KRA, counties clash over VAT on revenue demand

Council of Governors Chairperson Ann Waiguru during the Senate Liaison Committee Retreat at EKA Hotel in Eldoret town, Uasin Gishu County on June 04, 2024.

Photo credit: Jared Nyataya | Nation Media Group

County governments have clashed with the Kenya Revenue Authority (KRA) over demands by the taxman that the devolved units pay 16 percent value-added tax (VAT) on their own-source- revenue (OSR) collections.

The chairperson of the Council of Governors Anne Waiguru says KRA’s persistent demands that counties pay VAT on revenue were unconstitutional and amounted to an affront to the distinct roles that are to be played by the national and county governments.

“The council has received reports regarding the persistent demands by the Kenya Revenue Authority (KRA), demanding from county governments for Value Added Tax (VAT) on various counties’ revenue sources and attendant interest and penalties. We take greatest exception to these unwarranted demands which are unfounded and undermine the principles of Article 6(2) of the Constitution,” she said in a statement.

Article 6(2) of the Constitution distinguishes between the two levels of government—national and county governments—noting that they are “distinct and interdependent.”

They are also expected to conduct their mutual relations based on consultation and cooperation.

Data by the Controller of Budget Office shows that county governments generated a total of Sh41.4 billion from their OSR, in the first nine months of the 2023/24 financial year, which was 51.3 percent of the annual target of Sh.80.78 billion.

Waiguru, who is also the governor of Kirinyaga County, noted the supreme law also outlines the taxes which are to be imposed by the two levels of government.

The national government, whose tax agency is the KRA, collects the levies known as ordinary revenues, which include income tax, VAT, customs duties, and other duties on import and export goods and excise.

On their part, counties may impose property rates, entertainment taxes, and any other tax that may be authorised by an Act of Parliament.

Ms Waiguru said the KRA has been demanding VAT on some of their OSR, as well as the charges, a move that she described as unconstitutional.

“We, therefore, find the demands by KRA on imposition of VAT on counties’ own source revenue (OSR) unconstitutional and an encroachment on the powers to impose taxes and duties of the Counties in contravention to Article 209 (3) and (4) of the Constitution.”

Waiguru added that there are legal provisions that exempt services by counties from VAT, which is why KRA’s demands have no basis.

“We therefore maintain that Kenya’s constitutional architecture does not envisage that the national government will impose taxes on revenues raised by the county governments.”

She argued that raising own source revenue by counties in its strict sense does not necessarily correspond with a service provided, nor does it fall under any stage of production.

The KRA had not responded to our questions on their legal basis for demanding VAT on the county government’s revenues.

However, the tax experts that we spoke with agreed with the Council of Governors.

Nikhil Hira, a Partner at Kody Africa LLP, said he concurs with Waiguru’s statement.

“If one is doing this to counties, shouldn't it also apply to the central government?” wondered Hira.

“I can’t think of anywhere where government services are subjected to VAT,” added Hira.

Robert Waruiru, another tax expert, said the Council of Governors has a valid argument.

“It is like asking Immigration to charge VAT when you apply for a passport and pay the fee for the National ID,” said Waruiru.

“I am also struggling to see what VATable services have been rendered by the county government,” added Waruiru.

VAT is charged at a general rate of 16 percent which applies to taxable goods and services other than zero-rated supplies.

Specific supplies listed in the Second Schedule to the VAT Act, 2023 are zero-rated. These included food items such as maize flour, cooking oil, and bread.

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