Council-vendor disputes
Council-vendor tensions have contributed to tax resistance and low compliance among market vendors which in turn has obstructed local governments’ service delivery. Previous studies found that the local governments of low-income countries (LICs) are inefficiently collecting revenue. This challenge reflects the limited revenue potential in local governments, high poverty levels, limited fiscal mandates, high collection cost pertaining to high population density, and low quasi-voluntary tax compliance.
Malawi, a southern African country, is not different. Indeed, local governments in Malawi, commonly known as local councils, have two primary sources of funds: intergovernmental transfers from the central government, and locally generated revenue (LGR). However, both previous and recent events have indicated that intergovernmental grants are unreliable and insufficient when it comes to enabling councils to provide uninterrupted sanitation services, adequate market space to traders, and general public goods within their jurisdiction. This reality leaves local councils with no option but to rely on LGR. Indeed, not only has LGR proved to be a reliable source of funds for local councils, but it has also guaranteed the flexibility needed when utilising funds to deliver services and public goods.
Against this backdrop, our research focuses on determining the enablers of a successful local government-vendor tax dispute resolution by conducting a comparative analysis of council-vendor relations in eight local councils in Malawi (Mzuzu city and Karonga district in northern Malawi, Kasungu Municipal and Mchinji district in central Malawi, and Blantyre, Chiradzulu, Thyolo and Nsanje in southern Malawi). Consequent findings expose market vendors’ tendency to make unrealistic demands from their councils, which exceed the latter’s financial capacity. These are common practices even with vendors in markets that do not contribute much in terms of revenue generation. This, coupled with inefficient ways of disseminating information on locally generated revenue, has raised vendors’ expectations from councils, making them unrealistic and unattainable and eventually leading to misunderstandings and tax disputes. All these factors have contributed to hindering a successful council-vendor tax dispute resolution process.
Research outcome: Findings and recommendations
Three indicators of successful tax dispute resolutions
A successful tax dispute resolution is manifested through (1) the voluntary tax compliance of vendors and (2) councils relying on methods other than the use of force to resolve tax disputes. Therefore, successful tax bargaining between both parties is manifested through:
1- Increase of councils’ revenues due to an increase in voluntary tax compliance
2- Willingness and ability of councils to deliver on the demands of market vendors once both sides have reconciled, and vendors have resumed paying market fees.
3- The prevalence of successful negotiations of tax rates by market vendors through their representative committees which are expected to be autonomous both financially and politically.
Five enablers of effective council-vendor tax dispute resolutions
1- Demonstration of mutual respect in engagement
The demonstration of mutual respect and the participation of senior officials in dialogue around tax is seen in some councils as a sign of a successful tax dispute resolution. Indeed, there has been more positive bargaining outcome in councils where the senior leadership participated in dialogue with market vendors instead of considering them as illiterate or uneducated. The lack of mutual respect makes vendors feel depreciated and generates the impression that their concerns are belittled, leading to tax resistance.
2- Transparency in tax information
Taxation knowledge was generally low across the eight studied councils, hindering vendors’ ability to accurately understand how market revenues are spent. In some cases, the effective flow of information has helped ensure successful tax dispute resolution, especially by increasing perceived transparency and amending vendors’ unrealistic expectations. For example, vendors believe that 100% of the council’s tax revenue should be reinvested into the markets while in reality only 25% should be used to benefit market development, waste management and offer other services. Our findings demonstrate that the unsystematic exchange of information and feedback between councils and vendors has a tremendous impact on tax compliance and bargaining. While councils assume that feedback and reporting systems ferrying messages to vendors are working effectively, the current system is actually hindering the reception of the message by its intended recipient.
3- Perception of equitable fee structures
In councils where the overall market fee structure is perceived as more equitable, vendors are more likely to comply and demonstrate higher trust, which can then facilitate the resolution of tax disputes. The perception of an equitable tax fee structure indicates consideration and a fair treatment across all vendors. This encourages vendors, especially those with small businesses that pay minimal fees compared to bigger traders, to display voluntary tax compliance.
4- Autonomy of market committees
Councils with successful tax dispute resolutions are characterised by relatively autonomous market committees. The more autonomous these committees are, both politically and in terms of funding their own operating costs, the stronger vendors’ bargaining position is especially that they are able to approach councils as their equals.
5- Mediation by civil society
In some cases, civil society organisations (CSOs) have played an important role in reinitiating dialogue between vendors and councils, especially where trust was totally broken, or where market committees were weak/less autonomous. They have also played an important role in making sure that relevant information is shared between councils and vendors. In Mchinji for example, the interviews that we conducted with CSO leaders, council officials and vendors show that awareness among vendors on council’s obligation to remit 25% of the revenues collected back into markets was increased through a Tax Justice project led by Action Aid.
Policy implications
Based on our research and the above detailed findings, we propose the following recommendations to inform policy direction in local councils particularly Malawian ones:
1- Overcome the prejudice that vendors are ‘illiterate’ and are not worthy of the attention of top council officials.
2- Improve reporting on revenue collection from market establishments and increase overall transparency on tax issues.
3- Communicate that according to best practices only 25% of collected revenue is recommended to be reinvested in markets, which will help recalibrate taxpayer expectations regarding the outcome of their tax money.
4- Take the mediatory role of CSOs more seriously.
Stakeholders’ reaction
To disseminate our research’s findings, we organised a series of workshops in the Kasungu and Mzuzu councils with the support of the International Centre for Tax and Development (ICTD) to engage council officials and vendors (in Kasungu vendors included lorries, car taxies, motorcycle taxies, and bicycle taxi operators who were in disagreement with the reintroduction of taxes on their businesses).
Both vendors and councils agreed that our findings and recommendations reflect the obstacles that have been hindering a successful resolution of tax disputes. In Kasungu for example, a chairperson for the operators of heavy goods vehicles in the municipality acknowledged that the perception of inequitable tax rates has contributed to tax resistance among their group. Council’s perception that transporters make a lot of money and hence are liable to paying higher tax rates, without understanding and considering how their business operates and the costs that they incur in the process, has led to high and unaffordable tax rates on these transporters and consequently to higher resistance from the latter. He added that had Kasungu Municipal Council considered equitable tax rates for lorry operators, the latter would have easily become tax compliant and contributed to the funding of the development projects launched by the municipality.
The above feedback proved that our findings and recommendations will improve the effectiveness of local government tax collection, strengthen state-citizen relations in local governments and efficiently guide tax dispute resolutions between market traders and local governments.
