Tax experts raise the red flag over VAT exemptions

Tax experts have the red flag over the wide latitude given to the commissioner of Value Added Tax (VAT) in granting exemptions, saying this could lead to abuse.

Though many goods that were exempted from VAT no longer enjoy the privilege, new rules allow the commissioner-general to give remissions on items that can be exempted.

Read Kenya losing taxes through incentives, study says

“We need a situation where the exemptions are not left to discretion that is not clearly defined. “Reliefs from VAT should be targeted, for example, if it is oil exploration then this should be stated, rather than left to an individual,” said Nikhil Hira, a tax partner at Deloitte East Africa, in a pre-budget briefing on Monday.

In a separate briefing yesterday, Martin Kisuu a partner at accounting and business advisory firm PKF, said the VAT Bill as originally published ignored the fact that essential commodities such as milk and sugar – which are currently zero-rated – were meant to ease the burden on the poor.

“It would be retrogressive to now impose VAT on fertilisers, pesticides and foodstuff as proposed in the Bill as they would harm key sectors of the economy,” said Mr Kisuu.

There is also uncertainty on whether or not the Treasury will retain the provision requiring the Kenya Revenue Authority (KRA) to pay interest on outstanding refunds.

“Refunds are a major constraint on business. And the provision on paying interest needs to be maintained in the law as initially proposed,” said Mr Hira.

Mr Kisuu said if KRA cannot pay refunds on time, then it must pay interest or forgo the next cheque on VAT.

“Why do we have to wait for two years to see payment of Sh18 billion in refunds? If you don’t pay on time, then pay interest. If not, don’t expect the next cheque,” said Mr Kisuu.

Under the old exemption rule, 12 items had been listed including maize, rice, wheat, sugar, milk, edible vegetable fats and oil, fertilisers and pesticides.

It also applied to textiles, new and used clothing and footwear imported or bought locally during periods of civil strife, national calamity or disaster or where they are intended for use in officially recognised refugee camps in Kenya.

Mr Hira said the other costs that businesses were expected to meet under the new rules was that of investment in GPRS-enabled electronic tax registers. Mr Hira said the law was passed in the Finance Act 2011/12 but cannot be implemented because there are no guidelines on it yet.

“We don’t know how it would work because KRA requires the technology to track them. It is a good idea but how will it be implemented? Are businesses expected to buy yet other ETR machines?” Mr Hira posed.

He said the Income Tax Act also needed to be reviewed to widen the tax bands which had remained the same since 2005. Currently, a taxpayers reached the top tax band of 30 per cent at about Sh39,000 – a level that is too low, he said.