Markets & Finance

KRA releases guidelines on withholding tax

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KRA Commissioner General John Njiraini. FILE PHOTO | NATION MEDIA GROUP

The Kenya Revenue Authority has released guidelines for the collection of withholding VAT on payments made to government suppliers, which will be charged at six per cent of the cost of supplied goods or services.

Reintroduced in the Finance Act 2014, the withholding tax is meant to ensure all VAT due to the taxman from suppliers is paid.

KRA in the notice outlining the new guidelines said that there will be a double declaration system of VAT by both the supplier and the purchasing government agency or department that has been appointed as a withholding VAT agent.

The withholding tax will not apply if those supplies are made to official aid funded projects.

“Only payments in respect of taxable goods and services are liable to withholding VAT. Hence no VAT is withheld on the payment of supply of exempt goods, services and zero rated supplies,” said KRA in the guidelines.

The suppliers will also be required to issue an invoice showing separately the amount of chargeable VAT.

Even though the agents will withhold six per cent, the supplier is still required to submit the other 10 per cent in order to make the total VAT payment at the standard 16 per cent.

READ: Suppliers on the spot as KRA re-introduces withholding tax

“Withholding VAT agents will be submitting the returns twice a month…through commercial banks to the withholding VAT collection account at the Central Bank of Kenya,” added KRA.

KRA has also published a list of the government agencies, ministries and corporations that have been appointed withholding VAT agents.

Failure by any of the agents— namely the government agencies— to withhold the tax on taxable supplies will constitute an offence, the tax body cautioned.

The taxman had stopped charging withholding VAT in September last year with the enactment of the new VAT Act, following the realisation that it was the single largest source of the refund claims that are now estimated to be worth about Sh30 billion.

In the subsequent months following the move, the government realised that instead of increasing VAT collections and reducing the size of outstanding refunds, suppliers to government took advantage to avoid paying VAT on the supplies.

The taxman has, however, had to review the tax collection system as part of the plan to meet this year’s revenue target of Sh1.1 trillion.

KRA collected an improved Sh227 billion in the first quarter of the fiscal year— up by 13 per cent from last year’s Sh201 billion. The revenue collected in the three months represented 21.6 per cent of the targeted annual collection.

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.

Tax experts now say that the move by KRA to withhold only six per cent of the full VAT is informed by the twin desire to not only collect what is rightfully due, but also to reduce the refund bill since many businesses would be demanding about 10 per cent of VAT in refund.

Treasury secretary Henry Rotich has revealed plans to create a fund to pay Sh10 billion of the VAT refund backlog in January, with the remainder paid off within the first quarter of the year.

READ: Treasury to pay tax refunds in January

The settlements will be made by issuing the claimants with tradable bonds instead of cash, a source familiar with the Treasury’s plan has recently revealed.

Tax experts are, however, treating the pledge with a wait-and-see attitude, saying similar promises have gone unfulfilled in the past.

“We need to wait and see whether the fund will indeed be set up or whether this was just another way of the government placating businesses,” Nikhil Hira, a tax partner with Deloitte East Africa, told the Business Daily on Monday.