There has been talk by tax experts about the possibility of expanding the tax net to capture more taxpayers. Such conversations are informed by the need to increase revenue collection to meet the ever-bulging annual fiscal budget.
At a policy level, the government has in the recent past introduced a raft of measures to either create new taxes/levies or ensure efficient collection and compliance within existing laws.
One of these measures was the reintroduction of withholding value added tax(VAT) through the 2014/15 fiscal budget cycle. In this article, we seek to demystify the various aspects of withholding VAT as is currently structured under the law.
The law requires appointed agents to deduct VAT at six per cent of the taxable value when making payments to registered persons for taxable supplies.
VAT withheld should be remitted to the revenue authority by the 20th day of the following month. Upon remittance of withheld VAT, the iTax platform automatically generates a withholding VAT certificate which entitles the supplier to credit for the amount withheld.
It is worth noting that withholding VAT is not a separate tax from Value Added Tax. Rather, it is a form of advance tax which is largely aimed at two objectives; advance collection and to monitor and enforce compliance.
Ordinarily, VAT is payable where there is excess of output tax (VAT on taxable sales) over input tax (VAT on taxable purchases) in a month. However, withholding VAT negates this general rule by firstly requiring that an appointed agent deducts VAT at the prescribed rate when paying registered suppliers for taxable supplies.
Its application does not consider the supplier’s VAT position i.e. whether the supplier is in a payable position or not. By disregarding the VAT position of the supplier, the government is therefore able to collect VAT well in advance even where the supplier would not be in a payable position.
At this point, it is perhaps important to note that withholding VAT does not and should not ideally result in collection of additional VAT. Rather, its application should ensure that the government collects earlier than would normally be the case.
This is irrespective of whether the supplier would be in a payable or credit position in the tax period VAT is withheld. VAT collected in advance through the withholding VAT mechanism is subsequently recovered where a supplier on whose payment VAT is withheld utilises credit thereon to offset against future tax payable.
Secondly, withholding VAT is aimed at ensuring compliance. Prior to the reintroduction of withholding VAT, registered suppliers could bill for and receive full payment for their supplies including VAT thereon.
It was therefore possible that suppliers could under-declare or omit altogether VAT charged and collected from their customers when filing their VAT returns.
As such, unless the Kenya Revenue Authority audited such suppliers, there was a good chance that some suppliers could walk away scot-free having underpaid VAT.
However, withholding VAT now places part of the responsibility to declare sales transaction on the shoulders of an appointed agent (normally the customer) without taking away the supplier’s duty to declare such transactions.
This way, it has become easier for the revenue authority to track transactions and raise queries or even additional assessments where there are anomalies between information declared by the customer and that presented by the supplier.
Such tracking is made easier by the automation of taxpayer obligations through the iTax platform. By default therefore, suppliers are somehow arm-twisted to ensure transactions which are subject to VAT are correctly declared in their VAT returns and VAT thereon paid. Consequently, this fosters compliance.
Withholding VAT challenges
The above notwithstanding, there are aspects of the law that need to be reviewed and possibly amended to ensure that the application of withholding VAT does not create unfair tax implications to the suppliers.
Firstly, it is often queried why suppliers on whose payment VAT is withheld are not entitled to refund for the credit arising from VAT withheld. The obvious response is that withholding VAT as currently structured should largely not result in continuous VAT credits.
This is because only six per cent of the taxable value is withheld as opposed to the full 16 per cent. There is therefore an assumption that VAT withheld will not be too significant to result in accumulation of credit. However, this assumption is likely to be violated in the following cases in:
• case of low-margin products;
• case of suppliers who make both taxable and zero-rated supplies; or
• complex business arrangements where some of the parties thereto are appointed agents while others are not.
Previously, when withholding VAT was applicable under the repealed VAT law, the law entitled registered persons to refund of credit arising from withholding VAT.
However, this attracted a large number of refund claims, an implication which the government was keen to avoid. This is possibly one of the main reasons why withholding VAT was abolished under the repealed VAT law.
To avoid similar cases when withholding VAT was reintroduced under the current VAT Act, the government devised two measures to curb cases of increased credits related to VAT withheld. One was to reduce the applicable rate from 16 per cent to 6 per cent and the other, which was introduced through the Finance Bill/Act 2017, was to entitle suppliers to exemption from withholding VAT.
Such exemption is subject to demonstration that a supplier is likely to be in a continuous credit position arising from the application of withholding VAT for 24 months or more.
These two measures appear to be well thought out. Perhaps the government should expedite the issuance of guidelines on the exemption application in the latter case.
Exemption comes as a reprieve to many registered persons and quite a number of applications have been lodged with the Commissioner. However, the Commissioner has hardly processed these applications pending issuance of a directive on the form and manner of granting the exemption.
Lastly, it would be recommended that the revenue authority reviews the order of offset of credits arising from both withheld VAT and excess input tax. The current iTax configuration prioritises utilisation of excess input tax ahead of withholding VAT credit.
As a result, where a registered person has excess input tax arising from zero-rated supplies, the person’s refundable input tax is diminished while he/she cannot separately claim a refund of the credit emanating from withheld VAT.
The iTax system should therefore be modified in a way that credit arising from withheld VAT is first utilised against any future VAT payable. Once such credit is fully utilised, the system can then allow utilisation of credit created by excess input tax.
Overall, it is hoped that withholding tax will have the right impact for the government in terms of revenue collection and enhancing compliance.
This, coupled with the automation of most tax processes and procedures, will ensure the government seals some of the loopholes previously leading to tax leakage. However, there remains a few hiccups which may need to be addressed to ensure its implementation is not burdensome to taxpayers.
It has to be remembered that VAT is the predominant consumption tax not only in Kenya but also world over. VAT presents untapped potential for the revenue authority and its effective and efficient implementation can significantly reduce the current budget deficits that are almost becoming a norm.
Charles Musyoka is Tax Manager, Deloitte East Africa.