Malawi VAT, GST, and Sales Tax Guide

Malawi

Blantyre GMT +2

EY

Apex House Kidney Crescent Blantyre Malawi

Indirect tax contacts

Chiwemi Chihana +265 1 876 476 chiwemi.chihana@mw.ey.com

Wame Pearson +265 888 324525 wamei.pearson@mw.ey.com

A. At a glance

Name of the tax Value-added tax (VAT)

Local name Value-added tax (VAT)

Date introduced 12 August 2005

Trading bloc membership African Free Trade Zone (AFTZ)

Common Market for Eastern and Southern Africa (COMESA)

Southern Africa Development Community (SADC)

Administered by Malawi Revenue Authority (www.mra.mw)

VAT rates

Standard 16.5%

Other Zero rated (0%) and exempt

VAT number format 2 0 0 0 0 0 0 0

VAT return periods Monthly Thresholds

Registration MWK20 million per annum

Recovery of VAT by non-established businesses No

B. Scope of the tax

VAT is charged on the following:

• Every supply of goods and services made in Malawi

• Every importation of goods

• The supply of any imported service, other than exempt goods and services

A taxable supply is a supply of goods or services made by a taxable person for consideration in the course of or as a part of his or her business activities and includes:

• The processing of data or supply of information or similar service

• The supply of staff

• The making of gifts or loans of goods

• The appropriation of goods for personal use or consumption by the taxable person or by any other person

• The sale, transfer, assignment or licensing of patents, copyrights, trademarks, computer soft ware and other proprietary information

• Exports

A supply is made as part of the business activities of a person if a supply is made by them as part of or incidental to any economic activity they conduct. Where a person produces goods by processing or treating the goods of another person, the supply of goods shall be regarded as supply of goods. The supply of any form of power, heat, refrigeration or ventilation shall be regarded as supply of goods.

A supply is made for consideration, if the supplier, directly or indirectly, receives payment wholly or partly in money or in kind from the person supplied or any other person.

C. Who is liable

VAT is due on the following:

• In the case of a taxable supply, by the taxable person making the supply

• In the case of imported goods, by the importer

• In the case of imported services, by the receiver of the services

Exemption from registration. The VAT law in Malawi does not contain any provision for exemp tion from registration.

Voluntary registration and small businesses. A person may voluntarily register for VAT if they qualify as a taxable person or has grounds to believe that they will qualify as a taxable person by applying voluntarily to the Commissioner General within 30 days of qualifying or having grounds to believe that they will qualify as a taxable person.

Group registration. Two or more corporate bodies may apply to be registered as members of a VAT group if each body is a registered as a corporate body in Malawi and has an established place of business in Malawi. One of the corporate bodies should have control of the other or other members of the group or one corporate body controls all the members of the group.

For purposes of payment of VAT, the group is registered as one designated taxable person.

There is no minimum time period required for the duration of a VAT group.

All members of a VAT group in Malawi are jointly and severally liable for VAT debts and penal ties.

Non-established businesses. The Commissioner General may refuse to register the applicant if they are satisfied that the taxable person has no fixed place of abode or business. However, a non-established business may register for VAT in Malawi, provided it exceeds the registration threshold (MWK10 million per annum) and the Commissioner General is satisfied that:

• The applicant will keep proper accounting records relating to any business activity carried on by that person

• The applicant will submit regular and reliable returns as required by under the VAT Act

• They are a fit and proper person to be registered

Tax representatives. A tax representative (normally referred to as the public officer) may be appointed by the taxable person if the taxable person operates offshore and has no physical pres ence nor has employees in Malawi. The taxable person is required to notify the tax authority of the appointed tax representative who fulfills the relevant tax obligations on behalf of the taxable person.

Reverse charge. The reverse-charge mechanism is applicable in Malawi on importation of services by the recipient of the services.

Domestic reverse charge. There are no domestic reverse charges in Malawi.

Digital economy. There are no provisions in the VAT Act on digital economy. As such, normal VAT rules apply. Nonresident persons supplying taxable goods and services are not required to regis ter for VAT. The VAT is accounted for by the customer via the reverse-charge mechanism.

There are no other specific e-commerce rules for imported goods in Malawi.

Online marketplaces and platforms. No special rules exist for online marketplaces and platforms in Malawi.

Registration procedures. The registration application is done online via the MRA online portal. The application is done by filing a prescribed form VAT Form 1 online and attaching all the necessary documents. This includes the VAT Form 1 with proof of annual turnover for the period or anticipated annual turnover, copy of the Certificate of Registration or incorporation, copies of ID for the directors or individuals for incorporated applicants and proof of physical address of the business.

After submission of the application form and upon successful consideration of the application by the Malawi Revenue Authority, the applicant is issued a registration certificate, which includes the trading name, taxable person identification number, place of business and the effective date of registration. The certificate is displayed at the principal place of business of the taxable per son.

Deregistration. Upon cessation of carrying on business, the taxable person shall notify the Commissioner General in writing within 30 days from ceasing operations for cancellation of registration.

Changes to VAT registration details. Every taxable person is required to notify the Commissioner General in writing if the business ceases to operate or is sold or there is a change in the location of business; or if there is material change in the ownership of the business; or of any change in the name or address of taxable person, material nature in the business activities or in the nature of taxable supplies being made. Such changes must be notified within 30 days from the change taking place.

D. Rates

The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT, including the zero rate.

The VAT rates are:

• Standard rate: 16.5%

• Zero-rate: 0%

The standard rate of VAT applies to all supplies of goods or services unless a specific measure provides for a reduced rate, the zero rate or an exemption.

Examples of goods and services taxable at 0%

• Exports of goods and services

• Laundry soap

• Exercise books

• Goods shipped as stores on aircraft and vessels leaving the territory of Malawi

• Fertilizers

• Sheath contraceptives (condoms)

• Salt

• Motor vehicles for transport of goods

• Pharmaceutical products

• Buses

• Military equipment

• Building materials for factories and warehouses

• Goods for use in tourism industry

• Miscellaneous chemical products

• Cycle ambulances

• Motorcycle ambulances

• Syringes with or without needles

• Mosquito and sand fly nets

• Poultry or chicken feed

• Printed books

• Gas cylinders

• Wood cook stoves

• Solar products

• Energy efficient bulbs

The term “exempt” refers to supplies of goods and services that are not liable to VAT and that do not qualify for input tax deduction.

Examples of exempt supplies of goods and services

• Banking and life assurance services

• Live animals

• Postal services

• Transport of exports

• Educational services

• Medical equipment

• Animal products

• Vegetable products in raw state

• Printed matter

• Petroleum products

• Vehicles other than railway and train way rolling-stock

• Industrial machinery and construction machinery

• Coin

• Banking and life insurance services

• Funeral service

• Medical services

• Rentals and sale of properties used for residential purposes

• Betting and gaming including lotteries

• Rail locomotives and parts

• Medical surgical or laboratory sterilizers

Option to tax for exempt supplies. Exemption of VAT is applicable where certain projects are agreed with the Government of Malawi by privileged organizations.

E. Time of supply

The general time of supply rule in Malawi is considered the earliest of the following:

• The goods are removed from the premises or from other premises of the taxable person where the goods are under the control of the taxable person

• The goods are made available to the person to whom they are supplied

• The services are supplied or rendered

• Payment is received for all or part of the supply

• A tax invoice is issued

Deposits and prepayments. Any deposit or prepayment, whether refundable or not, given in respect of the supply of goods or services shall not be regarded as a payment for the supply of

goods or services, or a taxable transaction unless the supplier applies the deposit as payment or part payment for the supply.

Where the deposit or prepayment is paid in the expectation that it will form part of the total pay ment for a particular supply, the time of supply is the receipt of the deposit or prepayment.

Continuous supplies of services. VAT applies on continuous supplies of services, provided there is:

• The performance of services for another person

• The making available of any facility or advantage

• Toleration of any situation or refraining from the doing of any activity

In light of the above, if services are supplied continuously and payment is made periodically, a tax point is created each time a payment is made or a VAT invoice is issued, whichever occurs earlier.

Goods sent on approval for sale or return. When goods have been supplied on sale or return, the tax point shall be the earliest of:

• The date when the purchaser chooses to keep the goods

• The issue of the tax invoice by the seller

• The receipt of payment by the seller

• The expiry of the period within which the customer may return the goods

Reverse-charge services. The beneficiary of imported services is responsible for payment of VAT. They self-declare output tax by declaring the VAT on the imported services. The tax point for reverse-charge services is when the service is performed.

Leased assets. The supply of leased assets occurs on the date the leased assets are made available under the lease agreement.

Imported goods. The time of supply for imported goods is the date of importation.

F. Recovery of VAT by taxable persons

A taxable person may seek a refund of the excess VAT if the input tax is more than the output tax due.

A taxable person that is in a refundable position for a continuous three months may apply for a VAT refund. Evidence in the form of supplier fiscalized invoices is required for a pre-refund audit before MRA issues a refund check. The Commissioner General is supposed to give the refund within 30 days of the application being submitted, but MRA usually delays refunds due to lack of funding.

The time limit for a taxable person to reclaim input tax in Malawi is six months.

Nondeductible input tax. Input tax may not be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use). Input tax cannot be recovered on invoices that are more than 12 months from the date of issue and also cannot be recovered from invoices that are not supported by the mandatory fiscal slips.

In addition, input tax may not be recovered for some items of business expenditure. The following lists provide some examples of items of expenditure for which input tax is not deductible and examples of items for which input tax is deductible

Examples of items for which input tax is nondeductible

• Repairs, hiring and maintenance of motor vehicles and purchase of spare parts, unless the taxable person is engaged in the business of hiring motor vehicles or selling motor vehicle spare parts

• Entertainment, hotel expenses, restaurant and meals, unless the taxable person is in the business of providing entertainment

Examples of items for which input tax is deductible (if related to a taxable business use)

• Communication costs

• Office rentals

• Stationery

• Utilities, e.g., electricity and water

• Office furniture

Partial exemption. A taxable person is considered partially exempt if they make both taxable and exempt supplies of goods and services. They can only claim input tax that is directly attributable to the taxable supplies. An apportionment formula is used to determine the deductible input tax.

A refund of VAT is possible where the amount of input tax exceeds the amount of output tax and the excess credit remains outstanding for a continuous period of three months or more.

Approval from the tax authorities is not required to use the partial exemption standard method in Malawi. Special methods are allowed in Malawi.

Capital goods. Input tax incurred on capital goods acquired for the business is claimable, except for motor vehicles as indicated above. A taxable person who is registered from a specified effec tive date and has in stock capital goods that have been held for a period not exceeding a period of six months from the date of their registration may claim credit or refund of VAT. There are no further special input tax recovery rules for capital goods. Normal input tax recovery rules apply.

The input tax on capital goods at hand on the date of registration acquired six months prior to the effective date of VAT registration is claimable and the deduction must occur within 12 months from the effective date of registration.

Refunds. Where the amount of input tax that is deductible exceeds the amount of output tax due in respect of the accounting period, the excess amount shall be credited by the Commissioner General to the taxable person. Where the taxable person remains in an excess VAT position for a continuous period of three consecutive months or more, a refund shall be made.

Pre-registration costs. A taxable person may recover the VAT on stocks purchased prior to regis tration if the goods are still in possession of the taxable person at the time of registration and if the purchase or importation of stocks occurred not more than four months prior to the date of registration.

Bad debts. VAT on sales that are declared bad is supposed to reduce the output tax payable by making the necessary adjustments on the VAT return. Where a customer does not pay for the supply, the taxable person must prove that they took all the reasonable steps to collect the amount due and failed. The VAT Act allows the taxable person to do an adjustment in its VAT return that was previously filed with the tax authority declaring the output tax based on accrual.

Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Malawi.

G. Recovery of VAT by non-established businesses

Input tax incurred by non-established businesses in Malawi is not recoverable.

H. Invoicing

VAT invoices. A taxable person shall, on supply of taxable goods or services to a customer, issue to the customer a tax invoice prescribed by the Commissioner General.

Credit notes. Where a tax invoice has been issued and the amount shown as VAT on the tax invoice exceeds the VAT properly chargeable in respect of the supply, the taxable person making the supply shall issue a credit note to the recipient of the supply.

Electronic invoicing. Electronic invoicing is mandatory in Malawi. Every VAT-registered operator is required by law to issue electronic tax invoices as prescribed by the law and be in possession of the mandatory electronic fiscal device (EFD). In circumstances where the EFD is not working, an authorization letter from the tax authority should be obtained to permit the VAT operator to issue non-fiscalized invoices up until the machine starts functioning.

The EFDs are all connected to the MRA server and transmit live data to the tax authorities.

A taxable person that does not receive a fiscal invoice may request the taxable person who sup plied the goods or services to it to provide a tax invoice in respect of the supply. The maximum retention period for the tax invoices received from suppliers is six years, and input tax is claim able only if the fiscal invoices are available as basis for claiming input tax.

Simplified VAT invoices. Simplified VAT invoicing is not allowed in Malawi. As such, full VAT invoices are required.

Self-billing. Self-billing is not allowed in Malawi.

Proof of exports. Exports of goods and services are zero-rated. For proof of exports, the following are mandatory export documents:

• Customs Declaration Form 12

• Supplier’s commercial invoice

• Currency Declaration Form CD1

• Carrier’s cargo manifest

• Certificate of origin

Foreign currency invoices. Invoices in a foreign currency but relating to the supplies made in Malawi should be converted to the domestic currency, which is the Malawian kwacha (MWK), for purposes of claiming input tax where VAT is explicitly shown on the invoice.

The exchange rates to use for such conversions are the Reserve Bank of Malawi’s exchange rate at the date of the time of supply.

Supplies to nontaxable persons. A tax invoice is supposed to be issued for any supply of goods or services, even if the supply is made to nontaxable persons. There are penalties for not issuing fiscal invoices.

Records. Every taxable person is required to keep the following records:

• A VAT account to show total output tax, total input tax and the amount of VAT due or refund able for each month

• Relevant business and accounting records, including sales and purchase journals, cashbooks, ledgers and other subsidiary books of accounts

• Copies of all tax invoices issued

• All tax invoices received

• Documentation relating to the importation and exportation of goods and services

• All debit and credit notes or other documents providing evidence of any increase or decrease in the value of goods and services purchased or sold

In Malawi, VAT books and records must be held within the country. Such records may be requested for review by the Commissioner General.

Record retention period. Records, as prescribed by the Minister or directed by the Commissioner General must be kept for a minimum of six years at such a place and time as gazetted. Written permission of the Commissioner General to destroy any book, document, account or record that is less than six years old, should be obtained. The permission granted shall specify the book, document, account or records to which the permission relates.

Electronic archiving. Archiving of records must be made in paper form only.

I. Returns and payment

Periodic returns. VAT returns are due on the 25th of the following month to which the VAT return relates. VAT returns are submitted physically to the tax offices.

Periodic payments. Payment of VAT due must accompany the filing of the VAT return, i.e., by the 25th of the following month to which the VAT return relates. Payment of VAT can be made through the ePayment platform, bank certified checks or by way of cash to be deposited at the bank.

Electronic filing. Electronic filing is not allowed in Malawi. All returns must be physically filed to the relevant tax office in Malawi.

Payments on account. Payments on account are not required in Malawi.

Special schemes. No special schemes are available in Malawi.

Annual returns. Annual returns are not required in Malawi.

Supplementary filings. No supplementary filings are required in Malawi.

Correcting errors in previous returns. A taxable person who made bona fide errors in a VAT return may make an application to the tax authority to correct the error and make adjustment to the VAT return. The application to the tax authority may be made online or by physical delivery to the tax authority.

Digital tax administration. There are no transactional reporting requirements in Malawi. However, all the taxable persons are required to use an electronic fiscal device (EFD) and all the EFDs are connected to MRA server, transmitting live data to the tax authorities. For further details see the subsection above Electronic invoicing.

J. Penalties

Penalties for late registration. The penalty for late registration for VAT in Malawi is MWK100,000.

Penalties for late payment and filings. The penalty for late payment of VAT is an additional sum of 15% of the amount of VAT involved, plus a further additional sum of 5% per month or part thereof for the period during which the VAT remains unpaid.

Interest is charged on the unpaid amount at the prevailing bank lending rate plus 5% per annum.

Penalties for errors. Fine of MWK200,000, plus imprisonment for 10 years for falsification and alteration of documents. The goods involved are confiscated.

No penalty applies for late notification or failure to notify the tax authorities for changes in a taxable person’s VAT registration details. For further details, see the subsection above Changes to VAT registration details.

Penalties for fraud. The penalty for VAT fraud is a fine not exceeding 20 times the amount of VAT involved and imprisonment for 5 years.

Personal liability for company officers. Where anybody corporate or unincorporated, liable for the payment of VAT, or of any penalties or interest arising under the VAT Act, or for any penalties or interest arising under the VAT Act, defaults in payment, in whole or in part, after written demand, the directors shall be jointly and severally liable to pay the sum due.

Statute of limitations. The statute of limitations in Malawi is six years. The taxable person has 12 months to correct errors.