Tax system calibration major test for KRA in 8pc fuel levy

Measured against the intense pain and financial burden that the new 16 per cent Value Added Tax (VAT) on fuel has caused across the Kenyan economy, the proposed reduction of the rate to eight per cent must have come as big relief for fuel marketers, distributors and consumers.

No one can deny that the lower VAT rate is a better option than the previous exemption regime, which among other challenges did not allow fuel distributors’ credits for the VAT incurred in the business of supplying fuel.

Consequently, all non-recoverable VAT was loaded on the final pump prices and borne by the consumer.

With a lower VAT rate, however, the fuel marketers and other players in the fuel supply chain will now be entitled to a recovery of the VAT incurred by their businesses.

The expectation is that the final pump price will go down and that the government will actualise its revenue collection target. On the balance of things this policy shift appears to result in a win-win situation for all stakeholders.

Yet for the eight per cent proposal to become effective, Parliament must amend the Finance Bill, 2018 in line with President Uhuru Kenyatta’s recommendation.

Otherwise, Parliament has the right through a two-thirds majority vote to pass the Bill a second time without amendment, or with amendments that do not fully accommodate the President’s recommendations.

In the latter case, the Bill will have to be re-submitted to Mr Kenyatta for his assent within seven days.

The question is whether Parliament’s approval of the presidential proposal is the only requirement needed to operationalise the lower VAT rate. The answer is, certainly not!

Unfortunately, the lower VAT rate of eight per cent that Mr Kenyatta has proposed is not supported by the provisions of the VAT legislation.

This is because the Value Added Tax Act, 2013 only allows the National Treasury Cabinet Secretary (CS), subject to Parliament’s approval, the discretion to vary the rate of VAT by either decreasing or increasing the rate by four percentage points.

This means that the existing VAT rates, 0 per cent and 16 per cent, may be varied from zero to four per cent, a reduction from 16 per cent to 12 per cent or an increase to a maximum rate of 20 per cent.

Ultimatley, if parliament adopts the 8 per cent VAT, further amendments to the provisions of the VAT laws will be required to enable the CS vary the existing rate beyond the four percentage points provided for in law.

Otherwise, the lower eight per cent VAT rate proposal will contradict the provisions of the existing VAT law and potentially open the new tax to legal challenge.

It is also apparent that if Parliament adopts the lower VAT rate the Kenya Revenue Authority (KRA) will have to make various amendments to its administrative framework to accommodate the new rate.

This is because the KRA’s online platform, the iTax, makes a special provision for a lower rate of 12 per cent, which is not activated.

The KRA will need to activate this provision on ‘other rated sales’ for eight per cent rated fuel products. This will be only possible if the KRA’s system developers made a provision that allows for such changes to be made as soon as the law is passed.

Besides, as a matter of practice the Electronic Tax Register (ETR) devices that suppliers use to issue tax invoices only allow for issuance of invoices at 16 per cent or 0 per cent.

This means there will be a need to reconfigure all ETR devices to incorporate the eight per cent rate. Such configurations of the ETR devices will definitely come with an additional cost burden for the taxpayers.

Even more troubling will be the fact that various taxpayers operate automated accounting systems that are already configured with 16 per cent and 0 per cent VAT rates. This means that in adopting the lower VAT rate, Parliament must provide for a delayed effective date to allow taxpayers time to reconfigure their accounting systems.

MPs must stay alive to the fact that a rushed introduction of the lower rate will occasion huge administrative inefficiencies that may lead to disputes between taxpayers and the KRA — and clog up the system.

This said, we are awake to the Government’s pressure to collect revenue on fuel.

But Parliament will also have to separately deal with the implications of the eight per cent VAT rate with regards to the existing laws on withholding VAT (WH VAT).

The Tax Procedures Act (TPA), 2015 empowers the taxman to appoint the various taxpayers as WH VAT agents who are required to withhold six per cent out of the 16 per cent VAT payable to the KRA and remit the amounts withheld directly to the taxman.

In the absence of a change to the TPA, the suppliers of fuel can expect to only receive two per cent VAT with the balance of six per cent being paid directly to KRA — this in our view is likely to plunge such suppliers in a perpetual VAT credit position without the right to VAT refund.

Ultimately, all relevant VAT law provisions and related laws should be holistically reviewed and, where necessary, amended.

This includes allowing the KRA and taxpayers sufficient time to operationalise the reduced VAT rate.

Kabochiis a partner andMutisois a manager with PwC Kenya’s tax practice.