PRINCIPLES OF TAXATION(P6) - ICAM

1 TAX C OMPLIANCE TNMALAWI THE INSTITUTE OF CHARTERED ACCOUNTANTS IN MALAWIPRINCIPLES OF TAXATION(P6) KNOWLEDGE LEVELCHARTERED ACCOUNTANT (MALAWI) e Institute of Charter ed Accountants in Mala wi 2017 e Institute of Charter ed Acc ountants in Mala Box 1 Blantyr eE-mail: IS BN: 978-99960-9-732-4 All rig hts res er ved. No part of thi s book may be reproduced or tr ansmitted in any form or by any means-graphic, electr onic or mechanical including photocopying, recording, tapin g or information st orage and retrie val systems-without t he written per mission of t he copyrig ht holder. 2 Contents Aim of the Module .. 4 Outcomes .. 4 Format and Standard of the Examination Paper .. 4 Chapter 1: Introduction to taxation .

2 8 Chapter 2: Administration of Taxes .. 17 Chapter 3: taxation of Individuals .. 22 Chapter 4: taxation of Employment Income .. 35 Chapter 5: Fringe Benefits Tax .. 40 Chapter 6: taxation of Passive Income .. 45 Chapter 7: taxation of Gains and Losses .. 49 Chapter 8: Capital Allowances .. 61 Chapter 9: Business taxation .. 74 Chapter 10: taxation of Partnerships .. 89 Chapter 11: taxation of Companies .. 94 Chapter 12: Special Trades and Cases .. 103 Chapter 13: Tax Collection Methods .. 115 Chapter 14: Provisional Tax System .. 122 Chapter 15: Returns and Assessments .. 126 Chapter 16: Tax Appeals Procedure .. 133 Chapter 17: Value Added Tax .. 136 Chapter 18: Customs Duty .. 150 Chapter 19: excise Tax .. 166 References .. 171 Appendices .. 172 Appendix A: General Exemptions First Schedule to the taxation ACT.

3 172 Appendix B: rates of Income Tax - Eleventh Schedule .. 174 Appendix C: Countries with which Malawi has Entered into Tax Agreements 175174 Appendix D: Annual Allowances .. 176 Appendix E: List of Approved Charitable Organisations .. 177 Appendix F: Withholding Tax Rate of Deduction .. 179 Appendix G: Zero Rated Goods and Services for VAT Purposes .. 180 Appendix H: Exempt Goods and Services for VAT Purposes .. 181 3 Studying taxation (TC 10) Paper TC10 taxation is a paper that is discursive and requires computation. As a result the exam has both narrative and computational questions. Contents of the Paper This paper comprises the following main areas: a) PRINCIPLES of taxation and introduction to Malawi taxation ; b) Income tax on persons; c) taxation of businesses income; d) Capital allowances; e) taxation of special trades and cases; f) Collection and administration of tax; g) Value added tax; h) Customs duties; and i) excise tax.

4 Skills to Demonstrate You will be required to understand the PRINCIPLES of taxation and apply these PRINCIPLES in computation of tax. 4 Aim of the Module To enable candidates understand the general objectives of taxation and to apply this knowledge in practice by calculating income tax for different taxable persons including individuals, partnerships, corporate bodies and taxation PRINCIPLES applicable to special trades. Outcomes On completion of this module the candidate should be able to: i. Explain the PRINCIPLES of taxation ; ii. Describe the administration of taxes in Malawi; iii. Explain the general objectives of Malawi tax and the different types of tax; iv. Calculate tax liabilities for individuals and corporate bodies; v. Calculate value added taxes, excise and customs duties owed by taxpayers; and vi.

5 Prepare various tax returns. Format and Standard of the Examination Paper The examination will be divided into two sections, A and B. Section A will have two compulsory questions. Section B will have five questions and candidates will be required to answer any three. Section A will account for 40% of the examination and section B 60%. There will be a balance between narrative and computational questions. The table below shows the relative weightings of topics within this module and gives an indication of the exam content for each area. Syllabus area Weighting Introduction to taxation and Administration of Tax 10% Income tax on individuals and corporate bodies 40% Capital allowances 10% taxation of special trades and cases 10% Collection of taxes 10% Value added tax 10% Customs duties 5% excise 5% Total 100% 5 Learning Outcomes The following are the learning outcomes: 1.

6 Introduction to T axation and Tax Administration Candidates should be able to explain the PRINCIPLES and objectives of taxation and how taxes are administered in Malawi. In the exam candidates may be required to: Explain r easons for a government introducing a tax system; Describe essential elements of a good tax system; Classify taxes and explain characteristics of taxes; State the powers of the Commissioner General; Explain the significance and application of the rule of secrecy; Explain the role of the Public Officer; and State appeal procedures. 2. Income Tax on Individuals and Corporate Bodies Candidates should be able to classify entities as individuals, partnerships, or companies for tax purposes and state how they are taxed. In the exam candidates may be required to: Identify assessable and exempt income, allowable and non- allowable deductions and taxable income; Compute fringe benefits tax; Compute capital gains or losses; Compute foreign exchange gains or losses; Compute tax on passive income; and Compute taxes for individuals, partnerships and corporate bodies.

7 3. Capital Allowances Candidates should be able to explain and compute the different types of capital allowances and identify the scenarios and on which assets capital allowances can be claimed. In the exam the candidate may be required to: Describe initial, investment and annual allowances; Identify assets that qualify for capital allowances; Compute capital allowances; and Describe incentives and restrictions on capital allowances. 6 4. taxation of Special Trades and Cases Candidates should be able to describe how special trades are taxed. Candidates may be required to explain or compute taxes for: Farming; Timber trade; Charities and trusts; Clubs and societies; Ecclesiastical bodies; Insurance business; Hire purchase; Double taxation ; and Turnover tax. 5.

8 Collection of Taxes Candidates should be able to identify the obligations the Malawi tax system imposes on tax payers and the implications of non-compliance. In the exam candidates may be required to: Explain collection procedures for the following: Pay As You Earn, Withholding tax, Provisional tax, and Non-resident tax. Identify the records that must be kept for various taxes; and State due dates for various tax returns and penalties for non-compliance. 6. Value Added Tax Candidates should be able to calculate the amount of VAT owed by or owed to businesses. In the exam candidates may be required to: Classify supplies as exempt, zero-rated, and taxable; Explain when a taxpayer could or should register or deregister for VAT; Explain the obligations of a registered person; Describe the VAT credit system (input and output VAT, and refunds); and Compute VAT.

9 7. Customs Duty Candidates should be able to explain the PRINCIPLES of customs duty and, where applicable, calculate the amount of customs duty payable by taxpayers. 7 In the exam candidates may be required to: Describe the nature and functions of customs duty ; Explain importation and declaration procedures (ports of entry, import documentation, valuation of goods, and purpose of importation); Explain the functions of customs tariffs; Explain rules of origin and preference of imported goods; Compute customs duty; Explain storage and post importation procedures (clearing procedures, bonded warehouses, customs record keeping); and Compute customs duty. 8. excise Candidates should be able to explain the PRINCIPLES of excise duty and, where applicable, calculate the amount of excise duty owed by taxpayers.

10 In the exam candidates may be required to: Explain what is meant by excise as part of the indirect taxes and how it is accounted for in Malawi; Identify goods liable for excise tax; and Explain registration procedures and conditions applying to all excise traders and their obligations. References Customs and excise Act ICAM taxation Manual Malawi taxation Act Value Added Tax (VAT) Act 8 Chapter 1: Introduction to taxation Learning Outcomes On completion of this chapter you should be able to: Define taxation ; Explain the functions of taxation ; Explain the canons of taxation ; State examples of taxes; Classify taxes ; and Describe the Malawi tax system. Introduction In this chapter, a short outline of the Malawi taxation is presented, beginning with the definition of tax and taxation followed by a discussion of the various reasons why governing bodies world over impose taxes on its citizens.