An analysis of the tax incidence of VAT to milk in Malawi

Dairy is a key investment sector for the Government of Malawi. On the 1st of October 2016 the Malawi Revenue Authority announced that milk, which until then had been exempted of the valued added tax (VAT), was going to be taxed at the standard rate of 16.5 per cent. Although the tax was scrapped in May 2017, the purpose of this paper is to study the incidence of such a tax along the domestic dairy supply chain as it provides unique information about the functioning of the Malawian dairy chain. For the analysis, a spatial multimarket model of the Malawian dairy supply chain was used. The results indicate that 24.3 per cent of the revenues of the introduced VAT would be borne by consumers and the remaining 75.7 per cent by the domestic dairy industry. This is mainly due to the fact that consumers’ demand for pasteurised milk is price elastic. The results highlight the sensitivity of inclusive value chains to changes in consumers’ demand.