Abstract

This paper aimed at analyzing incidence of Value Added Tax (VAT) in Malawi. Using third integrated household survey (IHS3) data from Malawi government and economic data from Malawi Revenue Authority, Reserve Bank of Malawi and World Bank, the paper analyzed incidence of VAT on households’ consumption and inequality. The average rate of progression, effective VAT rates, relative burden index, Lorenz curves and inequality indices were estimated which then formed the basis of the analysis. The conclusion is that VAT in Malawi is less progressive but not regressive. Furthermore, rural areas are less burdened by VAT than urban areas and VAT slightly reduces inequality in rural areas compared to urban areas though the difference is minimal. The nature of the informal transactions and subsistence activities that are dominantly carried out in rural areas may explain the low inequality observed. As for the general households’ population, the VAT system is affecting households in low income groups more compared to households in middle income groups. These results point to the need for deliberate policies that will ensure that the inequality gap is reduced and all households are paying a good share of their income as VAT. Taxation of the informal sector and enforcement of VAT compliance may also help in improving the VAT system. Further research can be done in analyzing the incidence of different taxes to feed into tax policy decisions without compromising the need for more revenues to finance developments in developing countries.