The Kenya Revenue Authority (KRA) has won a long-running war with the water services regulator to charge value added tax (VAT) on sewerage services, setting up consumers for a steep rise in monthly water bills.
The Water Services Regulatory Board (Wasreb) is expected to include the 16 per cent VAT charge in water bills after Attorney-General Githu Muigai gave a legal opinion supporting the taxman’s position that sewerage services are not exempted from tax.
As much as 75 per cent of water bills is made up of sewerage costs, meaning that a new 16 per cent increase will have a far-reaching impact on Kenyans who are heavily burdened financially.
For instance, a consumer with a water bill of Sh1,000 — and therefore a sewerage fee of Sh750 — will have to remit Sh120 more to the taxman.
Wasreb had initially rejected the KRA’s demand that it charges and remits tax on water services arguing they are tax-exempt.
In the protracted feud, the KRA insisted that water and sewerage service providers must pay tax for the sewerage segment of their services because the law clearly distinguishes between provision of “water” and “sewerage” services and that an amendment to the VAT Act 2013 made the latter vatable and not zero-rated as is the case for water.
Wasreb had argued that the two services were offered to consumers as a package and could not be separated because consumption of water leads to waste that the supplier of the water must collect and manage.
The water sector regulator termed the KRA’s decision to claim tax arrears from water companies unlawful and ill-advised as it would hurt the quest to provide essential services to the majority of Kenyans.
Wasreb on January 26, 2017 wrote to Prof Muigai, the government’s legal adviser, seeking his opinion on the matter only to get a response that favours the taxman.
“It is our considered opinion that based on a strict and ordinary interpretation of tax law, it is only water supply that is zero-rated as part of water services and not sewerage,” Prof Muigai said in his reply to Wasreb.
“The impact of such an interpretation on the affordability of sewerage services is a pure policy consideration that should be taken up with the Ministry of Water and National Treasury.”
Kenya has about 86 water companies, many of whom have received hefty sewerage tax demands from the KRA.
Nyeri Water & Sewerage Company, for instance, is currently locked in a legal battle with the KRA contesting payment of Sh34.4 million sewerage tax bill.
Prof Muigai’s opinion opens the door for water companies to seek Wasreb’s permission to increase tariffs in line with the 16 per cent (VAT) tax charge.
“Water companies are being asked to pay for costs that were not factored into the current water tariffs,” Robert Gakubia, the Wasreb chief executive, said in an interview.
“If this matter is not resolved, you should expect to see these companies applying to Wasreb to increase their tariffs soon,” he said.
Meter rent, which is used to maintain and replace the devices, currently stands at Sh50 per gadget per month, a charge that is expected to attract VAT at 16 per cent.
The charge varies according to meter size.
The tax standoff stems from the interpretation of the Water Act 2002 alongside the VAT law and recent amendments.
Proponents of introducing the VAT insist that the Water Act offers a clear distinction between water supply and sewerage, despite both “falling under water services.”
Prof Muigai said the difference dates back to the VAT Act 1993, which split “water services into drilling services, treatment and supply of natural water from sanitary and pest control services rendered to domestic households.”
The provision of sewerage services was captured in the “sanitary” part of the law, which listed all services that were at the time tax-exempt.
Wasreb argues that deletion of this clause from the tax law four years ago is what awakened the KRA to pursue water companies for VAT arrears, leading to the current stalemate.
“KRA has on its own volition…deemed sewerage services are not meritorious but essential supplies necessary for the dignity and wellbeing of the citizenry,” Wasreb said in its letter to Prof Muigai.
“Thus it would be interpreted that the KRA is taxing Kenyans for using toilet facilities.”
Mr Gakubia further argues that by imposing VAT on sewerage services, the taxman will be going against the Constitution, which guarantees Kenyans access to “clean and safe water “and “reasonable standards of sanitation” in the Bill of Rights.
Water companies across the country had 1.4 active customers (meters) as at the end of last year and supplied 243.8 million cubic metres of water to 11.1 million Kenyans.