Taxman defends move to tax basic goods in VAT Bill
Shoppers at Nakumatt Mega along Mombasa Road in Nairobi on March 3, 2013.The biggest concern from the public was the likely impact of VAT on the prices of these commodities and in extension the cost of living. Photo/FILE
What you need to know:
The Kenya Revenue Authority (KRA) said the current VAT regime which applies different rates for various categories of goods and services had made paying taxes in Kenya among the most expensive in the world.
KRA wants government to think of a way outside tax law to subsidise essential goods.
The VAT Bill 2013 seeks to subject all items to 16 per cent tax but KRA officials said its main motivation was a simple and easy-to-follow regime.
The taxman has defended the introduction of Value Added Tax (VAT) on essential commodities saying it will reduce paper work and boost compliance.
The Kenya Revenue Authority (KRA) said the current VAT regime which applies different rates for various categories of goods and services had made paying taxes in Kenya among the most expensive in the world.
“The best way out is to subject all items to VAT at 16 per cent then find alternative ways of subsidising essential items,” said KRA commissioner-general John Njiraini on Wednesday.
A controversial VAT Bill now being scrutinised by a parliamentary committee seeks to waive tax exemptions on more than 400 items including bread, milk, flour, medicine, farm inputs and sanitary pads.
However, MPs have agreed in principle to retain the exemptions on bread and maize flour amid widespread calls for other essential items to be spared the tax.
At the moment, imported goods and services — inputs and supplies used in agriculture, health and education, computer hardware and software, air travel and supplies to oil exploration companies — are zero-rated.
Agricultural produce and financial services provided by banks are classified as tax-exempt while supply of electricity and fuel were up to last month subject to only 12 per cent VAT rate.
“The longer the list of items treated differently, the more the filing that a taxpayer is required to do in order to comply with the law,” said Mr Njiraini even as he added that a small exemption list could be justified.
Every business handling at least Sh5 million worth of taxable suppliers is required by the Act to register for VAT.
“Failure to submit VAT return results in a penalty of five per cent of of the tax due while failure to register attracts a penalty of Sh100,000,” says Nikhil Hira, a tax partner at Deloitte.
The VAT Bill 2013 seeks to subject all items to 16 per cent tax but KRA officials said its main motivation was a simple and easy-to-follow regime.
Since VAT is based on an input-out principle, suppliers recover their taxes from consumers or government (for zero-rates goods). KRA wants government to think of a way outside tax law to subsidise essential goods.
According to PwC/World Bank Paying Taxes 2013 report, Kenya ranks 164 in ease of complying with tax laws with entities spending an average of 243 hours to complete the filing.
The ranking of 185 economies globally puts Kenya behind its main rivals for investments in the region — Mauritius at position 12, Rwanda at 25, South Africa at 32 and Uganda at 95.
Mr Njiraini said that the complexity of the VAT Act accounts for 75 per cent of time taken to file returns and pay taxes in Kenya. The taxman targets to raise Sh15 billion in 2013/4 financial year by implementing the VAT reforms.
On Wednesday, the officials released a 2012/13 financial year results showing that contribution of VAT has sharply declined in recent years due to various political interventions.
Kenya now charges the lowest VAT in East Africa compared to 18 per cent preferred by its East African Community partners.
By end of 2011, VAT accounted for just 12 per cent of domestic exchequer receipts, compared to 14.7 per cent for Tanzania, 17.9 per cent in Uganda and 18.6 per cent in Rwanda.
The taxman has also blamed suspension of withholding tax following pressure by the business community for poor performance of the VAT segment.
The VAT receipts dropped Sh11 billion from its peak of Sh103 billion recorded in 2010/11 to Sh92 in the 2011/12 financial year after the government suspended withholding VAT. In the last financial year, the VAT receipts rose to Sh101 billion.
“The withholding VAT used to provide us a very reliable compliance tool,” said Mr Njiraini.
He was referring to a penalty of Sh10,000 and 10 per cent on unpaid tax (whichever was higher) institutions that failed to withhold, issue certificates, remit the withheld VAT or submit a return faced.
Under withholding VAT, a declaration of tax was made by both the supplier and customer all acting as agents.
The government departments, parastatals, banks, financial institutions, Co-operative Societies, Insurance companies and regular exporters also acted as agents.
The Agent would withhold VAT in exchange for a certificate to the supplier who would in turn claim back the withheld VAT to avoid double taxation since the same tax is declared and paid by the trader.
Withheld VAT was to be remitted by agents to KRA on weekly basis and defaulters detected as filed details to support their claims.
