Economy

Suppliers on the spot as KRA re-introduces withholding tax

kra

Taxpayers outside the KRA headquarters in Nairobi. PHOTO | FILE

Kenya has re-introduced the withholding value added tax in a move seen as targeted at the thousands of suppliers to government that have evaded the tax since September last year.

The tax, which became obsolete a year ago with the enactment of the VAT Act 2013, is coming back following sustained criticism that the current regime is focused on easy targets such as individuals in formal employment, large businesses and medium enterprises.

The Kenya Revenue Authority (KRA) stopped charging withholding VAT in September last year following the realisation that it was the single largest source of the refund claims that are now estimated to be worth Sh30 billion.

It has now emerged that instead for increasing VAT collections and reducing the mountain of VAT refunds, elimination of the withholding tax has created a loophole that suppliers to government are using to avoid paying the tax.

The tax is being re-introduced as part of the plan to meet this year’s revenue target of Sh1.1 trillion.

“Government ministries, departments and agencies (withholding agents) are required on purchase of taxable supplies, to withhold six per cent of the taxable supplies at the time of paying for the supplies and remit the same to the commissioner immediately,” said the KRA office in charge of domestic taxes.

Withholding tax is ordinarily charged on supplies to government that are worth hundreds of billions of shilling every year.

“The policy reversal is mainly going to affect suppliers of government. Many suppliers who are being paid directly by cheques are simply disappearing without a trace denying the State billions of shillings in unpaid taxes,” said Clive Akoras, a senior tax manager with audit and advisory firm KPMG.

READ: KRA surpasses tax target, collects Sh963.8b

Mr Akoras said the time for the tax evaders to pay has finally come as every ministry or government department will be required to deduct the money at source before writing any cheques for the suppliers.

Suppliers to government agencies have been the major culprits of the massive tax evasion racket, which has also sucked in commercial banks through which the payments are made.

Under the new regime, commercial banks have to withhold six per cent of the value of the supplies paid for through their system for onward remission to KRA.

Unpaid refunds are estimated to be worth Sh30 billion, though the Treasury has promised to start paying in January.

Withholding the entire 16 per cent VAT rate before September last year has been blamed for the rapid growth in the tax refunds because most of the businesses would claim back a large part of it.

The tax applies from September 19 this year meaning that suppliers to government are currently ceding six per cent of their payment for the taxman.

KRA put out a notice yesterday saying that ministries and other tax withholding agents must remit six per cent of the taxable supplies. “You can expect that this move by the KRA will increase VAT collections. It will catch those who were not voluntarily paying VAT by surprise,” said Alpesh Vadher, the managing partner at consulting firm PKF.

“Collections from VAT appear to have dipped considerably since the withholding tax was removed and that is why it is being re-introdiuced. By taking only six per cent, the Treasury is also avoiding huge accumulation of refund arrears,” said Mr Akoras.

Steve Okoth, a tax expert with RSM Ashvir said that instead of asking for the entire 16 per cent, the Treasury had opted to get just what would remain after netting the supplier and government positions on VAT.

This means that out of the 16 per cent, an automatic six per cent will go to KRA and the other 10 per cent is what would have been claimable under the old system.