Firms blocked from tax claims on leased cars

Firms hiring or leasing vehicles for passenger transport will be barred from claiming in-put tax if Parliament accepts proposed changes in law to seal revenue leaks.

The Finance Bill 2021 seeks to change Section 17(4) of the Value Added Tax (VAT) Act on input tax to include leasing and hiring of passenger cars or minibuses.

An input tax is a levy paid by a business on acquired goods and services. Under the arrangement, the business pays the Kenya Revenue Authority(KRA) the difference between the output tax and input tax if the amount is positive, or it can apply for a tax refund if the amount is negative.

“The proposal if passed, will prohibit registered persons from claiming input VAT relating to hiring or leasing of passenger cars or minibuses, unless the vehicles are acquired exclusively for the purpose of making taxable supplies in the ordinary course of the business of dealing in or hiring of the vehicles,” consultancy firm, Deloitte said in an analysis.

“Currently, input tax relating to hiring or leasing of passenger vehicles is deductible although we have seen instances where the revenue authority has taken the view that acquisition includes hiring or leasing of passenger vehicles,” it added.

This means companies, schools, and other institutions with staff vans or leasing vehicles to be used by employees for commuting will now pay 16 per cent VAT.

This comes amid a shift to leasing of vehicles for directors or employees by firms and even government parastatals, instead of buying due to the advantage of claiming back part of the VAT on the monthly tax payments.

This in turn saves the costs involved with vehicle leases and hiring, but leads to high input tax claims from the KRA.

Currently, businesses such as entertainment joints, restaurants and accommodation services can claim full VAT if their vehicles are used for transportation passengers or stocks and supplies

The proposals in the Finance Bill 2021 come in wake of thinned revenue collection even as the State sought to finance a Sh3.632 trillion budget for the financial year 2021/2022.