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.
Enhance compliance
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.
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