deducting
allowable expenses which have not been deducted). However, there are some differences
which include:-
1) Adjustments are made for private expenses for unincorporated businesses
whereas no adjustments are made in respect of private expenses in the profit
and loss account of a company (There may be Fringe Benefits Tax implications.
2) When computing capital allowances for partnerships or sole proprietorships,
the allowances are reduced if an asset is partly used for private purposes; no
adjustment is made for private use of assets when computing capital allowances
for companies.

EXAMPLE
Sterling Holdings Limited is a company incorporated in Malawi and is engaged is property
letting and provision of services. The following is a summary of the company’s financial
activities for the year ended 30 June 2012:-
Sterling Holdings Limited
Operating Profit and Loss Account
year ended 30 June, 2012

Note K’000 K’000

Operating profit

820,000
Less: Salaries and Wages 165,000
Depreciation-furniture 8,500
General expenses 2 45,000
 Hire charges 3 16,000
Vehicle running expenses 48,500
Legal expenses 4 10,500 293,500
Profit before taxation

531,500

NOTES:
1. The following was taken into account in arriving at the figure of K820, 000,000
operating profit.
i) K3, 200,000 - Depreciation on equipment
ii) K25, 000,000 - Fencing of two properties
iii) K15, 000,000 - Alterations - one property has a
room subdivided to provide the tenant with a lockable
garage.
2. General expenses included K4, 500,000 being the cost of building plans which were
submitted to the City Authorities for approval.
3. Hire charges were a prepayment in respect of a vehicle which, for some reason, was
not delivered for use by 30 June, 2012.
4. Legal expenses were incurred due to an increase in share capital except for an amount
of K1, 500,000 which was incurred in respect of tenancy agreements.
5. Agreed capital allowances on all eligible items amounted to K27, 000,000.

REQUIRED
a. Prepare an income tax computation for Sterling Holdings Ltd for the year ended 30
June, 2012.
b. Assuming that the figure of operating profit included rental income from which
withholding tax was deducted, what effect would such withholding tax have on the
company’s overall tax liability?
(PAEC Dec 1992 Modified)

SOLUTION
a. STERLING HOLDINGS LIMITED

INCOME TAX COMPUTATION FOR THE YEAR ENDED 30/06/12

Notes K’000 K’000

Net Profit per accounts 531,500

Add back: Depreciation 1 11,700
Fencing 2 25,000
Alterations 2 15,000
General expenses 2 4,500
Hire charges 3 16,000
Legal expenses 4 9,000 81,200
612,700
Less: Capital allowances 1 27,000
 TAXABLE PROFITS

585,700

TAX LIABILITY 5 175,710

NOTES
1. Depreciation is capital expenditure hence not deductible instead capital
allowances are deducted.

2. Fencing, alterations and building plans are capital expenses.

3. The expense, though paid for, has not been incurred.
4. Cost of raising share capital is expenditure of a capital nature.
5. The tax liability is 30% of taxable profits (K585, 700,000).

b) The withholding tax would be deducted from the company’s overall liability to arrive
at the amount of tax remaining to be paid.

EXPORT PROCESSING ZONE

To encourage exports, certain areas have been designated as Export Processing Zones.In
addition from 1997/8 certain industries have been designated as Priority industries. Exporters
within these zones and companies within these industries used to attract the following income
tax benefits:
- the corporate tax rate is reduced to 0% indefinitely for companies in export processing
zones for a period up to 10 years (or as the minister may direct)
-
for priority industries. Certain priority industries will continue to pay tax at a reduced
rate of 15%;

However, from the tax year 2011/2012, a 30% tax was introduced on companies operating in
the export processing zones.

- no duty on capital equipment and raw materials;

- no excise taxes on purchases of raw materials and packaging materials;

- no VAT (value added tax).

TRADING LOSSES
Under s42 a Company can carry forward its trading losses to offset them against the taxable
profits of future periods of assessment. There are no provisions for the carrying back of losses
under the Taxation Act. A loss can only be carried forward for a maximum of up to six years
in respect to trading operations other than manufacturing, agricultural and mining industries.
Companies within manufacturing, agricultural and mining industries will still be eligible to
carry forward trading losses indefinitely.

The ability to utilise assessed losses brought forward is lost if there has been a change in the
share holding of the company with assessed losses or the company that controls it if the
Commissioner is satisfied that the change has been effected to take advantage of the losses. All
companies are separate tax entities and tax losses incurred by one company may not be offset
against profits of another. The Commissioner would disallow any transaction between
affiliated companies which are carried out, in his opinion, specifically to take advantages of
assessed loss.

DIVIDENDS
Under s70A (1) Every company incorporated in Malawi shall, upon distribution of any
dividend, withhold 10 per cent of such dividend and remit the amount to the Commissioner
within fourteen days from the date of distribution.

The amount of tax withheld from a dividend under subsection (1) shall be a final tax and the
recipient of the dividend shall not be required to include the dividend received in his taxable
income.
Any company which fails to withhold tax at the time of distribution of any dividend as required
by subsection (1) shall be liable to pay the tax due and an additional sum equal to 20 per cent
of the tax due.

END OF CHAPTER QUESTIONS

QUESTION ONE
ADAMSON MANUFACTURING LIMITED, a Malawi registered company and a
‘manufacturer’ within the meaning of paragraph 4 of the Second schedule commenced
business on 1July, 2007. The company’s profit and loss account for the year ended 30 June,
2008 is as follows:

Salaries and wages 21,

572

Gross
Profit

97,195
Lease premium
5,243
Discount
receivable

1,042
Rates and insurance 10,692
Motor expenses 26,185
Depreciation 16,427
bad debts 4,391
General expenses 10,683
Net Profit for year
3,044

98,237 98,237
The following points should be noted in connection with the profit and loss account:-
1. Salaries and wages include K900 in respect of wages paid to domestic servants of the
managing director.

2. Lease premium - on 1 July 2007, the company paid the sum of K40,000 as a single
payment to secure a thirty-year lease for certain premises from which the company
intended to operate. The finance director has calculated that this payment is equivalent
to the present value of K5,243 (the amount charged to the profit and loss account)
paid at the end of each of the thirty years of the lease, using a discount rate of 12,75%,
the company’s estimated cost of capital.

3. In addition to depreciation shown above, depreciation of K25, 231 has been charged in
the manufacturing account.
4. Bad debts include the amount of K4, 000 set aside to establish a provision for doubtful
debts.
5. General expenses include K5, 200 in total in respect of donations (each over K250)
paid to charities approved in terms of section 39 (d).
6. The following is the cost of fixed assets brought into use by the company during the
year ended 30 June, 2008:-
Factory buildings K50,000 including K9,000 in respect of office accommodation
within that building erected by the company in time to begin operations.

Plant and machinery K80, 000 of which K25, 000 was in respect of plant bought over
from a company winding up. The remainder was for new items.

Land on which factory was built K10, 000.

Staff housing (all occupied by full-time non-director employees) total cost amounting
to K60, 000.
Motor vehicles (new) K60, 000.
(One of the motor vehicles which cost K10, 000 is exclusively used by the GM.
Private use has been agreed at 30%)

Rates of annual allowance

Plant and machinery 10%
Motor vehicles 20%

7. In the profit and loss account, the company has shown the amount of K4,000 deducted
from net profit after taxation being the first year’s share of write-off over ten years of
the costs, incurred during the year before starting the business, of establishing the
company. Of the total ‘development’ costs amounting to K40, 000, the amount of K7,
500 was paid to a plant hire company for the use of earth moving equipment to clear
the factory building site to enable building to start. The remaining K32, 500 was for
normal business expenses (e.g. wages, salaries, etc) including labour costs of K1, 500
for the above site clearing. All ‘development’ costs are in addition to fixed assets
noted in 6 above.

8. The company’s turnover for the year was K1, 550,000.

REQUIRED: Prepare a detailed income tax computation in respect of ADAMSON

MANUFACTURING LIMITED for 2008/2009 giving brief notes in explanation of significant
points.
 CHAPTER TWELVE

SPECIAL TRADES AND CASES

1. FARMING
Apart from the deductible expenses looked at so far, under s58 (2) any person deriving
income form pastrol, agricultural or other farming operations is allowed to deduct
expenditure incurred during any year of assessment on:

a. The stumping, levelling and clearing of lands,

b. Works for the prevention of soil erosion
c. Boreholes;
d. Wells
e. Aerial and geophysical survey;
f. Any water control work in connection with the cultivation of rice, sugar or
such other crop as the Minister may approve.
(“water control work” includes any canal, dyke, channel, furrow and any flood
control structure whether of a permanent nature or not)
g. Water conservation work
(“Water conservation work” means any reservoir, well, dam or embankment
constructed for the impounding of water)

If a farmer pays another person who carries out any work relating to the above, the
expression “expenditure incurred” means the amount paid by the farmer during a year
of assessment.

NOTE:
The expenditures listed above are capital in nature and would not be deductible if
incurred by a taxpayer other than a farmer.

GROWING TIMBER FOR SALE

S24 where land is sold and there is timber growing on the land which has been grown for
commercial purposes. The normal selling value of the timber shall be included in the Seller’s
taxable income.

EXAMPLE
Joyce planted timber 5 years ago with the intention of felling and selling the timber. This year
Joyce has decided to sell the land together with the timber at K50, 000. The market selling
value of the timber at the time of disposal is K30, 000. The market selling value (K30, 000)
should be included in Joyce’s assessable income; and K20, 000 is the ‘amount realised’ for
capital gain/loss purposes.

Deductions allowable to a taxpayer who acquired timber which was already growing.
a. If a taxpayer derives income from the sale of right to fell timber which was growing on
land at the time the seller acquired the land, the allowable deduction will be:-

i. If land was acquired for valuable consideration, the value of the consideration
that relates to the cost of the standing timber at the time of acquisition;
 ii. If no valuable consideration was given by the taxpayer, the amount fixed by the
Commissioner to represent the value of standing timber at the time of
acquisition.

If only a portion of the timber is sold, the allowable deduction will be that relating to
timber sold during the year.

b. If taxpayer acquired timber and the right to fell and dispose of the timber was not
acquired together with the land, the allowable deduction would be the amount of the
consideration paid by the taxpayer in respect of the timber that relates to the time sold
or the value of the timber sold at the time of acquisition if no consideration was paid.

TAXPAYERS WHO DERIVE INCOME FROM THE GROWING OF TIMBER

A farmer who derives taxable income from the growing of timber may elect that his taxable
income be determined in accordance with the rules below - s58 (4):-
a. The cost of planting the timber plus a fixed percentage addition (to the cost) is carried
forward annually until the timber reaches maturity;
b. The fixed percentage is added to taxable income (or deducted from assessed loss) in
each year of assessment until the timber is sold;
c. The sum of the cost of planting and total of the fixed percentage added annually is the
cost of sales for such timber. If a proportion of the timber is sold, the cost of sales will
be that relating to the proportion sold.
d. Any other expenditure which meets the conditions for deduction under the Act (and
capital allowances) is deductible in the year incurred. (Claimable).

The S58 (4) election, once made, is binding on the farmer for all subsequent years.
Where a taxpayer does not make the election, the timber business will be treated like the other
businesses.

COOPERATIVES SOCIETIES

COOPERATIVE AGRICULTURAL SOCITIES

S59 - the income of any producers’ cooperative agricultural society registered under the
Malawi law is exempt from tax if the income is derived from transaction or dealing carried out
in fulfilling all or any of the following objectives
(SIXTH Schedule):-
1. To dispose of the agricultural products or livestock of its members in the most
profitable manner:
2. To manufacture or treat the agricultural or livestock products of all its members and to
dispose of such products in the most profitable manner.
3. To purchase agricultural implements & machinery, livestock feeding stuffs, seeds
manure or other farming requisites on behalf of its members;

4. To manufacture or treat feeding stuffs, manure or other farming requisites;

5. To engage competent persons to carry out any of its objects and to give instruction and
advice to its members on farming operations.
6. To acquire and distribute information on the markets of the world and cooperation in
general, and information as to the best manner of carrying out farming operations
 profitably;
7. To recruit and supply labourers for its members
8. To purchase or otherwise acquire shares in any other cooperative agricultural limited
company or society formed under any Malawi Law.etc.
Any producer’s cooperative agricultural society which has income which has not been
derived form the furtherance of any of the objects listed in the Sixth Schedule should
submit proposals to the Commissioner for the determination of its taxable income. The
Commissioner may or may not accept the proposals. If he does not accept the
proposals he will determine the taxable income of such cooperative societies in a
manner he deems fit.

OTHER COOPERATIVE SOCIETIES

The income of all cooperative societies (other than those discussed above) is liable to
tax regardless of the fact that the income arises from transactions of the cooperative
society with its members. The income of such cooperative societies is 6.25% of Gross
Turnover. This is taxed at the rate applicable to companies (30%).

The word ‘Turnover’ means the total amount in cash or otherwise received by or
accrued to the cooperative society in question from the sale of goods or services
rendered.
REBATES or BONUSES based on purchases made by a member are not included in
assessable income of a member except where the price of the purchases is allowable as
a deduction in determining the member’s taxable income.

3. CLUBS, SOCIETIES OR ASSOCIATIONS

These fall into two categories- those that are exempt from tax and those that are liable
to tax.

EXEMPT CLUBS, SOCIETIES OR ASSOCIATIONS include:

- Clubs, societies or associations not formed for pleasure or recreation
but formed, organised or operating solely or principally for social welfare, civic
improvement or other similar purposes if their receipts or accruals are not
divided among the members.

- Ecclesiastical, charitable and educational institutions and trusts of a

public character.

- These organisations would be liable to tax if they derive income from

the carrying on of business.

NON EXEMPT CLUBS, SOCIETIES OR OTHER ASSOCIATIONS

The income of any club, society or association formed, organised or operated solely or
principally for pleasure or recreation is liable to income tax.

The taxable income of any club, society or association is 6.25% of its gross receipts
and accruals from sales of goods, cinematograph performances, stage plays and
gambling machines. This income is taxable at the rate applicable to companies (30%).
The income is still taxable even where it is received by or accrued to or in favour of a
trustee for such a club society of association.
The expression “STAGE PLAY” includes any tragedy, comedy, play, opera, farce,
revue, variety, burlesque, interlude, melodrama, pantomime, dialogue, prologue,
epilogue or other dramatic entertainment.

EXAMPLE
PVC Club presented the following income and expenditure account to its members for
the year ended 30 June 2012.

INCOME
K
Subscriptions

250,000
Profits from bar
15,000
Surplus from gambling machine 16,000
Donations from ex-members 500
Fees from sporting activities
21,000
302,500

EXPENDITURE

Staff wages 150,000

Loss on theatre shows 35,000
Maintenance of equipment 60,000
Affiliation fees 45,000
General expenses 15,000 305,000
NET DEFICIT ( 2,500)

NOTES

1. Turnover from bar was K125, 000

2. The gambling machine operated on the basis of 80% pay out.
3. Revenue from theatre show amounted to K95, 000

REQUIRED
Computed the tax liability for the club for the year ended 30 June 2012?

SOLUTION
PVC CLUB

INCOME TAX LIABILITY FOR THE YEAR ENDED 30 JUNE 2012

K
Turnover 125,000
Gambling machine (W1) 80,000
Theatre shows 95,000
TOTAL RECEIPTS AND ACCRUALS 300,000
 TAXABLE INCOME (W2) 18,750

TAX LIABILITY (W3) 5,625

Workings

W1 Gambling machine receipts - 80% pay out; K16, 000 represents 20% of
total takings. Total takings = 16,000 x 100 = K80, 000
20

W2 Taxable income is 6.25% of total receipts and accruals i.e. 6.25% of K300, 000.

W3 Tax liability = 30% x 18,750

K5,625

4. INSURANCE COMPANIES

Insurance business can be classified into two - Life Assurance and General insurance.

GENERAL INSURANCE BUSINESS

The tax provisions in respect of the latter (also known as “short term insurance
business”) are contained in the SEVENTH Schedule and these are:

i. The gross income of such insurance business is the sum of:

- premiums received in Malawi;
- amounts, other than premiums, received in respect of short term insurance
business; and
- the amount of a reserve allowed as a deduction in the previous year of
assessment for unexpired risks at the percentage adopted by the insurer for
such risks in relation to the general insurance business as a whole (as with bad
debts recovered).

ii. The allowable deductions include:

- Premiums paid on re-insurance
- Actual losses in Malawi less losses recoverable on re-insurance;
- Management expenses, other than those of a capital nature;
- Net commission after deduction of commission received on reinsurance.
- Other expenditure (not being of a capital nature) incurred in the production of
income;
- an allowance as approved by the Commissioner in respect of expenses incurred
outside Malawi in connection with premiums and other amounts received in
respect of the short term insurance business; and- an amount of a reserve for
un expired risks at the percentage adopted by the insurer for such risks in
relation to his insurance operations which is set aside by the insurer at the end
of the year of assessment (as with provisions for doubtful debts).

Where a person in general insurance business derived income from a source other than
insurance, the taxable income or assessed loss relating to such a source is to be
determined in accordance with the general provisions of the Act.

LIFE ASSURANCE BUSINESSES

 The receipts and accruals of Life assurance business are exempt from tax under the
First Schedule. Under Section S63 (2) , investment income (excluding investment
income attributable to pension, provident and annuity funds) arising from the business
of life assurance is liable to tax and it is determined using the following formula-

Taxable income = T1 less E

Where T1 = Gross taxable income

E = the lesser of E1 and E2; where

E1= Expenses relating to taxable investment income.
E2=Expenses relating to taxable investments income
restricted to 70% of gross taxable investment
income.
Expenses relating to investment income include commissions, contractual bonuses, and
management expenses.

5. HIRE PURCHASE
s64 - If a taxpayer enters into an agreement with another person to the effect that
ownership of an asset will transfer to the other person when that other person pays the
whole or a portion of the amount payable, the whole of the amount payable is deemed
to have accrued to the taxpayer on the date agreement is made.

6. BUSINESSES CARRIED ON PARTLY IN MALAWI AND PARTLY OUTSIDE

MALAWI.
S56 - If a non-resident person wholly or partly manufactures, produces, grows,
improves, packs, preserves, fabricates, mines or constructs anything in Malawi and
exports the items without sale prior to the export, he will be deemed to have derived
taxable income from a Malawian source corresponding to the profit derived from the
sale of the item or part of the item manufactured, grown, constructed etc in Malawi.

The taxpayer should submit proposals for the determination of the taxable income
deemed to have been derived from Malawi. The Commissioner will consider the
proposals, if he is satisfied with the proposals having regard to the Act, he will accept
the taxable income so constructed etc in Malawi.

If the Commissioner is not satisfied with the proposals or no proposals have been
submitted, he will determine the taxable income in a manner he deems appropriate.

S57 - If a person’s business extends to another country and it is not possible or

impracticable to ascertain the taxable income derived from a source within Malawi, the
person is required to submit proposals to the Commissioner for the determination of
his taxable income. The Commissioner may or may not accept the proposals. If he
does not accept the proposals or proposals are submitted the Commissioner will
determine the taxable income in manner he deems appropriate taking into account the
circumstances of the case.

7. RELATED PARTY TRANSACTIONS

S56 (5) - In cases where a person sells, exports or transfers goods, services or
property to another person who is directly or indirectly related to him at a price lower
 than the market value, he will be required to include the market value of the goods,
services or property in his assessable income. Examples of related parties include: a
company and its subsidiaries; an individual is related to the children, parents, sisters
etc; partners in a partnership are related to each other.

8. SALES AT LOWER THAN MARKET VALUE

S56 (6) - If the Commissioner is of the opinion that goods, services or property have
been sold at a price which is lower than the market value, he will determine the market
value in an appropriate manner and will adjust the taxable income of the seller
accordingly.

9. DOUBLE TAXATION RELIEF

A taxpayer’s income may be liable to tax in two countries. For example, the UK
income tax system is based on residence i.e. the source of income does not matter;
generally an individual is liable to income tax on ‘world wide’ income if he/she is
resident or ordinally resident in the UK. The Malawi tax system is based on source.
Say, an individual who is resident in UK has a bank account in Malawi; Non resident
tax will be withheld on the interest arising on the account by the bank and he will be
liable to tax in the UK on the same income. This could result in very high rates of tax.
To avoid such situations the Act provides for a relief which takes the form of a tax
credit against the taxpayer’s total liability. This is after subject of Double Taxation
Agreements between countries and Malawi has entered into such agreements with
several countries. For example Kenya, South Africa, and the United Kingdom.

S123 states that the amount of reduction in tax under the double taxation agreements
cannot exceed the amount derived using the formula below-

Ax B where
C
A is the amount of income which is taxable in two countries.
B is the taxpayer’s Malawi income tax liability before any
reduction;
C is the taxpayer’s total income taxable in Malawi.

EXAMPLE
Z has in 2011/2012, taxable income of K650, 000 (income tax liability is K164, 400).
The income includes K130, 000 which is also taxable in the UK. Calculate tax liability
assuming full reduction is given under the Double Tax Agreements.

SOLUTION

Maximum tax credit (full reduction) =

130,000 x 164,400
650,000
 = K32, 880.00

Tax liability after full reduction = K164, 400-K32, 880

= K131, 520
Where the other country has no double tax agreement with Malawi, and the taxpayer
proves to the Commissioner that he has paid tax in the country, the taxpayer’s liability
is reduced using the above formula or the amount of foreign tax paid; whichever is the
lesser.
 CHAPTER THIRTEEN

COLLECTION OF TAXES

WITHHOLDING TAXES
A withholding tax is a system of collecting tax whereby a person making payment withholds a
percentage of the amount to be paid. The payee gets the net amount while the tax withheld is
remitted to the tax department.

In the Malawi tax system, there are three forms of withholding taxes; these are Pay As You
Earn (PAYE), Withholding Tax and Non-Resident/Border Tax.

1. THE PAY AS YOU EARN SYSTEM

Every employer is required to operate the PAYE system in respect of all employees
earning more than K180, 000 per annum. The employer must deduct tax from the
emoluments of such employees at the time the emoluments are paid (this could be
weekly, fortnightly or monthly).

PAYE TABLES
The Income Tax Department supplies employers with PAYE tables to enable them to
make deductions from their employees’ emoluments.

TREATMENT OF DEDUCTIBLE EXPENDITURES

When determining the amount of tax to deduct from an employee’s emoluments,

allowable deductions will not be taken into account. The employee can claim the
deductions in his return of income at the end of the year of assessment or he may apply
to the Commissioner to have such deductions taken into account by the employer
before calculating the PAYE due. These deductible expenses may be professional
subscriptions, donations etc.

PAYMENT OF TAX
Tax deducted under the PAYE system is due within 14 days of the end of the month in
which the deduction was made. e.g. tax deducted in the month of April is due by 14
May. An employer is personally liable to a penalty of 15% of the tax due if he does not
pay the tax in time

An additional surcharge at 5 % of the accrued amount is also imposed monthly until

the amount due is paid.

The Commissioner may reduce or waive the penalty if a satisfactory explanation for
the delay is given.
END OF THE YEAR PROCEDURES
At the end of the year, the employer is required to give to each employee form p9
which shows total emoluments for the year, total tax deducted and other deductions
made during the year e.g. pension contributions.
 A copy of form p9 for each employee should be sent by the employer to the Tax
Department together with form p16 which is a summary of all forms p9 for the
employer’s staff. These forms must be submitted within fourteen days of the end of the
tax year i.e. 14July each year.

FAILURE TO MAKE DEDUCTIONS AND UNDER-DEDUCTIONS OF TAX

If the employer does not deduct tax from any of his employees’ emoluments or deducts
less tax than that which should have been deducted, he will personally be liable to pay
the tax he has failed to deduct or the difference between the tax due and the tax
deducted. (Rule 3)

Under the same rule (3), the employer is allowed to recover such taxes from the
employee. The employer cannot recover any penalties he is liable to due to failure to
deduct or under-deductions from the employee’s emoluments.

VARYING OF TAX DEDUCTIONS

Under rule 4 the Commissioner is authorised to permit an employer to vary the amount
of tax deductions under PAYE regulations if the employer is of the opinion that the
deductions may cause exceptional hardships on the employee.

RECORDS TO BE KEPT BY THE EMPLOYER

Every employer is required to keep records showing

a. The emoluments paid to each employee; and

b. The amount of income tax deducted from the emoluments of each employee.
These records must be available for inspection by the Commissioner or any public
officer duly authorised by him.

OFFENCES
Any person who
a. Makes any false declaration in any form, record or return completed, kept or
made under the PAYE regulations;
b. fails to operate the PAYE system;
c. fails to remit tax by the due date:
d. fails to provide form p9 to employees;
e. fails to maintain records required under the PAYE rules.

Shall be liable to a fine of K100 in addition to the penalties already mentioned.

NOTE: PAYE is creditable in assessment.

ii. NON RESIDENT TAX

S76A - Any income payable to a person not being a person resident in Malawi arising
from a source within Malawi shall be liable to a final tax (Non Resident Tax) at the rate
15% of the gross amount of such income.

Who is a person not resident in Malawi?

The Act defines a person resident in Malawi as

 a. Any individual present in Malawi for an aggregate of 183 days or more in the
year of assessment:
b. any trust, estate or partnership established or otherwise organised under any
written law of Malawi; and
c. Any company incorporated in Malawi.

Any person other than the above is said to be a person not resident in Malawi.

PAYMENT OF TAX
Non resident (Border) Tax payable should be deducted from the amount of income
payable on
a. Accrual of the amount to a non-resident;
b. Payment of the amount to a non-resident whether directly to him or to his
account in or outside Malawi.
c. Remittance of the amount to a non-resident;
d. Crediting of the amount or value thereof in favour of a non-resident.

EXEMPTIONS
Non- Resident tax is not payable in respect of:-
a. Income and other amounts exempt under the First Schedule, e.g. dividends.
b. Any pension or annuity payment.

EXAMPLE
MINCOM (Malawi) Ltd is a wholly owned subsidiary of SPARCUS inc. an American
company. During the year to 30.6.08, the company remitted the following to its parent
company:-
Dividends 130,000
Loan repayment (part) 100,000
Interest on loan 65,000

REQUIRED
Calculate the Non-Resident tax due on the above amounts and state who is
liable to pay.

SOLUTION
- Dividends Taxable at a final 10% rate by the issuing company and not
to be included in the computation, therefore non-resident tax will not be
deducted;
- Loan repayment is not an income to the non-resident company;
- Non-resident tax is due on the interest as follows
15% x 65 000
= 9,750
MINCOM should pay this tax to the Tax Department
SPARCUS Inc. will get the net amount i.e. K55, 250

iii. WITHHOLDING TAX

The withholding Tax legislation was introduced in 1985 with the aim of accelerating
tax collection and bringing into the tax net certain incomes which were not being
declared by the recipients.
HOW THE SYSTEM OPERATES
Under S102A, any person who makes any payment specified in the Fourteenth
Schedule is required to withhold tax in accordance with the rates specified in the
Schedule. For example a person making payment in respect of rent must withhold
10% of such payment as tax.

When tax has been deducted, the person making the deduction is required to prepare a
Withholding Tax Certificate (WTF 1) in triplicate. The copies are distributed as
follows:
- The original is remitted together with the tax deducted to the Inspector of
Taxes;
- The duplicate is issued to the person from whose payment Withholding Tax has
been deducted;
- The third copy is retained by the person making payment.

The tax deducted is due within 14 days of the end of the month in which the deduction
was made.
Failure to remit the tax deducted with the specified period shall render the person who
fails to do so personally liable to an additional sum (penalty) of 20% of the
Withholding Tax due. This penalty must be paid together with the Withholding tax
due.

THE WITHHOLDING TAX EXEMPTION CERTIFICATE

No withholding tax shall be deducted from any payment to a person who is a holder of
a valid Withholding Tax Exemption Certificate.

To be granted a withholding tax exemption certificate the following conditions must be

satisfied:-

a. The applicant is a registered taxpayer;

b. The applicant’s returns of income that are due have been submitted to the
Commissioner and have been accepted;
c. The applicant has complied with Provisional tax, Fringe Benefits tax and Pay
As You Earn law requirements; and.
d. The applicant has settled all outstanding tax.

A withholding tax exemption certificate is issued for a particular year of assessment or

such period as determined by the Commissioner. The Commissioner may, by notice in
writing , withdraw or cancel or order the taxpayer to surrender the certificate within
the period specified in the notice.

The regulations are quick to point out that a withholding exemption certificated does
not exempt its holder from paying income tax. It benefits the holder in that he is given
the opportunity to use the amounts which could have been withheld under the
Withholding Tax system.
A provision to S102 A(1) states that no withholding tax exemption certificate can be
granted in respect of Bank Interest and rent (i.e. a person shall not be exempted from
withholding tax on rent and bank interest on the basis that he is a holder of a valid
exemption certificate). Bank interest includes:
- Interest payable by an institution registered under the Building Societies Act or
the Banking Act on deposits held on accounts with such institutions; and
- Interest on treasury bills, stock, bonds or promissory notes raised by or on
behalf of the Government under s24 and S26 of the Finance and Audit Act of
Malawi.
Bank interest does not include:
- Interest payable by any person to institutions registered under the Building
Societies Act or the Banking Act;
- Interest payable to a person exempt from income tax under the first schedule;
- Interest payable to a person who is not resident in Malawi and whose income is
liable to Non-Resident tax.

The issuing of withholding tax exempt certificate was abolished on 1 April 1997
however in a subsequent press release, the government has changed this provision and
companies and individuals are now free to apply for the Exception Certificate. .

OFFENCES AND PENALTIES

Any person who
a. Fails to operate the Withholding Tax System i.e. who makes any payment
specified in the Fourteenth Schedule without deducting tax;
b. Fails to pay withholding taxes deducted;
c. fails to remit withholding tax within 14 days of the end of the month in which
the deduction was made:
d. Does not surrender a withholding tax exemption certificate when the
Commissioner has ordered him to do so;

shall be guilty of an offence punishable by a fine of K200 in addition to any other

penalty mentioned above.

END OF CHAPTER QUESTIONS

QUESTION ONE

a. What is withholding tax in general?

b. Describe two common types of withholding tax currently in use in Malawi

stating both differences and similarities between the two.

c. List any four types of payments which are subject to Withholding Tax under the
Fourteenth Schedule of the Taxation Act.

d. Explain the procedure as regards payment of Withholding Tax in respect of

payments specified in the Fourteenth Schedule.

e. List three exemptions from Withholding Tax.

f. What are the consequences of one’s failure to deduct Withholding Tax from a
qualifying payment?
 QUESTION TWO

a. What is Non-Resident Tax? Explain why it should be paid.

b. What is the rate of Non- Resident tax? What expenses are deductible before
the rate of Non-Resident tax is applied?

QUESTION THREE

Tony’s Haulage Limited has 31 March as its year end. It operates strictly on a cash
basis and achieves a gross profit percentage of 25%. Its profit before tax is 10% of
turnover. You should assume that adjustments for tax purposes have no net impact, so
that its taxable income is also 10% of turnover.
REQUIRED

a. Calculate the tax charge on Tony’s Haulage Limited for the year ended 31
March 2012 when its turnover was K10 million.

b. Tony’s Haulage Limited held a Withholding Tax Exemption Certificate for the
year ended 31 March, 2012. Briefly describe the benefit to the company of
having this certificate.

CHAPTER FOURTEEN

THE PROVISIONAL TAX SYSTEM

The Provision Tax system was introduced in 1988. This was done to enable the Government
to get revenue evenly throughout the year. This also brings into line the treatment of
taxpayers whose source of income is employment who pay tax as they receive their incomes
under the PAYE systems and persons engaged in business who are now required to pay tax in
instalments during the year.

PERSONS LIABLE TO PROVISIONAL TAX

Every taxpayer is liable to provisional tax except those taxpayers whose taxable income for the
year of assessment is estimated.
a. not to exceed K180,000; or
b. to exceed K180,000 but is all from employment or pension or both in
relation to which PAYE is being deducted; or
c. to exceed K180,000 and to include non-employment and/or non-
pension income of not more than K180,000.

Provisional Tax is principally applicable to persons carrying on business (the self-employed

individual and companies).
WHAT IS PROVISIONAL TAX?
Provisional tax is an estimate of the total income tax payable. A taxpayer must make the
estimate at the beginning of every year of assessment.
Provisional tax is payable in quarterly instalments and is due within 30 days of the end of each
quarter except for taxpayers with seasonal income.

TAXPAYER WITH SEASONAL INCOME - S84A (2)

A taxpayer whose income for the year of assessment in question is estimated to include 75%
or more income which meets the definition of seasonal income must notify the Commissioner
in writing of the time or times within that year of assessment when he shall pay the provisional
tax in whole or in part. This notification must be done before the end of the first quarter of
that year of assessment.

The Commissioner may accept the dates proposed by the taxpayer or he may issue a notice to
the taxpayer specifying dates on which substantial part of the provisional tax must be paid. If
the Commissioner issues such a notice, the taxpayer should pay within 14 days of the specified
dates.

S84A (4) defines SEASONAL INCOME as “income that is ordinarily received from a given
source during any period of six consecutive month of the year of assessment of the person
receiving such income.

DETERMINATION OF PROVISIONAL TAX - S84A (3)

The taxpayer will determine the provisional tax payable during the year of assessment by
estimating the current year’s tax liability. The estimate must not be less than 90% of the actual
tax liability for the year of assessment.
This will have to paid in quarterly instalments.

The instalments must be paid in such a way as to make sure that when the final instalment is
paid the taxpayer will have paid at least 90% of the final tax liability.
It is upon the taxpayer to decide on how much to pay at each date.

EXAMPLE
PAEC Ltd, a Malawian Company, has a financial year ending 30 June. In July 2011 the
company estimated taxable income for 2011/2012 to be K2, 000,000. Show how provisional
tax would be calculated indicating when each instalment would be due. (The actual taxable
profits are K3, 200,000 and the rate of tax is 30%).
SOLUTION

QUARTER AMOUNT DUE DUE DATE

1.07.11 - 30.09.11 150,000 (W1) 30.10.11
1.10.11 - 30.12.11 150,000 (W2) 30
01.12
1.01.12 - 30.03.12 150,000 (W3) 30.04.12
1.04.12 - 30.06.12 414,000 (W4) 30.07.12
864,000
Balance
96,000

27.12.12
 960,000
WORKINGS
W1-3 Amount due in first quarter
Estimated liability for the year30% x 2,000,000
= K600, 000

Initial instalment 600,000

4
= K150, 000
W4 Amount due fourth quarter
The company must pay an amount
so that total paid after the fourth
instalment is at least 90% of actual
liability 90% x 3,200,000 x 30%
=864,000
Amount paid so far 450,000
Balance 864,000 - 450,000
=414,000

ENFORCING PAYMENT OF TAXES

A person who fails to pay any amount of provisional tax shall be liable to a penalty as follows:

If the amount of tax unpaid as a percentage

of total tax liability Penalty

a. Does not exceed 10% Nil

b. Exceeds 10% but does not

exceed 50%
25% of the unpaid
amount of tax

c. Exceeds 50%

30% of the
unpaid amount of tax.
The Commissioner may reduce or waive the amount of penalty chargeable if in his opinion a
satisfactory explanation for failure to pay is given.

EXAMPLE
Justus Limited whose taxable profits for 2008/2009 amounted to K 2,500,000 had never paid
provisional tax during this period. Calculate the penalty that the company is liable to.

SOLUTION
Provisional Tax liability for 2004/2005
 = 90% x 30% x K2, 500,000
= K 675,000
as a percentage of total liability =90%

The amount of tax unpaid as percentage of total tax liability exceeds 50% therefore the
company is liable to a penalty of 30% of the unpaid tax.
i.e.30% x K 675,000 = K 202,500

END OF CHAPTER QUESTION

a. Write brief notes on provisional tax stating:-
(i) What it is;
(ii) Who is liable to pay;
(iii) When it is payable;

b. Briefly discuss how a taxpayer determines the amount of provisional tax payable for
any year of assessment in respect of which provisional tax is payable. Illustrate your
answer with figures.
c. Comment on the advantages and disadvantages of the provisional tax system:-
(i) to the tax system
(ii) to the tax payer
d. Define “Seasonal Income” and state the conditions that must be satisfied in order for a
taxpayer to qualify for special consideration under the provisional tax system. What
special consideration does the tax payer get? (PAEC)
CHAPTER FIFTEEN

RETURNS AND ASSESSMENTS

RETURNS
s84 (1) states that every taxpayer is required to submit a return of income within 180 days
after the end of the year of assessment. The Commissioner may, by notice in writing, require a
taxpayer to submit a return of income at any time during the year; in this case the taxpayer
must submit the return within 30 days of the issue of such notice.

A married couple may make an election to submit a joint return of income (a married woman
is a taxpayer in her own right in respect of her earned income).

It is not compulsory for an employed person or a person receiving pension income whose
income does not exceed K180, 000 p.a. on which PAYE has been deducted to submit a return
of income unless he chooses to do so.

OTHER RETURNS WHICH MAY BE REQUIRED BY THE COMMISSIONER

S85 (1) states that the Commissioner may require an employer to submit returns of all or any
particular class of persons employed by him.

S85 (2) states that any person carrying on trade in Malawi may be required to submit to the
Commissioner returns showing
a. Payments made to any person in respect of any share or interest in such trade;
b. Moneys received by him from any person on deposit for any fixed time or period with
or without interest.
c. Any other information which is in his possession in respect of income received by
himself or any other person.

ACCESS TO RECORDS
S86 (1) The Commissioner has access to public records such as registers, books of account
returns kept by an officer in the public service in Malawi without fee or charge, the inspection
of which may tend to secure tax or give proof or lead to the discovery of any fraud or offence
or omission in relation to tax.

Under S87, every return required from a taxpayer shall be accompanied by supporting
documents such as Balance Sheets, Profit and Loss accounts and other accounts necessary to
support information contained in the return.

PAYMENT OF TAXES
S84C - A taxpayer should pay the difference between his/her total liability as disclosed in the
return and the taxes paid during the year (tax credits e.g. PAYE, Provisional Tax, etc) when
submitting his/her return of income.

PENALTIES
Failure to submit tax shall render the person liable to penalty as set out in S84E (see chapter
fourteen: Provisional tax).

Under S112 (3), a taxpayer who

a. Fails to furnish the Commissioner with a return of income for any year of assessment;

b. Omits income from his return;

c. Makes a deduction which is not allowed or claims an allowance to which he is not

entitled.

is liable to penalty not exceeding K1000.00 plus the difference between the amount of tax he
ought to have been charged and the amount he has been charged.

Under subsection 4, if the taxpayer commits the offences above with the intention to defraud
he shall be liable to a penalty of K10,000 or twice the difference between the tax he ought to
have been charged and that which he has been charged; whichever is the greater.

Also a taxpayer who with intent to defraud:-

a. Makes any false statement or gives any false information when complying with
any notice served on him under the Act; or

b. Prepares or maintains or authorises or causes the preparation or maintenance of

any false books or accounts or other records, or falsifies or causes the
falsification of any books, accounts or other records; or

c. Make any false claim for repayment of tax for any year of assessment, shall be
liable to the penalty stated above.
ESTIMATION OF INCOME
S89 (1) The Commissioner may estimate a taxpayer’s income in the following circumstances:-
a. A taxpayer defaults in furnishing any return or information; or

b. The Commissioner is not satisfied with the return or information furnished by the
taxpayer; or

c. The Commissioner has reason to believe that the taxpayer is about to leave Malawi
without furnishing a return or satisfactory return.

S89 (2) states that if the Commissioner is of the opinion that the taxpayer’s is unable to
submit an accurate return of income, he may accept the taxpayer’s estimate of his
taxable income for example where the taxpayer’s records have been destroyed by fire.
ASSESSMENTS
S90 The Commissioner will proceed to assess taxpayer to tax basing on the information
provided by the taxpayer in his return of income if the taxpayer has submitted a satisfactory
return or on estimated income where S89 applies.

ADDITIONAL ASSESSMENTS - S91

If the Commissioner discovers or is of the opinion that a taxpayer has not been assessed or has
been assessed to a lower amount of tax, he may within six years of the end of the year of
assessment in question issue an assessment or an additional assessment.

Where any fraud or wilful default has been committed by or on behalf of a taxpayer which has
led to him (taxpayer) not being assessed or assessed to a less amount, the Commissioner can
still raise an assessment even where the six year limit has been exceeded.

In the event that the taxpayer who commits fraud or wilful default or on whose behalf fraud or
wilful default has been committed is deceased, an assessment on his personal representatives in
respect of any of the six years preceding the tax year death takes place must be raised not later
than the end of the third year following the end of the year in which the taxpayer died.

For example, if a taxpayer died during 1995/96, an additional assessment in respect of any of
the years from 1989/90 to 1995/96 must be issued not later than 31 March, 1999.

NOTICE TO ASSESSMENT

The Commissioner must give a notice of assessment to the taxpayer which must contain a note
that any appeal against the assessment can be made within 30 days of the issue of the notice of
assessment.

REPRESENTATIVE TAXPAYERS

A representative taxpayer is a person who acts on behalf of another person as regards matters
concerning tax; for example paying tax on behalf of another person. The other person might
not be able to act on his own - e.g. a company cannot fill returns although its a legal person
and a taxpayer in its own right.

The Act lists representative taxpayers in s77. These are

a. Public officer of a company;
b. Trustee of a trust;
c. An agent who is controlling or managing another person’s assessable or taxable
income;
d. Person remitting or paying assessable or taxable income to a person who is temporarily
or permanently absent from Malawi:
e. Receiver if income is paid under a decree or court order;

f. A company as an agent of a shareholder who is absent from Malawi in respect of

income accruing to the shareholder from the company.
PUBLIC OFFICER

S67 - A public officer is an individual representing a company.

Every company that carries on trade or that has an office in Malawi is required to appoint an
individual resident in Malawi who will be its public officer. This individual must be approved
by the commissioner.

The public officer must be appointed within one month of establishment of an office or place
of business by a company in Malawi. If the public officer is not appointed within one month of
establishment, the Commissioner may appoint the Managing director, director, secretary or
other officer of the company to act as a public officer.

Such companies must also appoint a place where notices will be served or sent within one
month of establishment.

Every notice or proceeding which may be given or taken against any company should be given
to the public officer.

Acts done by the public officer in his representative capacity shall be deemed to have been
done by the company.

Declaration of dividend

The public officer of a company incorporated in Malawi must, within 30 days of declaration of
dividend, submit to the Commissioner:-

a. a copy of the resolution declaring the dividend; and

b. a statement containing, in respect of each person to whom dividend has accrued -

(i) name and address of the person;

(ii) amount of dividend accrued;
(iii) the date on which dividend was declared.

AGENT
The Commissioner may declare any person to be the agent of another person if he deems it
necessary to do so. The agent will act on behalf of the other person for the purposes of tax
e.g. paying tax on behalf of the other person.

The commissioner may appoint an agent in the United Kingdom for the purpose of facilitating
assessment of income of any person residing in the United Kingdom.
DUTIES OF THE REPRESENTATIVE TAXPAYER

S78 - The representative taxpayer is liable to tax in respect of taxable income to which he is
entitled in his representative capacity and such tax is recoverable from him except for tax in
respect of an assessment made upon the public officer which is recoverable from the company.
An assessment is raised in the representative’s name. He is responsible for the submission of
returns required by the Commissioner from the person he is representing.

The representative taxpayer has the right to recover any amounts of tax he pays in his
representative capacity from the person on whose behalf he pays tax.

If a representative taxpayer has not paid tax that is due and while it is still unpaid he

a. Alienates, charges or disposes of taxable income in respect of which tax is chargeable.

b. Disposes of or parts with any funds or money which is in his possession or comes to
his after the tax is payable when tax could have been lawfully y paid out of such funds
or money;
he shall personally be liable for the payment of tax which is due in his representative capacity.

END OF CHAPTER QUESTION

1. a. Who is liable to submit a return of income?
b. When is a return of income to be submitted to the tax authorities?
c. When is submission of a return of income made optional?

2. Under s91 of the Act the Commissioner is empowered to make an additional

assessment on any taxpayer.
a. State the circumstances under which an additional assessment may be issued to
the taxpayer.
b. What is the time limit for issuing such an additional assessment?
c. When is such time limit disregarded?

3. Under which circumstances would the Commissioner estimate a taxpayer’s income?

Can he issue an assessment on the basis of estimated income?

4. a. Explain in your own words as far as possible what you understand by

the term “Representative Taxpayer”. Give four examples or representatives
taxpayers.

b. Under what circumstances would a representative taxpayer be personally liable

for tax assessed by the Commissioner?

EXAM STYLE QUESTION

a. What is the name given in the Taxation Act to the representative taxpayer of a
 company?

b. In the event that a tax assessment cannot be personally served on the representative
taxpayer of a company, what are the three options available to the Commissioner of
Taxes so that the assessment is “sufficiently and effectively served”? In each case, how
is the date of such delivery determined?
c. How may an assessment be sufficiently and effectively served on a tax pay who is
unable, through illiteracy or infirmity, to read the assessment?

d. What is the name given in the Taxation Act to the person who administers the payment
of remuneration for a business and who accounts to the Commissioner of Taxes for the
PAYE deducted?

CHAPTER SIXTEEN

APPEALS
S95 - In any appeal case it is to the taxpayer to prove that:-
(i) any amount of income is exempt from or is not liable to income tax.

(ii) any amount is subject to a deduction or is an allowance.

A taxpayer may be aggrieved by

a. Any assessment made upon him by the Commissioner

b. Any determination by the Commissioner of a reduction in tax under the double tax
relief arrangements (S123 and S124)

c. Any decision of the Commissioner in relation to an assessment.

PROCEDURES FOR APPEAL

APPEAL TO THE COMMISSIONER

1. The taxpayer is supposed to appeal to the Commissioner within 30 days from the date
when notice of assessment, decision or determination of reduction was despatched to
him by the Commissioner and should specify the grounds of appeal.

NOTE: 30 days period may be extended if the Commissioner is satisfied with

any reason by the taxpayer for the delay.

2. The Commissioner may require the personal attendance of the appellant (taxpayer) but
if the appellant fails to do so the appeal may be dealt with in his absence and the
Commissioner will send a written notice of his decision to appellant.

APPEAL TO SPECIAL ARBITRATOR

The taxpayer who is not satisfied with the Commissioner’s decision may appeal to the Special
arbitrator and the procedures for appeal are as follows:-

a. The taxpayer is supposed to notify the Commissioner in writing within 21 days of the
issue by the Commissioner of the notice of his decision of his intention to appeal.

b. The taxpayer should within 42 days of the issue by the Commissioner of the ‘notice of
his decision’ lodge with the Commissioner a written statement (in duplicate) on his
grounds of appeal.
c. Within 42 days of receiving appellant’s grounds of appeal, the Commissioner shall
lodge with the special arbitrator the appellant ground of appeal and Commissioner’s
reply.
d. Then an arbitrator will notify the taxpayer and the Commissioner the date and place of
hearing the appeal.
NOTES:
i. If any party is not present at the date of hearing the special arbitrator may
decide the appeal in his absence.

ii. The ruling by special arbitrator is final as regards to matter of fact.

iii. Anyone publishing proceedings without the authority of special arbitrator is

 fined K1,000.

APPEAL TO HIGH COURT

1. Any party aggrieved by special arbitrator’s decision shall lodge with the high court his
intention to appeal within 21 days of the special arbitrator’s decision.

2. The appellant should within 42 days from the date he received special arbitrator’s
decision lodge with the high court (four copies) a written statement specifying his
ground of appeal.

3. Upon receipt of written statement of appeal the high court shall send a copy to the
respondent who is also supposed to write a statement of reply (four copies) specifying
the grounds upon which he will rely on the hearing of appeal.

EXAM STYLE QUESTION

a. If a taxpayer is aggrieved by an assessment raised on him he first appeals to the

Commissioner of Taxes.

What steps will the Commissioner take?

b. If the taxpayer remains aggrieved he next appeals to the Special Arbitrator.

What powers does the Special Arbitrator have in order that he may fulfil his role in the
appeal process?

c. If the taxpayer remains aggrieved, he may, for one reason only appeal to the High
Court.

With what reason may a taxpayer finally appeal to the High Court?

d. Why is the appeal process heard in private? What restrictions therefore arise if
publication of the results of the appeal are deemed appropriate?

e. What is the statutory penalty for publicising the appeal proceedings without the
authority of the Special Arbitrator or the High Court as the case may be?
CHAPTER SEVENTEEN

CUSTOMS DUTY
IMPORTATION AND CUSTOMS CLEARANCE OF GOODS

INTRODUCTION

The customs service in other parts of the world is a very old established service. If one were
to include ‘tax gatherers’ levying taxes on goods taken into and out of cities it is even more
ancient still. In olden days ‘the customs’ was formed out of tender to individuals but was this
fell into disrepute for many reasons and nowadays it is universally a government department
usually under the respective Ministry of Finance (Treasury). Excise became part of the
customs service in relatively recent years and even more recent such things as purchase taxes,
value added taxes, sales taxes or VAT and the like were added. In Malawi the Department of
Customs and Excise, which is in the Ministry of Finance, is responsible for the collection of
customs, excise and VAT duties.

OBJECTIVES

The Customs and Excise Department is revenue - collecting organisation. It collects import
duties, VAT and excise duties on goods and services imposed by law as promulgated by
Parliament. Revenue of this nature is known as “indirect taxation” as opposed to Income Tax
which ‘direct taxation. All monies which are collected are paid into the consolidated fund.
Parliament, in budget session, decides on how the income of the country is to be obtained and
how it shall be spent (e.g. on Education, health, Defence, Agriculture etc). At present at least
sixty percent of the total annual government revenue of Malawi is derived from Customs and
Excise collections. It also to be noted that the Department of Customs and Excise is charged
with control over the importation and exportation of goods.

CONTROLS

Many goods and classes of goods may not be imported or exported except under certain
conditions (e.g. import licence is required for firearms) or in some cases entirely prohibited
(e.g. drugs such as marijuana).

It is the duty of the Department of Customs and Excise to implement the various controls in a
proper manner and not to release and goods out of customs control until the conditions of
import and export have been complied with.

APPROVED PORTS OF ENTRY AND EXIT OF GOODS

The Minister of Finance is empowered by Section 8 of the Customs and Excise Act
(Cap.42.01) to prescribe parts at or through which goods shall be imported or exported (e.g.
Mwanza, Mchinji, Muloza, Kibwe and Dedza).

He also prescribed ports known as Customs airports at which aircrafts from foreign ports
shall land, from which aircrafts leaving for foreign ports shall depart and through which goods
shall be imported or exported . (e.g. Lilongwe International Airport and Chileka Airport).

Under Section 8 (d) the Minister of Finance may prescribe customs offices for the collection of
revenue and general administration of the Customs Laws e.g. Blantyre, Balaka, Nsanje and
Karonga.

IMPORTATION OF GOODS

IMPORT: To import anything into Malawi means to bring or to cause it to be brought into
Malawi.

DECLARATION OF GOODS

The law requires that all imported goods be declared. A declaration can be either verbal or
written depending on circumstances such as type of goods, mode of importation, etc.

GOODS IMPORTED BY ROAD

Immediately after entering Malawi all vehicles must be driven to the nearest customs offices
and the driver or person in-charge of such vehicles must report his arrival to the customs
officer declare all goods that are carried on the vehicle.

GOODS IMPORTED BY TRAIN

In terms of Section 27 of the Customs and Excise Act the person in charge of any train shall
upon arrival in a port before unloading or in anyway disposing of any goods subject to
customs control, report his arrival to the proper officer at such port and produce:-

a. copies of all invoices, waybills or other documents relating to the goods,

b. copies of delivery and advice notes

c. advice of all goods delivered to licensed private sidings.

The following ports have been approved for trains:- Blantyre, Balaka, Nsanje, Lilongwe and
Mchinji.

GOODS IMPORTED BY PERSONS

Any person arriving from a foreign port, whether or not he has goods in his possession should
proceed immediately to the nearest port to report his arrival to the proper officer and make
declaration of the goods carried.
ARRIVING AIRCRAFTS

Within 3 hours after the arrival of any aircraft from a foreign port before the unloading of any
goods from such aircraft the person in-charge shall make a declaration to the proper officer of
all cargo carried on such aircraft by producing the relevant cargo manifest and any other
documents relating to the goods.

POSTAL IMPORTATIONS

All postal parcels from foreign countries must be declared to customs by the postal authorities.
There are three approved Post Offices for the clearance of postal importation namely: Limbe
Post Office for the Southern Region, Lilongwe Post Office for the Central Region and Mzuzu
Post Office for the Northern Region.

DOCUMENTATION FOR IMPORTED GOODS

Documentation in import and export trade is a very important part of trade. To the honest
importer/exporter a written record is a safeguard of his own rights as it shows what facts were
brought to the notice of the appropriate customs officials and what action they took at each
stage.

The Commercial documents get properly scrutinizes to see whether any third person,
(intermediary/shipper) has been mentioned.

If a third person is mentioned, a call fro a document that may have been issued is made and
attached to the bill of entry. Where no document was issued or used the importer is called
upon to explain to the satisfaction of the officers or the documents are referred to the
Valuation and Origin Branch for further inquiry.

The following are some of the documents commonly used in the Customs clearance which
must be submitted to customs wherever appropriate in support of the Bill of Entry.

a. Commercial Invoices
b. Freight Invoices (Sea/Air)
c. Rail, Road, Advice Notes
d. Port Charges Invoices
e. Shippers Invoices
f. Bill of Lading (Inward or Ordinary)
g. Insurances
h. Packing List
I. Certificate of Origin (Form 18)
j. Declaration of Value (Form 19)
k. Work-sheet
l. Clean Record of Findings (CRF)
m. Import Licence.

Bill of Entries are of great significance because the Government uses them in many ways. e.g.
for audit of Customs documents, for accounting purposes. The Malawi National Statistics
Office compiles the national trade statistics from Bills of Entry, imports and exports.
PURPOSES FOR WHICH IMPORTED GOODS MAY BE ENTERED

Imported goods may be entered for any of the following purposes:-

a. Consumption - F21, F82

b. Temporary Importation - F21
c. Warehousing in a bonded warehouse (F24)
d. Transit (Form 30)

ONWARD CARRIAGE OF GOODS

The controller of Customs and Excise is empowered by the Act to allow on carriage of
imported goods from the port of importation to another port for clearance there subject to
such conditions as he may impose. The movement of such goods is covered by a Report
Order/Authority to proceed.

REPORT ORDER SYSTEM/AUTHORITY TO PROCEED (ATP) SYSTEM

A report Order/Authority to proceed is a Customs Document which is issued at the Port of

Entry to cover the goods which are allowed to be on-carried from the border port to an inland
port for clearance there. The procedure for Report/order/ATP is as follows:

(I) There copies of the ATP are printed at the Border Post and signed/stamped by
a Customs Officer. The ATP details are sent electronically to the Customs House.

An Advance copy of the ATP is sent to the Port of Clearance by fax or any other
quickest means.

(ii) The vehicle driver brings all three copies to Temporary Store Operators to the
Collector for Temporary Stores at the Custom House.

(iii) All three copies of the ATP are taken by the Temporary Store Operators to the
Collector for Temporary Stores at the Custom House.
(iv) The computer at the Custom House makes a list of all imports awaiting off-loading
authorisation. All ATPS are listed in order of need to be witnessed.
All carriers or agents who wish to use the ATP facility must furnish the Department with a
bond to cover 50% of the value of the goods. If no security is provided the vehicle will not be
allowed to enter the country but the goods will have to be cleared at the border.

REASONS FOR ONWARD CLEARANCE.

1. Finance institutions not available at border e.g. banks

2. Need to facilitate trade.

3. Carriers are not the owners of goods and many not possess all necessary documents
 for clearance at border.

4. No customs Clearing Agents at the border.

5. Security reasons.

TIME LIMIT FOR ENTRY OF GOODS

a. Goods delivered to Temporary Stores (e.g. MANICA) must be cleared within 30 days.

b. Goods delivered to Private Sidings must be cleared within ten days.

If goods are not cleared within the prescribed time they are removed to the Customs
Warehouse.

BONDED WAREHOUSES

This part of the hand-out sets out the law relating to the licensing and operation of bonded
warehouse.

A bonded warehouse is a place licensed by the Controller of Customs and Excise for the
storage of dutiable goods. The purpose is to allow goods to be stored under official
supervision without the payment of duty until when they are cleared out for consumption.
They can be exported from bond without payment of duty.

OBLIGATIONS OF THE WAREHOUSE LICENSEE

1. The licensee is responsible for the care and custody of all goods in the bonded
warehouse.

2 .I. He is not allowed to keep naked lights unless on emergency.

ii. Inflammable goods likely to cause danger to other goods are not allowed
unless segregated from other goods to the satisfaction of a proper officer.

iii. Public sales may not be held in a bonded warehouse except with the authority and
presence of an officer.

3. The licence must provide such facilities for the examination and taking account of
goods as the Customs Officer may require.

4. Each consignment of goods must be stacked separately and with sufficient space
between stacks.

5. Each consignment must be marked with the warehousing date.

6. Stock cards must be attached to each consignment of goods showing the number and
date of the Customs entry by which they were warehoused on Form 24.

7. No goods may remain in a bonded warehouse for more than six months.
APPROVAL ON THE DISCRETION OF THE COTROLLER

In considering an application for approval of bonded warehouse the Controller is obliged by

the law to have particular regard to:

a. the financial standing of the applicant;

b. the amount of revenue involved in the goods proposed to be
warehoused;
c. the situation of the proposed warehouse;
d. the security arrangements at the proposed warehouse and;
e. the bonded warehouse facilities already available to the public in the area.

Unless the Controller is full satisfied on all the above accounts, he will refuse to approve and
license the place as a bonded warehouse.

TYPES OF BONDED WAREHOUSE

Bonded Warehouses are approved and licensed as either:

a. Private Bonded Warehouses

These are for the deposit of dutiable goods belonging to several other importers.

b. General Bonded Warehouses

These are for the deposit of dutiable goods belonging to several other importers.

c. Bonded factories for processing of goods/EPZ

The approved bonded warehouse will be approved by the Controller if its area is not less than
186 square meters.

BOND
When an approval for a warehouse is made by the Controller, the applicant is advised
accordingly and is told to enter into bond with the Controller in Form 123 for the due
observance of the customs laws relating to bonded warehouse.

The penalty of the bond must be a maximum amount of duty which is anticipated on the
goods warehoused at any one time. The amount must be agreed upon before completing for
123 (the bond). The surety to the bond must be a bank or an insurance company established
and registered in Malawi. The original copy of the bond is kept by the Department of
Customs and Excise. The Principal and/or the surety to the bond wishes to have copies for
their own purposes they should be submitted for numbering and stamping.

ORIGIN AND PREFERENCE OF GOODS

The country of origin of any goods is defined to be (in case of goods grown or produced) the
country in which such goods were wholly grown or wholly produced. In the case of
manufactured goods, the country in which the last process of manufacture was performed. To
be given preference, according to Malawi Laws, the percentage content of manufacture for
the said country must be 25% of minimum as stipulated in Part II of the Malawi Customs
Tariff as read with Section 118 (b) (ii) of the Act. In case of goods originations from PTA
states the percentage content of manufacture must be at least 45%.

Preference in customs context is explained as an act of choosing or liking one above another,
thus a lower rate of duty applying to goods of certain origins as stipulated in the Malawi
Customs and Excise Act.

There are, however, specified countries whose goods are given preference
If they meet Malawi customs requirements.

a. Members states of the ACP as stipulated in the convention signed in Lome, Togo
on 28 February, 1975.

b. Independent countries of the Commonwealth and any dependent territory,

protectorate or protected states of such independent states of such independent
country under the trusteeship system of the United Nations (e.g. Namibia but now
independent).

c. A contracting party to the General Agreement of Tariff and Trade-GATT.

d. Goods imported into Malawi from COMESA members states being goods
described in the common list.

RULES OF ORIGIN

Goods imported into Malawi are generally of two categories:-

a. Goods grown – agricultural products e.g. vegetables, maize etc.

or goods produced e.g. mineral products – coal, gold copper, live animals. Etc.
As stated above, for goods grown or produced, they must be wholly grown /produced
in the specified countries mentioned above to qualify for preference in Malawi
Customs Tariff.

b. For manufactured goods, the last process of manufacture must genuinely take place
from one of the above specified countries. Such goods must undergone sufficient
working or manufacturing process.

IMPORTANCE OF CORRECT DECLARATION OF THE COUNTRY OF ORIGIN

(FORM 18)

The significance of correct completion of Certificate of origin (Form 18 is that:

1. It enables customs officer to establish the correct rate of duty in accordance

with preferential provisions of the Customs Tariff.

2. It enables them to establish whether goods are subject to Open General

 Licence (OGL) importation that does not require an import licence of
Specific Licence.

3. It also enables customs officer to correctly collect trade statistics for the
national Statistical Office.

VALUATION OF GOODS FOR CUSTOMS PURPOSES

Commercially, valuation may be defined as an appreciation of one thing in terms of the other.
Customs valuation systems in Malawi are based on the new GATT Code but on CIF value
Malawi border.

We learn Customs valuation because:

a. Customs duties depend on correct valuation of goods:

b. The N.S.O depends on the valuation data from the Bills of Entry checked by the Customs
Officers

c. Apart from monitoring the economy of Malawi, the above statistics are used in
International Trade Negotiations.

DISCOUNTS

There are two types of discounts:

a. Allowable and
b. Non-Allowable discounts

Non-allowance discounts are those that are given because of commercial relationship e.g.
Agent discount distributor’s discount.

Allowable discounts are those which are not given because of relationship e.g. cash and
quantity. These are allowable as deductions from the value of the goods. Non-Allowable are
not allowable as deductions from value of the goods. Discounts must always be specified (e.g.
cash quantity, etc)/

COMMISSIONS

There are three types of commissions. These are amount charged by an intermediary to an
importer for rendering certain services:

1. Buying Commission: for arranging goods to be purchased on behalf of the importer.

1.
2. Selling Commission: for arranging goods to be sold on behalf of supplier, and

3. Financing Commission: for arranging goods to be financed on behalf of an importer.

Financing and selling commission are includible commissions and are included in the
VDP. Buying Commission is called ‘Non-includible’ commissions and are not
included in the VDP. The reason being that Financing and selling commissions are
incidental (Connected with) to the sale and delivery of the goods.
WHAT IS INCLUDED IN VDP FOR DUTY PROCESS

VDP included all the costs and charges incidental to the delivery of goods to Malawi Border –
(CIF Value) = Cost, Insurance and Freight. However, allowable discounts ( cash, quantity)
must be deducted while non-allowable must be included. Non- includible commissions must
be ignored.

FUNCTIONS OF CUSTOMS TARIFF

The functions of the Malawi Customs Tariff are, in brief, to provide for;

a. the collection of government revenues

b. the protection of and assistance of infant industries
c. the collection of trade statistics
d. the implementation of the provisions of Trade Agreements with other countries in so far as
they relate to Malawi duties.

CALCULATIONS OF CUSTOMS DUTY DEMONSTRATED

Problem - Example

What is the customs duty and total revenue on the following importation?

79 Christmas tree candles made in UK (70%) and the value of duty purposes is UK Sterling
2.00 pounds per candle.

GIVEN 1. Rate of Exchange:

UK Sterling 1.00 pounds = MK 1.58

iii. Rate of customs duty = 70% under normal Customs

Tariff column and 65% under Preferential Customs Tariff
column.

iv. Rate for import VAT is 20%.

v. Tariff Heading: 34.06.00/00

SOLUTION:
TH : = 34.06.00.00
VDP: = MK250 at 65%
DT : = MK162.50

Value for S/T (Import)

= (VDP + D/T)
=K250 + 162
=K412 at 20%
 ST = K82.40

Total Revenue = K162.50 D/T

= K 82.40

MK244.90

INCOTERMS

Incoterms are international rules for the interpretation of trade terms. The International
Chamber of Commerce (ICC) first issued its incoterms in 1936 and published them in 1953.
These have regularly been up-dated. They were later published in 1974, 1976 and 1980.

The following are some of the incoterms commonly used. The ICC has fourteen incoterms.

a. EX-WORKS: Ex Factory Price cost of goods and packing

only,

b. FOB: (Free on Board Rail, road, Truck-Price) cost of goods, packing

and loading on the train, truck and lorry.

FAS: (Free alongside Ship) cost of goods, packing, delivery to ship and freight to Port of
destination.

vi. C & F (Cost and Freight): Cost of goods, packing, and delivery to ship and freight to
Port of destination.

vii. CIF: (Cost of Insurance and Freight):Cost of goods, packing deliver to ship,
insurance and freight to Port of destination.

viii. FRANCO DOMICILE: Cost of goods and all other charges incidental to the
delivery of goods to the buyer’s premises.

GATT VALUATION SYSTEM

The new GATT Valuation System has just been adopted in Malawi and unlike the (BDV)
Brussels Definition of value of system which notional. GATT valuation system is positive and
is based on six methods as listed here below.

As the majority of countries which use GATT new valuation Code basing their VDPs on FOB
values, Malawi opted to use CIF and this is optional. The tariff would not fetch sufficient
revenue with FOB as basis for Value for Duty Purpose (VDP)

METHODS OF VALUATION

The new GATT Valuation System consists of six methods of valuation:

1. Transaction Value Method

 This transaction value is the price actually paid or payable for export to the country of
importation adjusted in accordance with the provisions of article 8 GATT CODE.

2. Transaction Value of Identical goods method

The transaction valued of identical goods is the customs value sold for export of the
same country of importation and exported at or about the same time as the goods
being valued. The transaction value of these identical goods has to be a customs value
previously examined and accepted in accordance with article 1.

3. Transaction Value of Similar Goods

The value of goods alike in nature

4. Deductive method

5. Fall-back method

BASIC REQUIREMENTS AND CONDITIONS FOR OBTAINING DUTY

DRAWBACK

1. Who is Eligible for Duty Drawback?

Any exporter, person or company who is registered as a “Registered Exporter” under the
Export Incentives Act (6/1988) is eligible to claim a drawback.

How to become a registered Exporter?

Any exporter, person or company can approach the Malawi Export Promotion Council
and register. An application form for registration can be obtained from the following
address either by person or by mail.

Postal address: General Manager

Malawi Export Promotion Council
P O Box 1299, Blantyre

Street Address: Dalemere House, 4th Floor

Blantyre

An application fee has to be included.

3. WHAT KIND OF IMPORTED GOODS AND MATERIALS ARE ELIGIBLE

Imported goods and materials, including packaging material, incorporated in, attached to,
or directly consumed in the manufacture or production of goods which subsequently
exported are eligible for the drawback.
 What kind of Imported Goods and Materials are NOT eligible for duty drawback?

The following imported goods and materials are not eligible for duty drawback.

a. Fuel, lubricants or any other goods or materials that are not incorporated into, attached
to, or directly consumed in the manufacturing or production process.

For example, duty paid on imported machinery used in the production of exports is not
allowed under this drawback program

b. Any by-product or waste, derived from a production process, which

Has commercial value and has not been exported.

c. Any imported goods that are not re-exported.

d. Any imported goods for which a drawback, refund or remission of duty is claimed
under any other law.

For example, if a refund on duty on an imported goods has been claimed by the
exporter under the industrial drawback program, this goods will not be eligible for
drawback under this program.

5. How about By-Product and Waste?

If the manufacturing or production process produces by of any drawback shall be

reduced by the same proportion that the by-products or waster bear to the total value
of the total value of the goods produced, unless they are exported.

For example, if the by-product represents 5% of the total value of goods produced. If
the total claim is MK100,000 the claim would be reduced by MK5000.00

If any amount of waster which could have been sold in the market but was nevertheless
destroyed under Customs’ supervision, this amount of waste should not be included in
the waste ratio calculation.

6. UNDER WHAT CONDITIONS A DRAWBACK MAY BE GRANTED?

Whilst the Government will be pleased to assist any exporter to obtain its duty
drawback, there are certain conditions that have to be fulfilled before a drawback claim
can be paid.

The following conditions must be fulfilled with in order to obtain a drawback.

a. The imported goods or materials must have been exported.

Prior to the exportation of the goods, the exported must give Customs a “Notice to
Pack” at least 48 hours in advance so that customs may inspect the packing if it
wishes.

When making a duty drawback claim, the exporter must attach a copy of Form 34 in
support of all shipments claimed. It is important to note that the form 34 should
 prominently marked “SUBJECT TO DUTY DRAWBACK”. Form 34 for duty
drawback must also bear a ‘Certificate of Exportation’ (Illustrated Below) which must
be signed and stamped by a Customs Officer at the boarder or the post office. Note
that if the Certificate of Exportation is not printed on Form 34, the exporter must have
the Form 34 stamped by customs.

CERTIFICATE OF EXPORTATION

Examined ______________________ packages externally

1. Seals intact
2. Opened and examined ____________________

Satisfied_______________________ packages exported

(Date stamp________________________________________
Customs Officer or Postal Official

ix. The goods must not have been used in Malawi for any purpose, other than for
incorporation into, attachment to, or packaging of the goods to be exported.
x. If the claimant is not the importer for the goods, for any imported goods the claimant
purchased from another importer, Form No.45 should be obtained form the
importer, or producer who used the imported goods in its production. Form 45
should be filled in by the importer who waives his right to the drawback on the
imported goods sold to the exporter. This form must be attached to the claim.

d. A claim, in Form No. 44 (Form 44-A and Form 44-B), for drawback shall be
submitted to proper officer in six (6) copies within two (2) year from the date of
payment of the duty on the imported goods. Duty paid on imported goods more
that two years from the date will not be eligible for drawback.
 CHAPTER EIGHTEEN
EXCISE TAX
OBJECTIVES

The central aid of this lecture is that at the end of the session, the Accountancy students who
are reading the subject for examinations will able to:

a. explain what is meant by Excise as part of the indirect taxes and how it is
accounted for in Malawi.
b. Know legal provisions as read in the Customs and Excise Act and Regulations
c. List goods liable for Excise in Malawi

d. explain registration procedures and conditions applying to all Excise Traders and
their obligations.

e. Explain controls by the Department over Excise traders.

DEFINITION
An Excise is a tax levies on certain unspecified locally manufactured and imported goods in
Malawi. The excise Tariff is contained in the second schedule of the Customs and Excise
(Tariffs) Order, 1989.

LEGAL PROVISIONS
The laws relating to the administration, charging and collection of Excise duty are found in
sections 63-82 (d), 83 and the rates applicable are in the second schedule of the Customs and
Excise (Tariffs) Order 1989, as read in Regulations 93-112 of the Customs and Excise Act and
Regulations Cap.42.01 of the Laws of Malawi.

GOODS LIABLE TO EXCISE

Excise as an indirect tax is collected on the following locally approved and manufactured
goods.
a. Cigarettes
b. Snuff (pipe tobacco, cigarette tobacco)

c. 1. Beer produced by factory methods e.g. Carlsberg Special Brew

ii. Opaque beer- Chibuku
xi. Ethanol
xii. Potable spirits – Malawi Gin
xiii. Manufactured tobacco
xiv. Vessels for pleasure 30%
xv. Motor cars 1-%

GENERAL REQUIREMENTS BEFORE MANUFACTURE

xvi. Licence to manufacture

a. No goods liable to excise duty may be manufactured in Malawi except under
licence issued by the Controller of Customs and Excise

Exceptions
- Excisable goods manufactured by private person for his own use.
i. Goods manufactured for experimental purposes.

Application for Licence

1. The excise manufacturer is required to apply to the controller in writing stating.

a. Full name and trading style of the applicant:

b. The goods to be manufactured;
c. The anticipated annual output;
d. The size and location of premises;

2. On receipt of the application the Local Officer will arrange for inspection of the
premises regarding its suitability for manufacturer of excisable goods.

xvii. Entry of Premises

xviii. The applicant is required by law to complete an Entry of Premises in Triplicate of

Official form (Ex 37) accompanied by the plans of the premises and plant.

ii. The entry of Premises must describe accurately:

1. All rooms, stores for the storage of raw materials and finished goods.

2. All plant, equipment and apparatus used in the manufacture

3. All marks and numbers of rooms and plant.

ii. Manufactures and Storage of goods other than as stated on

the approved Entry of Premises is illegal.

iii.
The object of an Entry of Premises is to have an official
cognisance of places, plant and apparatus which the
applicant proposes to use in the manufacture of excisable goods.

c. BOND
4. Before an Excise Licence can be issued the applicant must enter into blood with the
Controller for the observance of the law relating to Excise manufacture

A bond is issued in Form 123 and is an agreement between a

manufacturer and the Controller for the full observance of the law relating to the goods under
bond.

The surety must be a bank or insurance company established Malawi. The penalty of the
bond must not be less than the anticipated duty arising from any consecutive two
months.

a. LICENCE FEES

The applicant is required to pay an Excise Licence fee prior to the issue of the first
licence which renewable every year on or before 31st December of the first licence which
renewable every year on or before 31st December each year.

b. MAINTENANCE OF RECORDS

The Excise Trader is required by law to keep;

xix. Stock records of receipts or disposal of raw materials

xx. Stock records or receipt or disposal of finished goods sufficient to satisfy the
officer that all excisable goods manufactured are duly accounted for.

GENERAL CONDITIONS APPLYING TO ALL EXCISE TRADERS

a. No other business should be conducted on the entered premises except with the
permission of the Controller
b. No other excisable goods may be kept on the entered premises except those manufactured
on the premises
c. All rooms, stores, plants equipment and warehouses must be given distinguishing marks
and numbers
d. The licensee must provide office, sanitary or living accommodation for an officer or
facilities for proper exercise of the Officers functions as the Controller may require.
e. The name of the licensee must be exhibited on a conspicuous place outside the entered
premises.

DUTY POINT

i. The point at which duty becomes payable on excisable goods is

normally upon delivery, from the manufacturing premises.

ii. In case of goods consumed on the entered premises is upon removal from the bonded
Excise Warehouse.

iii. In case of goods consumed on the entered premises is upon the time of such use.

RATE OF DUTY

I. The rate of duty on excisable goods in normally that in force when they pass the
duty point.

xxi. In case of a change in any rate of duty the manufacturer is required to distinguish
 between goods that passed the duty point before and after the effective date.

xxii. Where the goods were delivered duty free because they were for export of for
removal into bond or rebate store but for one reason or another were not so
exported or received in Bonded Warehouse or used for rebate, the rate of duty is
that in force.

PAYMENT OF EXCISE DUTY

a. Excise duty is payable immediately after excisable goods have been delivered for
consumption in Malawi, normally on delivery from excise warehouse or used for rebate, the
rate of duty is that in force.

b. Licensees in Malawi are however, allowed to total their deliveries at the end of the
month and to pay the duty by the 20th day of the following month- (deferred payment)

EXCISE RETURNS

xxiii. Each registered licensee is required by law to submit monthly of 20th of every
month an Excise Return showing disposals of all excisable goods during the
precious month from the entered premises.

xxiv. The Excise return must show disposal details of all excisable goods

1. sales to diplomats and exempted organisations:

2. exports;
3. removed to Industrial
4. removed to industrial rebate
5. donated or given away as gifts;
6. appropriations to the licensee himself
7. sold on duty paid basis

LOSSES OR DESTRUCTION OF EXCISSABLE GOODS

The goods are accidentally lost or destroyed on the entered premises prior to being delivered
for consumption; the Controller may allow refund of Excise duty.

If the goods are found to be defective after delivery and are returned to the entered premises,
the Controller may allow them to be destroyed or to be further manufactured to remedy the
defect and refund the amount of Excise duty paid.

Refunds are affected by allowing the licensee to deduct the appropriate amount of duty
from the payment for the month in which the destruction or further manufacture took place.

FUNCTIONS OF THE CUSTOMS OFFICERS

The functions of the Customs Officers embrace the following:

i. To receive and process monthly returns and Excise remittances.

ii. To send reminders to Excise traders in arrears of payments

iii. To visit Excise traders and verify the correctness of excise returns.

iv. To advise the Controller of any irregularities or omissions by excise.

Traders.

CHAPTER NINETEEN

VALUE ADDED TAX

BACKGROUND OF VAT
VAT was introduced into the Malawi tax system in 1989 under the Customs & Excise Tariff
Order. VAT then known as surtax was charged on all taxable manufactured goods which
were liable to this tax. Manufacturers and associated persons to manufacturers supplying
taxable goods were required to register and operate Surtax credit systems upon reaching set
sales limits.

In 2001, Parliament passed an Act known as Surtax Act 2001 which among other things, had
the following effects on Surtax:
 a. The Act increased the application of Surtax to a wide range of commodities covering
both manufactured as well as other goods and services. As such, service providers,
retailers e.g. Grocery and shop owners, and manufacturers were all liable to register
for Surtax on supplies of taxable goods and services.
b. This Act also introduced heavy penalties as part of campaign to enforce compliance to
the legislation.
In 2005, Surtax was renamed to Value Added Tax (VAT) following the passing of VAT Act
2005. This Act consolidated provisions of the previous legislations, i.e. the Surtax Act 2001
and others.

WHAT IS VAT CREDIT SYSTEM?

VAT Credit System is the mechanism under which registered trader deducts VAT paid in his
raw materials from the VAT charged on his customers.

LEGISLATION
The laws relating to the administration, charging and collection of VAT are found in the
Surtax Act 2001 and also in VAT Act 2005.

HOW THE SYSTEM WORKS

When a registered person imports or acquires materials locally for his business he will be
charged VAT. This VAT is called “INPUT VAT”
When the registered person manufactures taxable goods from those materials and sells them to
his customers he will charge VAT. This VAT is called “OUTPUT VAT”. This means that the
registered person will have two taxes. The input VAT and the Output VAT. At the end of each
month or tax period the registered person will add up all his Output VAT. He will then
deduct the total Input VAT from the total Output VAT, the balance is what the registered
person will pay to the MRA..
However, if the Output VAT is less that the Input VAT,, the difference , known as
“Excess VAT” will be refunded to the registered person, if it occurs in three consecutive
months.
Sometimes it may happen that the registered person neither purchases raw materials nor sells
goods in a particular month or where the Import VAT balances the Output VAT, the registered
person will be in a Nil Return situation.
As may be seen, a registered person may fall in one of the three situations.

a. Input VAT being greater than Output VAT – “EXCESS VAT”.

b. Input VAT balances with Output VAT or where the registered person neither
purchases nor supplies taxable goods – Nil.

c. Output VAT being greater than Input VAT – balance to pay to the MRA..

LIABILITY FOR REGISTRATION FOR VAT

The VAT law requires that “Any person manufacturing taxable goods or providing taxable
services shall apply to the Controller for registration for VAT is prescribed for ST1”. A
person is liable for registration as a taxable person if he or she is a person who makes taxable
supply of goods or services and, whose business turnover is, or exceeds, K6,000,000 per
annum. Registration must be made on form ST1 within 30 days from the date he/she qualified
as a taxable person. This is called COMPULSORY REGISTRATION.
However, any manufacturer whose sales turnover does not exceed the prescribed limit may
apply for registration if he can satisfy the Controller that his business may suffer if he was not
registered for VAT. This is called: “VOLUNTATY REGISTRATION”.

OBLIGATIONS OF REGISTERED PERSON

a. They must issue a VAT Invoice for each and every sale they
make of taxable goods.
The invoice must be issued not later than 7 days after the delivery of goods. The
invoice must prominently be marked “VAT Invoice” and must contain:
.
a. VAT registration Number – Taxpayer’s Identification Number (TPIN)
b. Serial number,
c. Date of issue;
d. Name and address of purchaser
e. Date of supply of goods (if different from the date of issue)
f. Description and quantity of goods;
g. Total value of goods
h. Rate of VAT
i. Total VAT payable.
j. Registered person’s name and address.

The importance of a “VAT Invoice” in the VAT Credit System is that it will enable a registered
person deduct his input VAT. This invoice is only issued by a registered person and when he
supplies taxable goods.

Any person who issues an invoice which falsely purports VAT invoice is committing an offence
and is required by law to pay any amount of VAT shown on the invoice to the Controller
within 7 days of issuing it and may be prosecuted.

b. The registered person must keep a VAT Account

In this account the registered person will enter all his Input VAT and Output VAT. At the
end of each month or tax period the VAT account must be balanced.

c. Submission of monthly Return

Every registered person is required to render to the Controller a monthly return on form
ST3. This return for any month is due on or before the 25th day of the month following the
taxable period on which it relates. This includes NIL Return payment due.

d. The registered person must keep Records and Accounts

Every registered person must keep records and to the satisfaction of the Controller. The
records must follow the normal business practice but must be sufficient to show how monthly
returns have been compiled. Such records shall be made available to the officer on demand of
verification:
i. Sales Records
Sales invoices must be posted into Sales Day Book or similar records. The
amounts of VAT shown on the invoice must be entered into a VAT account.
These invoices must be filed in numerical order.
 ii. Purchases Records

All purchases invoices must be recorded in the Purchases Day Book or similar
records and any VAT shown on the invoices must be posted into the VAT
Account.
The invoices must be filled in chronological order.

iii. Bill of Entry

Bills of Entry should be filed in chronological order after the invoices
relating to these have been posted to the books of accounts e.g. purchases or
sales (Exports).

iv. Other Records

A registered person must keep a full and true written record in the English
language of every transaction he makes.

Retention of Records
All VAT records and documents must be kept for at least 7 years from the date
of the last transactions to which they related.

TAXABLE SUPPLIES

The following activities are included within the definition of taxable supply;
a. The processing of data or supply of information or similar service,
b. The supply of goods to staff
c. The acceptance of a wage or stake in form of betting or gaming, including
lotteries and gaming machines,
d. The making of gifts or loans of goods,
e. The leasing or letting of goods on hire,
f. The appropriation of goods for personal use or consumption by the taxable
person or by any other person.

TIME OF SUPPLY

VAT shall become due and payable at the time when:

i. the goods are supplied to the purchaser, or
ii.an invoice is issued in respect of the supply of the goods
or
iii. Payment is received for all or part of the supply,
whichever is the earliest.

VAT AT IMPORTATION

The time when VAT on the importation of taxable goods into Malawi becomes due and
payable is when goods are entered for consumption.

VALUE FOR VAT PURPOSES

a. Imported Goods
 The value for VAT purposes shall be in the case of imported goods the sum of:
i. the value determined for Customs purposes under Section of the
Customs Act:
ii.the Customs duty, if any, paid or payable at the time or importation,
and
iii. any other duty or levy payable at the time of importation

b. Taxable goods manufactured in Malawi

i. the actual selling price at which the goods are supplied by a taxable person to
any other independent person of himself: or

ii. where there is association between the seller and the buyer the normal selling
price at which the goods would have been supplied in the ordinary course of
business;

iii. the controller may determine the value when the selling price does not
represent the true value.

ZERO RATED GOODS

Goods whose rate of VAT is “0” are taxable and person supplying such goods may be
registered for the VAT paid on their inputs. ALL GOODS WHICH ARE EXPORTED ARE
“0” RATED.
List of zero rated goods and services include the following;
a. Export of taxable goods and services
b. Goods shipped as stores on aircraft and vessels leaving the territory of Malawi
c. Pharmaceutical products and medical services
d. Fertilizers
e. Buses with seating capacity of forty-five or more persons including the driver
f. Building materials used for construction of factories and adjoining warehouses
g. Goods for use in tourism industry such as building materials, industrial catering
equipment, motor boats, scuba diving, jet skis, knives, forks, spoons and similar
articles for cutlery.

EXEMPT GOODS

Persons who wholly manufacture exempt goods cannot register for VAT. If a person
manufactures both taxable goods and exempt goods he is called a partially exempt person.
List of exempt goods and services include the following;
a. Live animals
b. Animal products such as meat, edible meat offals, fish, natural honey, eggs
c. Vegetable produce in raw state
d. Water
e. Petroleum products
f. Printed books and newspapers
g. Mosquito and sand-fly nets
h. Ambulances, tractors and other goods carrying vehicles
i. Medical equipment
j. Educational services
 k. Banking and insurance services
l. Postal services
m. Funeral services such as provision of vehicles, coffins, wreaths and tombstones, and
n. Transport of exports.
o. Rail locomotives
p. Air crafts
q. Aircrafts engines and related spare parts.
r. Importation of sporting equipments imported by Malawi Nation Council of sports
s. News papers and internet services
t. Bread
u. Machinery
v. Financial services

DEDUCTIBLE INPUT VAT

In addition to deducting VAT paid on raw materials the registered person is also entitled to
deduct VAT paid on capital goods e.g.

ii. machinery and spares

iii. furniture
iv. stationery
and goods carrying vehicles and other goods related to the manufacture of taxable goods.
However, there is a limitation to the provision in that some goods although used in the
manufacture of taxable goods are not allowed as deductible inputs . These are

v. Passenger carrying vehicles

vi. Fuel and
vii. Entertainment expenses

PARTIAL EXEMPTION

If you cannot be treated as fully taxable you cannot take credit for all your input VAT. You
must normally work out how much you can reclaim using the standard method.

STANDARD METHOD-STEPS INVOLVED

1. Identify all the supplies and imports you received and work out the extent to
which they are directly related to your taxable supplies. This amount is
allowable input tax.

2. Identify all the supplies which are directly attributable to the exempt supplies.
This amount is disallowable or exempt input tax.

3. Identify all the supplies which cannot be directly attributed to either taxable
or exempt supplies. This amount is subject to the adjustment below.
 For the purpose of determining the deductible input tax , the following formula shall apply:
AxB
C

Where A is the total amount of input tax identified at step 3 above for the period: and:

B is the total amount of taxable supplies made by the taxable person during the period: and

C is the total amount of all supplies made by the taxable person during the period.
NOTE

a. You cannot reclaim input VAT when after applying the above formula, the fraction is less
than 5% of the taxable supplies to the total supplies.

b. You can however, reclaim all input tax when after applying the above formula, the fraction
is more than 95% of the taxable supplies to the total supplies.

You should disregard input tax paid on the following:

i. Motor vehicle and motor vehicle spare parts unless you are in the business of
hiring, selling and dealing in motor vehicles and motor vehicle spare parts.

ii. Motor vehicle and motor vehicle spare pats unless they are wholly, exclusively
and necessarily for the business.

iii. Entertainment, including restaurant, meals and hotel expenses, unless you are in
the business of providing entertainment.

RELIEF SUPPLIES

Taxable supplies may be delivered without payment of VAT to certain persons or organisations
that are exempted by law from the payment of VAT.

Such supplies are known as relief supplies and they include the following:
a. Goods and services for official use of the President and the Vice President of the
Republic of Malawi,
b. Goods for the exclusive use of the Government of any other country, at foreign
embassies, missions and Consulates in Malawi,
c. Goods for use of diplomatic staff in terms of the Immunities and Privileges Act,
d. Goods for use of International agencies or Technical Assistance Schemes where the
terms of the agreement made with the Malawi Government includes exemption from
taxes, and
e. Specified goods for use of Government including donations of whatever description.

VAT SPECIAL SCHEMES

There are a number of special schemes operated to deal with different categories of business
and transactions. Some of the special schemes include the following;
1) VAT ON PROPERTY TRANSACTIONS

This scheme has the following features;

There is no VAT on rent or sale of residential properties.
Construction as a service is liable to VAT and the contractor must therefore charge
VAT on cost of constructing property.
Rent and sale of commercial property is subject to VAT at the standard rate.
Materials used for construction are also subject to VAT at the standard rate
2) MARGIN SCHEME FOR SECOND HAND CAR DEALERS

Under this scheme, a seller of a second hand vehicle will be required to calculate VAT
on the difference between the buying price and the selling price of the vehicle.
This is contrary to normal required practice where VAT is charged on the selling price
of a product.
This scheme is of importance to second hand vehicle dealers who purchase vehicles
from individuals and other sources who are not VAT registered and therefore, under
normal circumstances, the taxpayer would not be able to recover any input VAT on
such vehicle purchases.

3) VAT RETAIL SCHEMES

A retailer is any business which makes supplies of goods and services mainly directly to
private consumers.
Under the Vat Retail scheme, a trader need not issue a VAT invoice for each and every
sale which the business makes, as normally required.
The trader will be required to keep the following records:
a. A copy of Daily Gross Takings(DGTs)
b. A copy of receipt given to customers
c. A copy of full tax invoice where a customer requests one
d. All purchases invoices, and
e. Cash register, cashbook or other suitable records.
Daily Gross Takings should include the following;
a. Cash received
b. Cheques received
c. Credit card sales
d. Full value of credit sales
e. Value of goods appropriated or donated

TYPES OF RETAIL SCHEMES

a. BASIC SCHEME
This is a scheme applicable to retailers supplying taxable goods only. VAT will
be calculated by taking the VAT rate and applying it on the total Daily Gross
Takings for the tax period.
b. POINT OF SALE SCHEME
This is a scheme for retailers supplying both taxable and non-taxable goods.
Cash register will be used to separate taxable and non-taxable supplies and VAT
will be applied on taxable supplies only.
c. APPORTIONMENT SCHEME
This scheme is used where the retailer cannot at the point of sale distinguish
between taxable and non-taxable goods. The scheme is based on calculating or
estimating the proportion of sales which are taxable. The method used in
estimating taxable supplies must firstly be approved by the Commissioner
General of Taxes.
VISITS BY CUSTOMS OFFICERS TO REGISTERED PERSONS’ BUSINESS
PREMISES

Purpose of Visits
i. to verify returns on hand and confirm that correct VAT has
been paid or claimed.
ii. to carry out checks and observations to detect error or fraud:
iii. to examine the accounting system, production and sales methods of the
registered person;
iv. to ensure that registered persons understand liability and basis of value and are
applying them correctly.
Types of Visits
a. Routing visits: these are visits conducted on quarterly basis
b. Special Purpose visits: Visits carried out for particular reasons e.g.
where fraud is suspected, or to check correctness of a final return in case of
deregistration, etc.

c.Frequency of Visits: VAT control visits are normally made once each quarter
(three months) to each registered person. This may be varied at the discretion
of the Principal Assistant Controller, VAT Division.
REFUNDS OF VAT

If in any month a registered person’s input VAT exceeds his output VAT, the excess is carried
forward to the next month. If the excess continues for three months the Controller may refund
the excess on application by the registered person on Form ST 11 such refunds may be made
after verification by an officer.

VAT PENALTIES

Section 34(8) of Surtax Act 2001 imposes a heavy penalty for failure to submit VAT returns.
The penalty is K20, 000.00 and a further penalty of K1, 000.00 for each day that the return is
not submitted.

In addition to this, interest will be charged at the ruling bank rate plus a quarter of the rate
for the period (days or months) VAT remains unpaid if a person fails to pay VAT on the
due date.
OTHER OFFENCES AND PENALTIES

Section 45(1) states that a person who fails:

a. to apply for registration as required under section 11,

b. or notify the Commissioner General of change in his business as required under section
13,
c. to apply for cancellation of registration as required under section 14,
commits an offence.

Subsection (2), states that where the failure under subsection (1)
a. is deliberate or reckless, the person shall be liable on conviction to a fine of K500,000
 and imprisonment for five years: and
b. for any other reason, the person shall be liable to a fine of K200,000 and to
imprisonment for 12 months

Section 46 states that a person who fails to issue VAT tax invoice as required under section21
for goods supplied or services rendered commits an offence and is liable on conviction to a
fine of ten times the value of VAT involved in the transaction.

Section 47(1) states that a person who in any matter relating to VAT:

a. makes a statement to an officer of the Authority which is false or misleading in any

material particular, or

b. omits from statement made to the officer of the Authority any matter or thing without
which the statement is misleading in any material particular, commits an offence.

Subsection (2) of the same section 47 states that where a statement or omission under
subsection (1):

a. was made knowingly or recklessly, the person shall be liable on conviction to a fine of
K500,000 and to imprisonment for five years: and

b. in any other case, the person shall be liable on conviction to a fine of K200,000 and to
imprisonment for 12 months.

Section 50 (1) states that a person who fails to maintain proper records as required under the
Surtax Act 2001 commits an offence and is liable on conviction to:

a. where the failure was deliberate or reckless, a fine of K500,000 and to imprisonment for 5
years, and

b. in any other case, to fine of K200,000 and to imprisonment for 12 months.

ADVANTAGES AND DISADVANTAGES OF VAT CREDIT METHOD

ADVANTAGES

Advance payment of VAT enables Government to receive revenue earlier than under
ring/suspension system previously used.

VAT invoice or Import Bill of Entry evidence required for deductible input tax has created an
“Audit trail” within the system. It is self-policing.

Fractional payment is less erroneous or less burdensome than under ring/suspension system
(ring/free system). Less prone to fraud by payment through stages.

Associated business will be registered and transfer pricing is countervailed.

Tax point of manufacturing retailers is at retail stage.

DISADVANTAGES
i. False invoicing
ii. Inflation or deflating of credit and debit notes
iii. Value manipulation for appropriation, gifts, and goods on hire or loan.

EXAM STYLE QUESTIONS

1. (a) Under what circumstances is a person registrable as taxable for

purposes of the Value Added Tax (VAT) Act? 2½ Marks

(b) State four reasons the Commissioner General may advance to decline a
person’s registration under the voluntary registration provisions of the
Value Added Tax (VAT) Act. 2½ Marks

(c) The following transactions were recorded in the books of a VAT

registered taxpayer for the month of September 2007.

(1) Business related expenditure, inclusive of VAT at 16.5%

K
Security 209,700
Legal 104,850
Stationery 52,425
Office furniture 256,300
Office rentals 69,900
Electricity 17,475

(2) Business related expenditure exclusive of VAT

K
Salaries 450,000
Water 12,000
Postal services 2,200

In addition to the above transactions, the value of sales net of VAT were
K2,600,000 and K900,000 in respect of local sales and exports respectively.

Required:

(i) Calculate the amount of VAT paid or payable on each item stated
above. 9 Marks

(ii) Calculate the amount of VAT chargeable of total sales, local and export,
indicating gross sales values. 2 Marks

(iii) Calculate the amount of net VAT payable to the Malawi Revenue
Authority after taking into account the input tax paid on each of the
expenditure items given above. 1½ Marks
 (d) What conditions must be fulfilled by a taxable person, who is not a motor
dealer, to enable such a taxable person claim input tax deduction in respect of
taxable supply of motor vehicle or motor vehicle spare parts?
2½ Marks

(PAEC December 2008)

2 (a) A person making taxable supplies and registered for value added tax
(VAT) is supposed to issue a tax invoice on making such supplies.

Required:
List the information a tax invoice must contain. (6 marks)

(b) Explain the circumstances under which input tax may not be
available to be claimed against output tax for a tax period. (5 marks)

(c) John Makande, a retailer who trades as Chichiri Enterprises, is registered

for VAT. He makes both taxable and exempt supplies. The
Commissioner General gave approval for Makande to use a special
retailer scheme for the purposes of VAT.

In the month of March 2010, he entered into the following transactions:

K
Total sales made 5,550,000
VAT exempt sales included in total sales 2,100,000
Total purchases for resale bought in the month 3,500,000

Value of taxable goods for resale bought in the month included in total
purchases K950, 500

Required:
Calculate the output tax to be included in the VAT return by John
Makande for the month of March 2010.
(4 marks)

(ACCA F6 June 2010)

APPENDICES
APPENDIX A

GENERAL EXEMPTIONS - FIRST SCHEDULE

The following incomes are exempt from income tax:-

a. The revenues of local authorities:-

b. The receipts and accruals of-

i. Land and agricultural banks specifically established by any law of Malawi to

foster or control primary production, manufacture, or marketing of any
commodity or stabilizing of any price of any commodity;

ii. A registered trade union;

iii. Clubs societies and association formed or operated solely or principally for
social welfare, civic improvement or other similar purposes, if the receipts or
accruals are not divided amongst the members;

iv. v. Statutory corporations, bodies and associations as may be specified by

the Minister (Statutory corporations that are liable to tax are those in the
Commercial Category e.g. ESCOM, BWB, ADMARC, LWB)

c. Any amount received as a war disability pension paid out of public funds;

d. Interest received by or accrued to or in favour of any person from any stock or bonds
issued by the Government which the Minister has directed shall be exempt from tax.

e. Interest up to K10000 received by or accrued to or in favour of an individual.

i. on any sums deposited with an institution registered under the Building

Societies Act or the Banking Act;

ii. From stock, bonds or promissory notes raised by or on behalf of the

GOVERNMENT.
f. Capital gains on shares traded on the stock exchanged if the shares have been held by
the taxpayer for at least one year;

g. Capital gains realised by an individual on the disposal of personal and domestic assets
not used in connection with any trade;

h. The gratuity, pension and other benefits granted by the Government to a former
president or a former vice president;

i. The salary and emoluments of the president and vice president received from the
Government in respect of their offices as president and vice president respectively; the
former and vice president’s gratuities, pensions and other benefits.

j. Any scholarship, bursary or similar educational endowment paid to a person receiving

full time instruction at a university, college, school or other educational establishment
approved by the Minister;

k. Amount up to K50, 000 of any amount paid by an employer to an employee who has
been declared redundant, not being notice pay or commutation of leave.

l. Allowances given to members of national assembly.

 APPENDIX B
RATES OF INCOME TAX - ELEVENTH SCHEDULE

PART I - TABLE OF RATES OF INCOME TAX ON TAXABLE INCOME

INDIVIDUALS
TAXABLE INCOME RATE

First K 180,000 0%
Next K 60,000
15 %
Excess over K240, 000 30 %

SIMPLIFIED TABLE
Taxable Rate
Tax
Cumulative

Cumulative
income

Income
tax

First K 180,000
0%
0
First K
180,000
0
Next K 60,000
15%
9,000
Next K
240,000
9,000
Excess over K240, 000 30%

RATES OF INCOME TAX FOR CORPORATE BODIES

.
Companies incorporated in Malawi 30%

Except for:
i. Companies in export processing zones which are liable to tax at 0%.

ii. Companies in priority industries which are liable to tax at either:

- 0% for a period not exceeding 10 years; or
- 15%
iii Cell phone operators 33%
Companies not incorporated in Malawi an additional 5% in each case

LIFE ASSURANCE BUSINESS 21%

FRINGE BENEFITS 30%

RELIGIOUS CHARITABLE ORGANISATIONS INCLUDING TRUSTS 25%

PENSION FUNDS (INVESTMENT INCOME) 15%

APPENDIX C

COUNTRIES WITH WHICH MALAWI HAS ENTERED

INTO TAX AGREEMENTS

United Kingdom

Switzerland

France

Netherlands

South Africa

Norway

Sweden

Denmark

USA

Kenya

APPENDIX D

ALLOWANCES
5% - industrial buildings
railway lines
farm improvements
10% - general plant and equipment
trailers
farm fencing

15% - mobile cranes

17.5% - general plant and equipment on double shift

20% - Motor cycles

cars
pickups
tractors
cement mixers

25% - light lorries (for heavy work)

tippers
tracked tractors
tree-dozers
scrapers
bulldozers
general plant and equipment working 24 hours a day

33.3% - tractors (for heavy work)

transport services

40% Computers

APPENDIX E

LIST OF APPROVED CHARITABLE

ORGANISATIONS
* The Malawi Red Cross
* The President’s Appeal for the Rehabilitation of the Handicapped in Malawi
* Save the Children Fund of Malawi
* Kamuzu Foundation Fund
* British Leprosy Relief Association for the Leprosy Control Project in Malawi.
* Royal Commonwealth Society for the blind.
* Christian Services Committee of the Churches in Malawi
* Malawi Council for the Handicapped
* Commonwealth Ex-Service league of Malawi (cellom)
* The Private Hospitals Association of Malawi
* Malawi Against Polio
* Antiquities and Museums Building Fund
* National Commission for Children (Malawi) Fund
* Designated Schools Board
* Cheshire Homes
* National Disaster Relief fund
* Habitat for Humanity.
* Wildlife Society of Malawi
* Chatinkha Maternal Care Support
* Justerini & Brooks(J&B) Circle of Malawi
* Mzuzu University Trust
* World Vision Malawi
* President Bakili Muluzi’s international Appeal Fund for Clean Water
* Bakili Muluzi Foundation for the poor

APPENDIX F

TAXATION AMENDMENT ACT 1998 - WITHHOLDING TAX

PROVISIONS

WITHHOLDING TAX - RATE OF DEDUCTION

Nature of payment

Rates of
Withholding
Notes Tax on gross
payment

a. Royalties - 20%
b. Rents 1 15%

c. Payment of over K60,000 for any supplies 10%

to traders and institutions under tender or
any similar arrangement-

Foodstuffs
-
7%

d. Fees 2 10%

e. Commission 20%

f. Payment for carriage and haulage - 10%

g. Payment for tobacco and other farm products 3%

h. Payment to contractors in building and construction industries 4%

i. Payment for public entertainment 3 20%

j. Payment of over K15, 000 for casual labour

or services - 20%

k. Bank interest of over K10, 000 20%

NOTES:
1. Includes rent for moveable and immoveable property, whether paid under a lease or
otherwise, but excludes rent payable by an individual whose source of income is only
from employment and the rent is payable in respect of property used as a dwelling
house and at a rate not exceeding K6,000 per annum.

2. Excludes fees and commission on which PAYE is being operated

includes technical fees and management fees to the extent they do not relate to
reimbursement of expenses - who will collect the tax.

3. Includes payment to musicians, radio and television artists, athletes and theatres, but
excludes payments to radio and television artists which are subject to PAYE.

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