Deloitte East Africa Consulting tax partner Nikhil Hira said there is less spending because the economy is not performing well, causing low yields from the consumption tax. Photo/FILE
What you need to know:
There is less spending because the economy is not performing well, causing low yields from the consumption tax.
In the next few years, however VAT is expected to exceed income tax collections because of tax reforms and possible increase in spending.
Low consumer confidence is hindering a steady increase in Value Added Tax collection despite the removal of exemptions on many goods and services last year.
Deloitte East Africa Consulting tax partner Nikhil Hira said there is less spending because the economy is not performing well, causing low yields from the consumption tax.
“With the economy not performing well and consumer confidence down, we are seeing less consumption so less spending which leads to less VAT. When you add depressed tourism the impact on VAT collections becomes worse,” said Mr Hira.
In the next few years, however, Mr Hira told a budget review seminar in Nairobi, VAT would exceed income tax collections because of tax reforms and possible increase in spending.
The VAT Act 2013 clawed back more than 400 items that were previously exempt into the consumption tax net, setting the stage for more collections.
The Kenya Revenue Authority is also instituting administrative reforms as Kenya seeks to join many other countries that collect more through consumption taxes rather than income and trade levies which require more policing.
“VAT should really exceed income tax as the major contributor to revenue as it is a consumption tax,” said Mr Hira. However, regulations guiding the full implementation of the VAT law are yet to be published.
Other administrative measures likely to boost VAT returns include collection of taxes at the first port of entry. This would curb diversion of transit goods to the Kenya market which ensured VAT on imported goods was not collected.
“Under the old act we had too many exempt and zero rated items so a lot of products and services were not being taxed. The new Act has largely addressed this issue so we should see a turnaround,” said Mr Hira.
He spoke at the Intercontinental Hotel, Nairobi, on Monday evening while briefing the media and clients on the 2014/15 Budget.
KRA chief executive John Njiraini said investigations had revealed possible undervaluation of previously zero-rated imports, especially computers and mobile phones.
This would help companies stop price increases, gaining a competitive advantage. Mr Njiraini said interventions were ongoing, focusing on risk-profiled importers.
Mr Hira suggested that the government starts paying interest on accumulated VAT refunds, sets aside funds to repay arrears or allows firms to offset claims against tax liabilities.
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