Is VAT exemption remedy for refund of huge claims?

The Tax Law Amendment Bill 2018 seeks to exempt from VAT several items including but not limited to assortment of medicaments, maize flour, ordinary bread and cassava flour, wheat, unsweetened milk and cream, agricultural pest control products, supply of liquefied petroleum gas, input of raw materials supplied to pharmaceutical manufacturers in Kenya for manufacturing medicaments.

If the Bill is passed, these items will be moved from being zero rated to exempt. The government had recently listed the aforementioned items as zero rated in the Finance Act 2017.

Being zero rated means that the items are charged VAT at zero per cent while exempt means that the items are not chargeable to VAT. The Kenya Revenue Authority only refunds VAT on bad debts, taxes paid in error and persons dealing with zero rated supplies.

It seems that the government has been struggling on whether to list these items as zero rated or exempt. This is based on the government’s decision to initially exempt them in the VAT Act 2013, thereafter zero rate them in the Finance Act 2017 and then propose to exempt them in the Amendment Bill 2018.

What does this mean to the manufacturers, suppliers, consumers, and the government? Who will be the beneficiary of these proposed amendments?

The Kenya Revenue Authority has over the years been grappling with huge VAT refunds. The proposed tax amendment bill may be one of the options they are exploring in a bid to reduce the number of VAT refund claims lodged.

This move may also have been propelled by the increased revenue that the government needs to finance the country’s budget and the huge debt that needs to be repaid.

With regards to the suppliers and manufacturers, it will mean incurring costs of the VAT charged to them. This would directly mean that the costs of operations will increase by the value of VAT incurred on purchases.

READ: Kenyans to pay more for food in proposed VAT Act

Previously, the products were zero rated which meant that suppliers and manufacturers would apply and be refunded the VAT incurred. It is conceivable that the manufacturers will pass the costs to the final consumer. In the event the manufactures pass the cost to the final consumer, this would mean that the prices of these basic commodities like flour, milk and medicines will go up.

With many Kenyans currently grappling with unemployment and earning below the minimum wage, moving some of these basic commodities from zero rated to exempt would not be in Wanjiku’s best interest.

The farmers especially the maize farmers have been struggling with the attack of the army worm. Exempting the agricultural pest control products would mean that the cost of the VAT will be passed to the farmers.

This would increase the costs of farming and consequently increase the prices of their products in the competitive market making it very disadvantageous to them.

The government’s big four agenda that focuses on Universal Healthcare, Affordable Housing, Food Security and Manufacturing would be hampered by the rise in the cost of basic commodities.

The government’s agenda is to ensure that the public is able to afford the basic commodities. To foster this, I am of the view, that the government should reconsider the amendments and retain the items as zero rated rather than exempt.

Lucia Khaemba, senior tax consultant, EY