Businesses set for Sh2bn boost from VAT claims

Businesses are set to get a major cash flow boost from a proposed legal amendment that will see their Sh2.6 billion withholding VAT claims from the taxman offset against their pending tax dues.

The Treasury, through the Statute Law (Miscellaneous Amendment) Bill 2019, is seeking approval from Parliament to empower the Commissioner of Domestic Tax to allow withholding Value Added Tax (VAT) to “be applied against any tax payable under this Act.”

“The Bill seeks to amend the Act to provide for a taxpayer to apply any withheld tax to his credit to offset any other tax liability due from the taxpayer,” the brief memorandum accompanying the bill reads.

Claims for refunds of the withholding input VAT, charged at the rate of six percent, have been accumulating since September 2017.

The proposed new clause to section 17 (5) of the VAT Act will allow the businesses to clear their outstanding tax obligations against their withholding VAT claims.

Tax claims against the Kenya Revenue Authority (KRA) have been a major point of complaint for many businesses.

It is estimated that the KRA owes in excess of Sh20 billion refunds including those on zero-rated supplies and VAT refunds on exports.

The Kenya Association of Manufacturers (KAM) protested to KRA on January 29 over lack of a legal framework to claim withholding VAT, compounding cash crunch challenges for some companies.

"The six percent WHVAT (withholding VAT) is effectively an additional tax on manufacturers, notwithstanding additional administrative costs that comes with it. There is currently no provision in law allowing manufacturers to claim the WHVAT," KAM said in its Priority Agenda 2019 report.

The value of withholding VAT had crossed Sh2.68 billion by August 2018, the lobby claimed, a value which has since gone up.

The amount has been accumulating since September 2017 when the taxman switched to a new formula in processing refunds following the enforcement of VAT regulations which were gazetted by Treasury secretary Henry Rotich in April that year.

The formula only uses zero-rated supplies in calculating refunds, unlike previously where refunds were arrived at by subtracting output from input VAT, according to KAM.

"Effectively, what’s happening is the portion of money that would have been paid to us as a refund is actually lying as credit there (at KRA) because they said we couldn’t claim and it’s lying in our account," Kaushik Shah, the group governance officer at steel roofing giant Safal, said in an interview in February.

"This VAT contributes 3-4 percent of the cost of funding and then there’s liquidity that is tied up that you still have to go and borrow from the bank and, in today’s environment, to borrow from the bank is not easy."