Effectiveness and Economic Impact of Tax Incentives in the SADC ...

A-6 APPENDIX
Government revenue in Lesotho has averaged around 40 percent of GDP. More than half of
this comes from customs revenue sharing through SACU. Income taxes account for just under
one-fourth of the total. In recent years the budget balance, including grants, has been well
under control. Thus, the country does not face serious revenue constraints.
Malawi 112
Malawi offers a variety of tax incentives with the aim of encouraging development, enhancing
output, earning or saving foreign exchange, and expanding employment opportunities. In
1991 the Government passed an Investment Promotion Act providing large tax benefits to
exporters and pioneering industries in agriculture, agro-processing, manufacturing, tourism,
and several other sectors. At the same time the Malawi Investment Promotion Agency was
established to promote, and facilitate both domestic and foreign investment.
The current tax system retains generous incentives for exporters and priority industries.
Exporters can qualify for EPZ privileges at an approved location, or be licensed to
manufacture under bond. The geographic dispersal of duty-free operations makes it more
difficult to control the leakage of imports into the domestic economy. Both export
mechanisms provide standard free trade benefits, including exemption from excise tax on
purchases of raw materials and packaging made in Malawi. EPZ companies also benefit from
zero corporate tax and an exemption from withholding tax on dividends. Exporters also
obtain a 25 percent tax allowance on international transport costs, and an allowance of 12.5
percent of gross export sales.
Separately, investments of more than $10 million in priority industries are eligible for a 10-
year tax holiday or an indefinite 15 percent tax rate. (The holiday option is 5 years for
investments between $5 and $10 million.) Other incentives include duty free importation of
qualifying capital goods used in manufacturing, tourism, mining, horticulture, IT and
telecommunication, and agriculture. For manufacturing, the duty-free benefit applies also to
raw materials. On top of this, manufacturers qualify for a 40 percent initial allowance (plus 15
percent in designated areas). Agricultural enterprises obtain favorable capital allowances in
the form of full expensing of farm works. Finally, companies receive a 50 percent additional
deduction for training costs.
Designation as an EPZ, a bonded manufacturer, or a priority industry requires approval by an
appraisal committee chaired by the Ministry of Commerce and Industry.
The tax incentive regime is exceedingly favorable for the investment in export activities, yet
the incentives have not been notably effective due to other pressing problems with the
112 Supplementary sources include investment promotion documents from MIPA; IMF Country Report 02/182,
2002; and www.sadcreview.com.