Consumption tax in Kenya is operated through the Value Added Tax (“VAT”). Currently, VAT in the country is governed by the VAT Act Chapter 476 Laws of Kenya which was signed into law in 1989. From financial year 2011, the Government of Kenya has made various attempts to overhaul the VAT Act governing administration and enforcement of VAT in the country. This was through the VAT Bills 2011, 2012 and currently VAT Act 2013.
The intention of the overhaul is to increase government revenues, simplify VAT administration, reduce compliance costs and dealing with the ever increasing burden of VAT refunds which presents an administrative challenge to the Kenya Revenue Authority (“KRA”).
The VAT Bill 2013 was approved by parliament on Monday August 6th 2013, assented by President Uhuru Kenyatta on August 14th making it an Act of Parliament, Gazetted on August 16th and will come into force within a month of its gazettment i.e. September 16th.
Below we summarize the various amendments in the VAT Act 2013 from the current VAT Law and the implications on businesses and the cost of living in general.
Exempt & zero-rated goods and services
The main amendments in the VAT Act 2013 is the reduction in exempt and zero-rated goods and services list. The current VAT Act has over 400 exempt goods, 23 exempt services, over 300 zero-rated goods and 22 zero-rated services.
The new Act has cut drastically the list of exempt and zero–rated goods and services. The fully exempted goods list is 39, exempt services list of 18 and a list of 8 zero-rated supplies (goods and services).
There is a transition list of fuel and fuel oils which will be exempt from VAT for a maximum period of three years before being standard rated. This will have the effect of increased fuel costs, leading to high transportation costs. Ultimately the cost of doing business in Kenya will be high, locally manufactured consumer goods prices will rise opening the local manufacturing industry to threats by cheaper imports and eventually high inflation rates which will adversely affect the economic growth.
Unprocessed milk, medical supplies, milk specifically prepared for infants, maize (corn) flour, Semi-milled or wholly milled rice, some fertilizers, sanitary towels (pads) and tampons are exempt in the new Act. While VAT will not be charged on these items, exemption from VAT means the suppliers of these items cannot claim input VAT they incurred on any purchases and directly attributable costs in supply of these goods. The input VAT cost will thus be passed on to the consumers which will result in increase in prices.
The following services have been deleted from the exempt list, Management of unit trusts and collective investment schemes, Credit Reference Bureau services, Sanitary and pest control services provided to households, Postal services, Tour operation and agency services and Airport landing and parking fees.
The increased costs on postal services may hamper the Kenya Postal Corporation recovery, affect negatively local tour operators and thus impact the tourism industry and reduce the attractiveness of unit trusts as an investment vehicle.
Mobile phones are also standard rated which may result in slowing of mobile phone penetration in the country.
The new VAT Act 2013 proposes only two VAT tax rates i.e. standard rate of 16% and the zero rate. This removes the 12% rate applicable to electrical energy and industrial oils. Furthermore the zero-rating of the first 200 units of electricity supplied to a domestic household is abolished. Electricity consumers will thus pay higher electricity bills. Furthermore, they will be higher industrial production costs as a result of the high energy costs which will likely lead to an increase in consumer goods prices.
The following individuals lose their privileged status and will be subject to VAT at the standard rate; The president, The Armed Forces, Charitable organization excluding St Johns Ambulance and Red Cross, Equipment for disabled persons, President’s Award Scheme, Safari Rally Drivers and Kenya Police, NSIS, Kenya Prisons and Kenya Wildlife Services.
The major impact will be taxation of equipment for disabled persons. Though there might be an increase in VAT collected from the armed forces and other security agents in Kenya, the removal of these bodies from the privileged list will result in higher budgets for them to cater for the VAT imposed on their supplies.
Oil & Gas prospecting and Geothermal Power generation
The New Act exempts taxable supplies, excluding motor vehicles, imported or purchased for direct and exclusive use in geothermal, oil or mining prospecting or exploration upon recommendation by the Cabinet Secretary responsible for energy or the Cabinet Secretary responsible for mining, as the case may be. This will reduce the costs incurred in these activities and remove the administrative workload of application for VAT exemptions.
The VAT Act 2013 defines a business to include any activity carried on regularly involving the supply of services and goods for consideration. This will ensure the tax authorities expand the VAT tax base.
The definition of an importer has been expanded to include not only the person who owns the goods but also any other person who is for the time being in possession of or has a beneficial interest in the goods at the time of importation. This may result in the KRA assessing import duties on the goods agents of the owners of the goods e.g. clearing agents.
The current VAT Act has self-supply provisions where if a registered person appropriates taxable goods or services for his own use the person is required to deduct VAT and remit the amounts to the KRA. The VAT Act 2013 has eliminated this ambiguous self-supply provision.
VAT on imported services (Reverse Charge VAT)
The VAT Act 2013 effectively eliminates accounting for reverse charge VAT for tax payers who would be entitled for a full claim of the reverse charge VAT remitted as part of their input VAT claim. Thus any VAT registered entity providing taxable supplies will not be providing for reverse charge VAT.
However entities which cannot claim a full deduction of input tax e.g. those providing exempt supplies like banks and insurance companies will continue accounting and paying the reverse charge VAT. This amendment will ensure reduction of VAT refunds backlog, reduce administrative costs to the KRA and tax payers and improve the cash flow of tax payers.
If the tax payer supplies both taxable and exempt supplies, the reverse charge VAT payable is the proportion of exempt supplies over total supplies.
The VAT Act 2013 requires an entity having both resident and non-resident businesses to consider the non-resident business as a separate business. Thus any services received from the related non-resident party will be subject to the above provisions on reverse charge VAT.
VAT on electronic commerce
VAT Act 2013 brings electronic commerce under the ambit of the VAT provisions. Electronic services are defined to include various services provided on or through a telecommunications network. This includes web-hosting, supply of software & their updating, access to databases, self-education packages, music, films, games and all types of broadcasts.
Any electronic services supply made by a non-resident to a non-registered person in Kenya will be deemed to have been made in the country and VAT charged. The non-resident entity deemed to have made supplies in Kenya, and have no presence locally will be required to appoint a representative in Kenya who will account for tax on behalf of the non-resident entity. This may be difficult to implement especially for individuals who will make the payments in the privacy of their homes.
The New Act has reduced the period of validity of a credit note from twelve months as it is in the current VAT Act to six months. Businesses need to take note of this and be vigilant to avoid incurring unrecoverable VAT after the six months have passed.
Businesses have to ensure complete efficiency in input VAT management as the time provided for a deduction of input VAT incurred has been reduced from twelve months as it is in current VAT Act to within six months after the end of the tax period in which the supply or importation occurred.
Restricted input VAT
The current VAT provisions restricts eight items on which businesses cannot claim input VAT. This includes all oils for vehicles, Passenger cars and minibuses, bodies, parts and services for the repair and
maintenance of such vehicles and the leasing or hiring services of such vehicles other than those used to generate business, furniture and fittings not permanently attached to buildings, household or domestic electrical appliances, entertainment services, restaurant services, accommodation services and supplies used for staff welfare.
This list has been cut to two purchase and maintenance of passenger vehicles and entertainment services. However if the costs incurred in the two restricted items are for furthering the business, the entity involved can claim the input VAT.
The new Act has stated direct attribution method as the only one method of apportioning input VAT where an entity supplies exempt and taxable supplies.
The Act has abolished VAT remissions on capital items. This will have a major impact on investment funding costs and humanitarian aid as they will incur VAT. This will impact on the cash flow of investors and relief agencies.
Registration for VAT
The registration threshold for VAT is Kshs 5Million. However the new VAT Act has clarified that the disposal of a capital asset or sale of business operations in whole or a part shall be excluded in determining the registration threshold.
Utilization of information technology
The New Act provides rules for application of information technology for the following procedures, registration, returns/statements filing, payment or repayments, any notice or other document required to be issued by the Commissioner and any act or thing which requires to be done under the Act. This will ensure ease of registering and accounting for VAT phasing out the current manual system.
Public and private rulings
The Commissioner-General of the KRA may make a public ruling by notice in at least two daily newspapers of national circulation. setting out his/her interpretation of the VAT Act provisions. The public ruling is binding on the Commissioner until withdrawn but not binding on the tax payer. Thus a taxpayer not in agreement with the Commissioner interpretation can challenge the public ruling.
The Commissioner may subject to writing by a registered person issue to that person a private ruling regarding provisions of the Act on a transaction entered or proposed to be entered into by the registered person. The ruling shall be binding on the Commissioner if the taxpayer has made a full and true disclosure. The private ruling is not binding on the registered person to whom its issued. A private ruling will have priority over an existing public ruling should there be an inconsistency between the two to the extent of the inconsistency.
The Commissioner may refuse to give a private ruling as result of, subject covered by public ruling, issue is subject of a tax assessment, audit or an objection, frivolous application, insufficient information, Commissioner has insufficient resources and proposed transaction has not taken place and is unlikely to do so.
Where Commissioner refuses to give a private ruling, he is to serve the applicant with a written refusal.
Under the current VAT regime, a tax payer has 30 days to object to an assessment by the Commissioner. The New Act provides that the Commissioner also has 30 days to respond to an objection by a tax payer. Where the Commissioner is to amend an assessment in light of the tax payer objection, he, the Commissioner is to serve the tax payer with Notice of amendment within 15 days.
Where the Commissioner does not respond to a Notice of Objection within 60 days, he will be deemed to have agreed to amend the assessment as per the objection.
Conclusions and recommendations
The new VAT Act 2013 is indeed progressive and offers a simpler VAT compliance system. This will ensure easier running of businesses in Kenya.
However some of the provisions contained in the Act may have a negative impact on foreign investment and result in high consumer prices driving inflation up which may overall reduce consumption and thus limit our economic growth. This will have the effect of going against one of the key objective of the new regime i.e. improving revenue collection. There is a need to review and amend the contentious areas to ensure that indeed the VAT framework achieves effectively all set objectives.