Reform the VAT law to cushion SMEs against delayed payments 

Looking back at the huge and negative impact that the inefficient administration of Value-Added Tax (VAT) in Kenya, one cannot help but argue that it is time its place in national economy was reviewed.

VAT is substantially a tax on expenditure that is levied on consumption of taxable goods and services supplied or imported into the country.

The law imposes a duty on the supplier of goods or services attracting VAT to collect and remit the amount to the Kenya Revenue Authority (KRA).

It cannot be denied that the VAT has proved to be an efficient means of collecting revenue for the government. But it has also resulted in debilitating negative unintended consequences for small and medium enterprises (SMEs) that supply government, and who generally get paid long after the service or good was delivered.

The bottomline is that the SMEs have been suffering the burden of   accounting for and remitting VAT in spite of delayed payment by the same government to whom they are paying taxes.

Taxpayers are required to account for VAT on a monthly basis. This has significant impact on cash flows. Though the taxpayer should ideally act as an agent, the VAT Act imposes financial burden on taxpayers since output tax should be accounted for and paid even before the tax charged has been received by the taxpayer.

Section 12 of the VAT Act 2013 provides that the time of supplies be the earlier of the date on which the goods or services are delivered, the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity, the date on which the invoice for the supply is issued, the date on which payment for the supply is received, in whole or in part.

To most SMEs, the government is the largest single buyer. It forms a substantial market for them for various goods or services.

The critical thing, however, is the fact that most of these suppliers are standard rated for VAT purposes. Suppliers of taxable goods and services are required to declare and account for VAT charged regardless of whether they have been paid.

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Both national and county governments have been characterised by delayed payments to suppliers due to irregular disbursements from the Treasury or on account of inefficient utilisation of resources. This leaves the SMEs to finance VAT payments for supplies made to government agencies from other sources.

The assumption that the VAT burden will be offset by respective input incurred is not always true for suppliers of services with minimal input VAT such as transport and consultancy services.

Since the law requires such taxpayers to account for VAT at the time of delivery or invoice date, they are forced to utilise their scarce working capital or borrow to finance the immediate VAT obligation as they wait for the government to pay for supplies, which in most cases take a long period of time.

Though they eventually get paid, the immediate cash flow pressure imposed has the potential to limit growth and at worst scenarios can cause such suppliers to go bankrupt or get de-listed by other business partners.

The problem is compounded by the rigidity with which the KRA administers VAT. The KRA makes demands without putting into consideration the fact that delayed payments are caused by the same government on whose behalf it is collecting tax.

It is the responsibility of the government to make laws that safeguard the interests of its citizens and facilitate them to achieve their full potential.

This is the reason the government should consider amending the VAT Act to ease cash flow problems among millions of traders doing business with the government.

There are two options to address this issue. First, amend the VAT Act to provide for cash basis accounting for VAT in regard to government supplies.

In this case, the supplies to the government agencies will be accounted and remitted once cash is received as opposed to when an invoice is raised or delivery is made. That way, it will be fair to all as the government will only earn the tax relating to business done with it once it pays.

Second, the government agency purchasing can be required to account and remit the VAT especially to suppliers who have negligible input VAT. In that case, the taxpayer will be relieved the burden of accounting for output VAT related to government supplies. The agency burden now will effectively shift to the right party.

These legal reforms will reduce cash flow challenges resulting from payment of VAT on unpaid sales to the government. SMEs will ultimately utilise the saved working capital for growth.

It will also minimise tax compliance burden for the businesses and put them in a better position to pay more taxes to the government in future.

Munyaka is a tax consultant. [email protected]