In essence, the amendment expands the list of goods and services deemed critical to economic development that will be exempted or zero-rated from VAT; it also reinforces ministerial powers to fine taxpayers who circumvent using electronic billing machines to avoid paying taxes.
Once enacted into law, the amendment is tipped by experts to improve Rwanda Revenue Authority’s (RRA) efficiency in VAT administration, a tax component that contributes about 35 per cent of total domestic revenues collected.
Rwandans returning from abroad such as students have also been liberated from paying VAT on their personal effects such as cars acquired while abroad.
Experts also say the expanded list of VAT free commodities and taxes will also encourage local investment in critical sectors such as agro-processing, IT and health.
“This was an important bill that Parliament had to give top priority because these amendments were critical to general VAT administration,” said Theobald Mporanyi, a member of the parliamentary Standing Committee on Budget and Patrimony.
Why amendments?
Mporanyi said the amendments were suggested by the Ministry of Finance after loopholes were noticed in the current VAT Law 37/2012 of 09/11/2012.
For instance, the list of VAT exempted commodities and services under the current law were found to be shallow and didn’t include some items that are deemed to be worthy of immunity given their importance to the population.
It was also noted that, while the Ministerial Order 002/13/10/TC of July 2013 established the implementation of the current VAT law provided for administrative fines against persons who do not comply with the use of Electronic Billing Machine (EBMs), the law was not clear on whether the minister with finance under his or her docket had powers to fine or not.
Charles Kagame, the deputy commissioner for legal department, told The New Times that RRA has been challenged in the past with people contesting the ministerial powers to punish those circumventing the use of EBMs.
“The minister’s powers under the current law had to be clarified and the amendment will do that to prevent future misunderstandings,” said Kagame.
To improve efficiency in VAT collection, RRA introduced EBMs but their implementation has been a tag of war–the new machines that enable electronic book keeping are not popular with merchants.
What’s coming?
The new changes will mainly affect Articles 5, 6, 8, 22 and 24 of the current VAT law that were found to have lacunas that needed fixing.
The first Article of the amendment lists the nature of goods and services to be zero-rated, effectively modifying Article 5 of the existing law.
According to the Article, exported goods and services such as minerals that are sold on the domestic market, international transportation services of goods entering Rwanda and transportation services of goods in transit in Rwanda to other countries will be zero-rated.
Zero-rated items are those that are taxable but the rate of tax is nil on their input supplies.
Article 2 of the amendment modifies Article 6 of the existing law to update the list of goods and services to be exempted.
Once assented to, services of supplying clean water and ensuring environment treatment for non-profit making purposes, goods and services related to health and medical purposes as well as equipment designed for persons with disabilities will be free from VAT.
Under Article 4, which will modify Article 8 of the existing law, the amendment states that the RRA Commissioner-General will refund a taxpayer if ‘during a particular prescribed taxation period, the input tax exceeds output tax.
Enforcing EBMs
Article five of the amendment will enforce the use of the electronic billing machines by modifying Article 24 in the existing VAT law.
“VAT registered persons will have the obligation to use tax administration-approved EBMs that generates invoices indicating the tax,” the Article states.
According to Eric Rutabana, the country manager of the Business Partners International (BPI), government currently loses a lot of VAT revenues as a result of traders who refuse to use the machines.
“I think this is a very big problem and I can imagine its one of the reasons why government would want an amendment to the existing law,” said Rutabana.
Article 6 of the amendment takes care of Rutabana’s observations by stipulating actions to be taken against those who refuse to use EBMs. The amendment reinforces Article 24 of the current VAT law, which already addresses the issue.
Heavy fines
Both articles propose administrative fines against traders who fail to use it or intentionally damage EBM machines in their trading premises.
For instance, traders with an overall turnover of above Rwf400 million will be fined Rwf20 millions when found guilty of circumventing EBMs.
The fines for noncompliance include Rwf10 million for those with a turnover of over Rwf400 million and Rwf5 million and for those with a turnover of between Rwf50 million and Rwf400 million.
According to the amendment, EBM users who fail to comply with the obligations, as listed under a ministerial order, will also incur heavy fines which are explained in Article 7 of the draft law.
The amendment also calls for a fine of Rwf10 million for offenders with a turnover of between Rwf50 million and Rwf400 million while those turning over between Rwf12 million and Rwf50 million will be fined Rwf5 million.
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Reactions
Rwanda Revenue Authority says the new amendment will benefit both the taxpayer and tax collector, especially when it comes to VAT administration.
“By using EBMs, traders can be enabled to keep better books of accounts and to the tax collector, it will ease the cost of auditing, this is a win-win for both parties,” said RRA’s Charles Kagame.
Region Holding’s Kefa Angwenyi said the revision of zero-rated and exempted goods and services will encourage local manufacturers and also reduce on imports.
“That’s because some of the locally manufactured goods were more expensive due to VAT, but exemption will make them cheaper in the medium term.”
Martin Kahanovitz, of Eurotrade International, a local mining firm, said the new tax exemptions, “is the best news so far. We (the investors) had looked forward to this legislation for so long, I am happy the law has finally been passed.”
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Fines over EBM use
Article 6 of the law states that any person required to use EBM and fails to do so or intentionally damages it will be liable to an administrative fine as follows:
A fine of Rwf20 million when overall turnover is above Rwf400 million for each tax period; Rwf10 million when overall turnover is between Rwf50 million and Rwf400 million for each tax period; and Rwf5 million when the turnover is between Rwf12 million and Rwf50 million.
“Any person who intentionally damages an electronic billing machine may be prosecuted in accordance with provisions relating to tax offences provided for by the Penal Code,” states the law.
Article 7 punishes any person who fails to comply with obligations of using EBM, with a fine of Rwf10 million when turnover is above Rwf400 million, and Rwf5 million when it’s between Rwf50 million and Rwf400 million for each tax period.
A fine of Rwf2.5 million shall be charged to the business operator whose overall turnover is between Rwf12 million and Rwf50 million, while Rwf500,000 will be imposed on one whose overall turnover is less than Rwf12 milion.
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