Opinion and Analysis
Withholding tax on services a burden
Posted Tuesday, August 14 2012 at 20:40
- Withholding tax (WHT) is an advance tax deducted at source. It is a tax deducted on the payment for management or professional services by a payer on the payments made to the payee.
- The spirit of WHT on non resident service providers is appreciated as this is a way of getting them to pay tax in Kenya.
- The WHT refunds held up at the KRA locks up the working capital of business thereby significantly curtailing their operations and possible expansion.
It is absurd to incur additional costs so as to pay another person’s tax in advance. Yes, I am talking about withholding tax on service provided by Kenyan tax payers.
It is an extra administrative burden imposed to the recipient of the service as you have to withhold tax and remit to the Kenya Revenue Authority (KRA) by a certain date. Failure to comply with the legislation attracts a penalty which is punitive.
Withholding tax (WHT) is an advance tax deducted at source. It is a tax deducted on the payment for management or professional services by a payer on the payments made to the payee.
In the case of Kenya tax payers, the withholding tax deducted is claimed as a tax credit at the end of the year when the tax payer is filing the self assessment tax return.
It seems withholding tax is a way the KRA uses to collect the tax payable by service providers in advance. However, the truth is that it’s not what it seems.
It is also important to note that certain payments also attract withholding tax and this includes dividends, interest, royalty and use of property payments for both residents and non residents.
Lease payments to non residents also attract WHT. This is acceptable and it makes sense as the tax may constitute the final tax on these sources of income.
The spirit of WHT on non resident service providers is appreciated as this is a way of getting them to pay tax in Kenya. Other positive things with WHT especially for non residents is that it makes it easy for the non residents to conduct their business in Kenya as they do not have to worry much about compliance.
We should not forget the other the other form of tax deducted at source such as Pay As You Earn (PAYE). PAYE is applicable on the employment income of an individual.
It makes sense for the employer to withhold the same and remit to KRA as PAYE is the final tax on employment income.
However, extend this to WHT on service providers and it becomes absurd as WHT is not typically the final tax on the Kenyan tax payers.
The recipient of the service is charged with the responsibility of ensuring compliance of payment for the service provider. This increases the administrative burden on the recipient of the service. KRA is mandated to collect taxes and it should not delegate this responsibility to tax payers.
At times, due to rates of WHT, there results a tax overpayment. Getting refunds from KRA is not easy in the instances where WHT payments results in tax overpayment.
The WHT refunds held up at the KRA locks up the working capital of business thereby significantly curtailing their operations and possible expansion.
This is not good for the economy especially with the fact that Kenya wants to be a middle income economy and the implementation of Vision 2030.