Vat Bill 2012 Review & Critique

VAT Bill 2012: Review and Critique

Institute of Certified Public Accountants of Kenya
Coast Branch Seminar on 25th August 2012

Presented by CPA Mohamed Ebrahim MBA (Manchester), CGMA, FCT

Partner: - Ace Associates – Certified Public Accountants

Director: - Ace Consulting Limited and Ace Taxation Services Limited

Coast Branch Seminar on 25th August 2012 by CPA Mohamed Ebrahim MBA (Manchester)

Background

The Minister of Finance in July 2011 had tabled a VAT Bill for consultation. He has
now tabled before the Parliament a revised The Value Added Tax Bill 2012.

Objective

The Bill aims to simplify many of the provisions in the current Act, and also
introduce some key amendments. When the current VAT Act was introduced in
1989 to replace Sales Tax, there were very few exempt and zero-rated supplies.
With lobbying from various stakeholder groups over the years, this list has grown
and has led to distorting the current VAT system. which should ideally operate on
the principals of input and output offsets. Moreover, when the current Act was
enacted, it was done with the aim of making indirect taxes the tax of the future
by shifting the tax burden of tax collection from taxing income to taxing
consumption. This aim has not been met, hence the revision.

Aims for the revision of the VAT Legislation

 Carry out a review with a view to streamlining the already inefficient VAT
system;
 Develop a simplified and modern VAT legislation which will enhance
compliance;
 Develop a VAT structure which is broad based thus making it possible in the
future to reduce the standard rate;
 Reduce the current list of zero-rated and exempt items and cushion the
needy through expenditure programs;
 Removal of remissions; and
 Ensure that the proposed Act has the backing of the stakeholder groups.


Opinion

The act is unlikely to attain one of the key objectives that of the backing of
stakeholder groups, as an unintended consequence is that it has the potential to
increase the cost of basic necessities (lack of public support) and cripple a key
sector of the economy namely tourism, which is essential for our region.

Organisation of the VAT Bill

Current VAT Act

 is divided into 14 Parts with 59 Sections and 9 Schedules;

Proposed Act

 is divided into 17 Parts with 82 Sections and 2 Schedules and also codifying
the various Legal Notices. This makes the proposed Act simple to read.

Comparative analysis of the proposed VAT bill to current VAT Act

Based on a preliminary review of the proposed Act, the key changes when
compared to the current Act can be summarised here below:

Referencing Note

Section (S) and Schedule (Sch) references below refer to the Section and Schedule
references in the proposed Act (VAT Bill), while CS and CSch refer to the Section
and Schedule references in the current Act.


Effective Date - S 1

New Provision

 After assent by the President, the Bill will come into force on
such date as the Cabinet Secretary may gazette.

Impact of the Provision

 This allows for adequate timing to be provided for the
implantation of the proposed Act.

Definition of Business - S 2

New Provision

 The definition of business has been extended to include
“profession, vocation or occupation” and is also extended to
include “an activity carried on by a person continuously or
regularly whether or not for gain or profit”.


 The extended definition could bring to tax services provided by
persons who are not in full time employment but provide a
service on a continuous or regular basis e.g. by being directors
or acting as members of taskforces where their total income
exceeds the registration threshold. It remains to be seen how
this provision will apply in practice.


Definition of Supply - S 2

New Provision

The supply of goods and services has been separately defined.

 Supply of goods means a sale, exchange, or other transfer of the
right to dispose of the goods as the owner; or the provision of
electrical or thermal energy, gas or water.

 The supply of services is defined to include anything that is not a
supply of goods or money, including the performance of services
for another person; the grant assignment, or surrender of any
right; the making of any facility or advantage; or the toleration
of any situation or the refraining from the doing of an act.
 Taxable supply is defined to include a supply, other than an
exempt supply, made in Kenya by a person in the course or
furtherance of a business.
 The definition of taxable supply now clearly excludes supplies
made outside of a business, and also supplies made by a foreign
branch of a Kenyan resident company.


 The definitions in the proposed Act provide better clarity than the
definitions in the current Act.
 The definition of supply of services has been extended to make it
broad.

However, it remains to be seen how it will apply in practice.


Definition of Export, Import and Importer - S2

New Provision

 Export means to take cause or to be taken from Kenya to a
foreign country or to an Export Processing Zone (EPZ).
 Importation means to bring or cause to be brought into Kenya
from a foreign country or from an EPZ.
 Importer in relation to goods means the person who owns the
goods, or any other person who is, for the time being in
possession of or beneficial interest in the goods at the time of
importation.
 Services exported out of Kenya have been defined to mean a
service provided for use or consumption outside Kenya.
 In the case of an importer, the definition has been extended to
include the beneficial owner, reflecting the complex nature of
import transactions which may involve multiple parties.


The definition of services exported outside Kenya aims to codify
Regulation 20 of the VAT Regulations, 1994. This definition still
does not go far enough to clarify the current confusion on what
“used or consumed outside Kenya” means.

This also contradicts with S8 (1) which states that a supply of
services is made in Kenya if the place of business of the supplier
from which the services are supplied is in Kenya. It is hoped that
this will be clarified in the proposed Act or through a Regulation.


Rates of Tax - S 5

 The only rates proposed are 0% and 16%, and these are now
enshrined in the body of the Act and not in a Schedule to the Act.
 The lower rate (12%) applicable to diesel oil, industrial fuels and
electrical energy is removed. This will increase the cost of
electricity for households, and cost of production for
businesses that do not meet the registration threshold, thereby
being unable to absorb the increase.

Exempt Goods - Sch 1

New Provision

 Exempt items list has been considerably reduced to now include
only items of animal semen; bovine semen; fish eggs; soya
beans; non-roasted or cooked groundnuts; copra; linseed;
sunflower, cotton, sesame, mustard, safflower and other oil
seeds; pyrethrum flower; live animals; meats and edible meat
offals; fish, crustaceans and other aquatic products; unprocessed
milk (which was previously zero-rated, hence likely to lead to a
price increase);fresh bird eggs in shell; edible vegetables (fresh
or chilled), roots and tubers, fruits, nuts and peal of citrus fruits
or melon; and cereals.
 Fuel and oils including petrol, diesel, aviation fuel, kerosene,
white spirit, oils and gas will remain exempt for a period of 3
years from the commencement of the new Act.
 All the goods in the proposed exempt category relate to
unprocessed agricultural and horticultural products. This will
have the impact of bringing a number of businesses who handle
processed agricultural and horticultural products into the tax net
shifting the tax burden to the final consumer.


 The bringing into VAT at the standard rate of cut flowers and
buds is a welcome move, as it will allow persons in this industry
to claim input VAT on the sale of flowers into the local market to
consolidators for export. The exporters can then claim the input
VAT on export making the end price of exports lower.


Items currently on the exempt list which will become VATABLE at the
standard rate include certain sea foods including crabs, octopus,
scallops, mussels, lobsters and prawns; egg yolks and bird eggs not in
shell; dried fruit (apricots, prunes, apple and mixtures of nuts and
dried fruits); seeds of wheat, corn, rye and barley; rice, rye and other
cereal flour; flour and meals of oil seeds; grouts and meals of cereals
(including wheat and maize); cut flowers and flower buds;
cinematographic films; hides and skins; charcoal; newspapers,
journals and periodicals; stamps; coins; transformers; inverters;
mobile handsets; helicopters and aeroplanes; weapons; wooden
coffins; energy saving bulbs; aquaria pumps; and outboard engines.

Exempt Services - Sch 1

The list of exempt services has been restricted to banking services;
insurance; reinsurance and insurance brokerage services; education
service; medical, veterinary, dental and nursing services; agriculture,
animal husbandry and horticultural services; burial and cremation
services; transport of passengers excluding international air
transport and hired or chartered services (affects negatively
tourism sector); sale, renting and hire of land and residential
premises; insurance agency, insurance brokerage, stock brokerage
and tea and coffee brokerage services; accommodation and
restaurant (affects negatively tourism sector), services provided


by educational institutions, medical institutions and employees for
internal consumption; supply of airtime by any person other than a
mobile or a wireless telephone service provider; and betting, gaming
and lottery service.

 The standard rating of electricity to households will increase the
domestic electricity bill. (common man adversely affected)
 Sale of commercial building now becomes VATABLE. This will
have an impact on the real estate market and also cause cash
flow issues as the buyer will now have to finance input VAT at
the time of purchase and recover it over a longer period against
output tax. (potential for rent increase)

New Provision

 Services which were exempt and which will now become
VATABLE at the standard rate include management of unit trusts
and collective investments schemes managed by trustees and
registered by CMA; credit rating bureau services; sanitary and
pest control services rendered to domestic households; social
welfare services provided by qualifying charitable
organisations; sale of commercial property; car park (except
where provided by Government agencies and to employees by the
employers) and conferencing and exhibition services; postal
services (including stamps, renting of post boxes and mail bags);
performances by resident Kenyan artists; tour operator and
travel agency services including air ticketing commissions;
transportation of tourists when the conveyance is hired or
chartered; hiring and leasing of, or chartering of exempt
and zero-rated goods; chartering of aircrafts for ambulance


services; and landing and parking services provided for
aircrafts. (This will make Kenyan Tourism uncompetitive)
 Betting, gamming and lottery service which hitherto had become
VATABLE in under the current Act have been reinstated as
exempt services. (difficult to understand rationale, unless
Kenya’s planners want Kenya to become the Las Vegas of Africa)
 Imposing VAT on postal services at 16% will further add to the
non-competitiveness of this sector in Kenya, which is struggling
to compete with electronic mail systems and courier services.

Zero-rated Supplies - Sch 2

 Zero-rated supplies will now include exports of goods or taxable
services; supply of goods and taxable services to the EPZ; ship
stores and taxable services provided to international sea or air
carriers on international voyage or flight; supply of tea or coffee
for export to coffee or tea auction centre; transportation of
passengers by air carriers on international flight; supply of water
(excluding bottled water) for domestic or industrial use by a
Government authority or a person approved by the Cabinet
Secretary.

 Two new items which have been added to the list of zero-rated
services include transfer of business as a going concern by a
registered person to another registered person; and taxable
supplies imported or purchased by a company which has been
granted oil and gas exploration or a prospecting license by the
Government.


 Zero-rated supplies which become VATABLE at the
standard rate include services supplied by hotel establishments
to foreign travellers attending a tourism promotion event; supply
of the first 200 kwh to domestic households; supply of taxable
services for goods in transit; supply of taxable goods or services
to persons carrying out cotton ginning, water drilling, construction
of grain silos, and film producers; and supply of transportation
services in respect of unprocessed agriculture produce.

 Making taxable services in respect of goods in transit goes
against the objective of making Kenya a transit hub as the VAT
paid by the consumers will become a cost to them which they
will not be able to claim as input in their respective countries.

 The zero-rating of transfer of a business as a going concern from
one registered person to another will reduce the cash flow
requirements and the time to complete the acquisition. Under
the Sixth Schedule of the current Act, the process of applying for
this exemption was time consuming.

Zero-rated Goods - Sch 2

New Provision

 Only a certain category of goods will be zero-rated for a period of
3 years from the commencement of the proposed Act. These
include antibiotics; glands and organs; vaccines; blood
preparations; medicaments; adhesives and dressings used for
medical purposes, blood grouping reagents; dental cements; first
aid boxes and kits; gels for medicinal use; chemical
contraceptive preparations and waste pharmaceuticals.


 Zero-rated goods which will now become taxable include
milk (except unprocessed milk which is exempt) and
cream; baby formula; bread; locally ginned cotton; live trees,
bulbs, tubers, roots and cut flower; maize and wheat flour;
glucose and glucose syrup; oil cake and residues of milling
industry used in preparation of animal feed; coffee not roasted or
decaffeinated; vitamins and supplements; insulin (except
medicaments containing insulin); fertilizers; pesticides,
herbicides and disinfectants; napkins and napkin liners;
photographic film rolls; mosquito coils and sprays; exercise
books and dictionaries; sanitary towels; contraceptives; glasses
for spectacles; fire extinguishers; ploughing and harvesting
equipment; dairy and milking machinery; manufacturing
machinery for various industries; computers; generators;
bicycles and motor cycles; buses; x-ray and ultra sound
equipment; and computer software.


 Essential products like milk, bread and maize flour VATABLE will
increase the cost of these products on the consumers in the
lowest strata of the economy, hence lead to inflation.

 Kerosene (household and jet fuel) and LPG which were zero-
rated will now be exempt goods during the 3 year transition
provision.


Zero-rated Supplies to Public Bodies, Privileged Persons and

Institutions - Sch 2

 Supplies which were zero-rated and which will now become
taxable under the proposed Act include supplies in respect of
goods for use by the President; all goods, including materials,
supplies, equipment, machinery and motor vehicles for the
official use of the Kenya Armed Forces; material, articles and
equipment for use by disabled and physically handicapped
persons; badges and record books to the President Award
Scheme; goods supplied to NAAFI and AFCO; cars and spare part
incentives enjoyed by safari rally drivers; motor cycle and spare
part incentives enjoyed by entrants in motor cycle rallies;
equipment, machinery, uniforms, motor vehicle, aircrafts and
vessels imported or purchased for the official use of the Kenya
Police, KWS, NSIS and Kenya Prisons; taxable goods imported by
registered custom bonded factories; vehicle brought in by Kenya
Military and Police Officers returning from UN peace-keeping
missions outside Kenya; life saving apparatus; ships and other
vessels; materials and equipment used in the construction or
refurbishment of hotels; rewards earned by Kenyan
sportsmen; containers; equipment for power generation;
fertilizers; diapers for adults and hygienic bags; specialized ship
loading and unloading equipment; plastic sheets for agricultural,
horticulture and floriculture use; electrical energy imported for
distribution to the national grid; and electronic tax registers.

 Taxable services supplied to Kenya Red Cross and to certain
donor agencies, international and regional organisations with
Diplomatic accreditation, or bilateral or multilateral agreement


are now standard rated. It is therefore important that all
agencies enjoying a zero-rated status on service explore the
impact of this proposed change on their organisation’s.

 Official Aid Funded Projects are now defined by S2 to mean a
project funded by means of a grant or concessional loan in
accordance with an agreement between the Government and any
foreign Government agency, institution, foundation, organisation
or any aid agency. This will reduce the red tape in requiring the
gazettement of such projects for VAT zero-rating purposes.

 Supplies which remain zero-rated include supply to
Commonwealth and other Governments in respect of goods
consigned to persons on board a naval vessel for their personal
use or for consumption on board and goods for use by armed
forces of any allied powers; supply to diplomat (taxable supplies
to UN and Commonwealth High Commission; diplomatic missions,
consulates or foreign embassies and to their certain high officials)
or on first person arrival (personal and household effects including
one car); supply to donor agencies with bilateral and multilateral
agreements for their staff on first arrival (personal and household
effects including one car) and for goods and equipment imported
by or supplied to donor agencies, international and regional
organisations with diplomatic accreditation or bilateral and
multilateral agreements; taxable supplies to the War Graves
Commission excluding office supplies and equipment; goods
imported by passengers arriving from outside Kenya subject to
limitations; taxable goods supplied to or imported for official use
by the National Red Cross and St. John Ambulance in the
provision of relief services; articles of apparel, clothing accessories


and equipment designed for safety or protective purposes for use
by registered hospitals and clinics or by Government Authorities to
be used in fire fighting; and taxable supplies to official aid funded
projects.

Place and Time of Supply - S 8, S 9, S 11 and S 12

A whole new part has been introduced on the Place and Time of Supply.

Place of Supply

 Where the place of business of a supplier of services is Kenya,
then the supply will be deemed to be made in Kenya.
 Where the place of business of supply is not in Kenya, then the
supply will be deemed to be made in Kenya if the recipient of the
supply is not a registered person and:
 The services are physically performed in Kenya by a person who
was in Kenya at the time of supply;
 The services are radio or television broadcasting services
received at an address in Kenya;
 The services are electronic services delivered to a person in
Kenya at the time of supply;
 The supply is a transfer or assignment of, or grant of a right to
use, a copyright, patent, trademark or similar right in Kenya.

Time of supply:

A supply of goods occurs in Kenya if:

 The goods are delivered or made available in Kenya by the
supplier;
 The supply of the goods involves their installation or assembly at
a place in Kenya; and


 The goods are delivered outside Kenya, the goods were in Kenya
when their transportation commenced.
 Under the current Act, there is a lot of confusion around the
place and time of supply and the proposed Act appears to
provide greater clarity on this as it implicitly clarifies a number of
situations.
 Moreover, the appointment of Tax Representatives gives KRA
greater powers to enforce tax collections in respect of non-
residents.
 The introduction of this new provision on the place of supply in
the proposed Act clarifies the place of supply. The proposed Act
seeks to make vatable e-commerce transactions undertaken by
non-resident suppliers including supply of electronic services e.g.
web-hosting, update of software and provision of self study
packages.

The time of supply of imported goods shall be the time where the
goods are:

 Custom cleared at the port of importation or inland container station;
 Removed from a licensed warehouse or an EPZ; or
 Brought into Kenya.

The time of supply, including a supply of imported services shall be
the earlier of:

 The date on which the goods are delivered or the services performed;
 The date on which the invoice for the supply is issued; or
 The date on which the payment for the supply is received, in
whole or in part.

Implication


There are changes in the timing from the date when the goods or
services are supplied to the time when then the goods are actually
delivered or the services performed. This effectively means that the tax
invoice is issuable on delivery of the goods and not when the supply
commences. This provision resolves the current problem where KRA
officers demanded that the invoice accompanies the delivery of the
goods.

 Tax Representatives are required to be appointed by non-
resident suppliers.

Implication

These replace the Tax Agents in the current Act. Tax representatives
have a greater duty of responsibility than that prescribed for Tax
Agents and they are severally liable for taxes due.

 In the case of construction contracts, the current Act - CS 13 (1)
(b) had a provision in respect of the time of supply on such
contracts which was when a certificate was issued by an
architect, surveyor, or any other person acting as a consultant or
in a supervisory capacity.

Implication

This provision has been deleted in the proposed Act, and will bring in
an added complication in the determination of the time of supply on
such contacts.

Reverse VAT - S 10

 Reverse VAT on imported service under the proposed Act will
only be payable where a non-registered person imports the
services.


 Reverse VAT is no longer payable on imported services where the
recipient of the service is entitled to claim the full amount of
reverse VAT as input. Where the recipient is not entitled to claim
the full amount, they are required to only account for the VAT
portion on the amount they would not have recovered as input tax.
 This will reduce administrative and cash flow burden of
registered businesses.

Business Carried on by a Branch Outside Kenya - S 10

 Where a registered person carried on business both in Kenya
and outside Kenya, the part of the business carried on outside
Kenya shall be treated as if it were carried on by a person
separate from the registered person.

This clarifies the earlier confusion, and now requires a person who has
a branch outside Kenya to account for reverse VAT on services
received from the non-resident branch.

Taxable Value of Imported Service - S 13

The taxable value of imported services shall be the total of:

 The amount in money paid or payable (including incidental costs
incurred by the supplier in the course of making the supply) less
discounts or rebates allowed at the time of supply;
 The open market value at the time of supply; and
 Any taxes, duties levies, fees and charges (other than VAT) paid
or payable.

Implication and Critique

 There appears to be a drafting error as the taxable value cannot
surely be the total of the price paid plus the open market value.


It has to be the higher, if the intention is to tax the higher value
between the price paid and the open market value.
 The new provision appears to bring in open market value even
when the transaction is with a non-related party which is absurd.
 Moreover, open market value is not defined. This may cause
difficulty in determining what the open market value is.

Taxable Value of Imported Goods - S 13

In calculating the taxable value of imported goods, the supply of
services that is ancillary or incidental to the importation of the goods
shall be treated as part of the importation.

Implication

This provision is not clear but appears to catch royalties etc which are
charged as a separate component to the supply of the goods itself.

Credit Notes - S 16

The period within which credit notes can be given on returns of goods
has been reduced from 12 months as provided in the current VAT
Regulations to 6 months in the Bill.

Implications

 This reduces the period to issue credit notes. This provision
appears not to take into account the business realities especially
in supply of specialized goods.

Deduction of Input Tax - S 17

The period of deduction of input tax has been reduced from 12 months
to 4 months in the proposed Act. The new provision states that input


tax shall be allowed for a deduction within 3 months after the end of
the tax period in which the supply or importation occurred.

A certified copy of a tax invoice will be an acceptable document for the
purposes of claiming input tax.

Implication

The current Act allows input tax to be deducted within 12 months of it
becoming due and payable. This effectively means 12 months from the
invoice date. The proposed Act provides for 3 months after the end of the
tax period in which the supply or importation occurred, which means the
month in which the invoice is issued and a further 3 months after that.

The provision in the current Act requires a person to defer the claim of input
tax on an asset acquired under a hire purchase or a leasing agreement
unless the acquirer is in the possession of a letter of undertaking or a
certificate of clearance from the institution providing the financing has
been removed. This means that input VAT can be claimed in full at the
inception of a hire purchase or a finance lease agreement.

Implication

What is not clear is what will be the position in the case of operating
leases? Our opinion is that input VAT will continue to be claimed on
each operating lease instalment.

 The reduction in the time frame to claim input VAT will mean
tighter administrative controls over input VAT claims.
 Under the current Act, only an original tax invoice could be used
to claim input VAT, but in practice certified copies were
permitted. This practice is now codified in the proposed Act.


Blocked Items - S 17

Input VAT is now restricted only in the case of:

 Purchase, repairs or hire of passenger motor vehicles or mini
buses, unless these are used to supply taxable services or are
stock-in-trade; and
 Entertainment, restaurant and accommodation services, unless
they are provided in the ordinary course of business and are not
supplied to an associate or employee; or while the recipient is
away from home for the purposes of business of the recipient or
the recipient’s employer.

Implication

 Input VAT can now be claimed on items of furniture & fittings; oils
used in vehicles, ships and other vessels; electrical appliances;
and items used in providing staff welfare. It can also be claimed
on travel expenses incurred out of station for purposes of
business.

Formula for Deduction of Input Tax - S 17

The proposed Act now only allows the direct attribution method for
claiming input VAT for a registered person providing both taxable and
exempt supplies (mixed supplies). Under this method:

 Full deduction is made of all input tax attributable to taxable
supplies;
 No deduction is allowed for any input tax related to exempt
supplies; and
 Apportionment of input tax attributable to mixed supplies using
the formula of value of taxable sales to total sales.


Implication

 The choice of the formula to be used in claiming input VAT on
mixed supplies has been reduced to one. This method is a fair
method and was commonly used in practice.
 There are no requirements in the proposed Act to make annual
adjustments for the apportionment of input VAT relating to both
taxable and exempt supplies based on the annual turnover.
 The de minimis limit on claiming of full input VAT for persons
having mixed supplies has been increased from 5% to 10%.
 Registered persons supplying 90% or more by turnover of
taxable supplies will now be able to claim the full input VAT
attributable to mixed supplies, while registered persons
supplying 90% or more by turnover of exempt supplies will not
be able to claim any input VAT attributable to mixed supplies.

VAT Refunds - S 17

 With the revocation of Withholding VAT Agents, VAT refunds will
only be due to persons where the Commissioner is satisfied that
such refunds arise from making zero-rated supplies.
 Unlike the current Act, the proposed Act has not stipulated any
timeframe for the lodging of refund claims which hitherto was 12
months from the date the tax became payable or such longer
period not exceeding 24 months as the Commissioner may allow.

Implication

 It is also not clear whether the requirements under the VAT
Regulations requiring that all refund claims of Shs 1 million and
over be accompanied by an Auditors’ Certificate, are still in force.


Remission of Interest - S 20

The Commissioner will be required to maintain a public record of each
remission together with the reasons thereof which shall be reported to
the Auditor General on a quarterly basis.

Implication

This new requirement will make the process of granting remissions
transparent.

Collection of Tax by Distraint - S 24

When collecting tax by distraint, where the goods are of a perishable
nature, the Commissioner can direct that such goods be sold by either
by public auction or by private treaty, and the proceeds of sale be
retained and dealt with as if they were goods.

Implication

This is a new provision. Under the current Act, any such goods seized
were to be kept for 10 days before they could be disposed. This new
provision gives powers to the Commissioner to deal with perishable
items which could loose value if held for 10 days.

Remission of Tax - CS 23

The provisions in relation to remission of taxes including on the
acquisition of capital goods, excluding motor vehicles, of Shs 1 million or
more for manufacturing and the hotel sectors; capital goods and
machinery for use in a bonded factory; capital goods and services
supplied to a registered person for use in the construction or expansion of
private universities; and taxable goods and services to designated
low cost housing projects has been removed in the proposed Act.


All zero-rated supplies are now listed in the Second Schedule of the
Act and include supplies to official aided funded projects and relief
goods supplied or imported for emergency use which were covered
under S 23 of the current Act.

Implication

The reason behind removing these remissions is to prevent abuse by
non-qualifying persons. However, this measure goes against creating
an enabling investment climate which is necessary to achieve the
Vision 2030. While in many cases like manufacturing, hotels and
infrastructure development, VAT paid can be recovered as input VAT,
the recovery of such input VAT, due to the size of the projects, takes a
longer period and thus increases the finance cost of such projects.

In other cases like universities and low cost housing, which are
exempt, it increases the overall project cost as the VAT paid
cannot be claimed as input tax.

Opinion

The goes against public interest as educational institutions will be
required to train the workforce, as our economy gradually becomes an
industrial and services based economy in line with VISION 2030 and a
rapidly increasing population requires decent affordable housing,
which is already in short-supply in both urban and rural areas.

Refund of Tax - S 30

Application for refund of tax paid in error has to be made within 3
months from the time the tax became due and payable.


Implication

The time limit is reduced from 12 months to 3 months. The proposed
time limit is short as it is not always possible to detect errors on a
timely basis.

Refund of Taxes on Bad Debts - S 31

Where a person receives a refund on tax on bad debts from the
Commissioner, and subsequently recovers that debt, the proposed Act now
makes it clear that the person has to refund the tax to the Commissioner
within 30 days of the recovery of the debt. If the amount is not refunded
back to the Commissioner within the stipulated time frame, it will accrue
interest at a rate of 2% per month, which interest shall not exceed the
refunded amount. There is no provision under the section to apply for the
remission of this interest.

Implication

The provision to seek refund of VAT on bad debts is rarely used in
practice due to the bureaucracy in the process of obtaining the refund.
It is our hope that with the streamlining of the VAT process, this
avenue will be used more often.

Registration Threshold - S 34

The registration threshold had been maintained at Shs 5 million per
annum in the proposed Act. However, the proposed Act now makes it
clear that in determining the threshold, the following shall be
excluded:

 A taxable supply of a capital asset of the person; and
 A taxable supply made solely as a consequence of the person
selling whole or part of the business.


Implication

This codifies current practice.

Group Registration - S 34

The proposed Act gives the Cabinet Secretary powers to develop
regulations for group registration.

Implication

Group registration is permitted under the Sixth Schedule of the
current Act but has been difficult to obtain in practice, and it is hoped
that the proposed regulations will make the process easier.

Notification of Changes - S 35

A registered person is required to notify the Commissioner, in writing,
of any changes in the business name, address, place of business and
nature of business within 21 days of the change. Under the current Act,
these changes had to be notified within 14 days. Under the current Act,
additional changes that had to be notified to the Commissioner within
14 days and which have been removed in the proposed Act include:

 Partners in a partnership.
 30% or more in the shareholding of a limited liability company.
 Persons authorised to sign returns.

Display of Tax Registration Certificate - S 35

A registered person will now be required to display the tax registration
certificate at the principal place at which the person carries on
business, and a copy of the certificate at every other place at which
the business is carried on. Under the current Act, apart from the
requirement to display the certificate at the principal place of business,
a registered person was required to display a certified copy of the


certificate at other business locations. This requirement was not
always adhered to in practice as registered persons usually displayed a
copy which was not certified.

Cancellation of Registration - S 36

Where a registered person ceases to make taxable supplies, he is
required to write to the Commissioner, within 7 days of ceasing of
making such supplies, for the cancellation of registration. On the
cancellation of registration, a person will be required to pay tax being
equal to the input tax credit allowed on any trading stock held
immediately before the registration is cancelled within 15 days of the
date of cancellation of registration.

Under the current Act, a person was required to make an application
and pay the tax on stock in hand and on all other taxable assets within
30 days on which he ceased to make such supplies.

Implication

The wordings of the proposed Act are not clear as they require that
one accounts for output tax on stock in hand at the time of
deregistration and not at the time of ceasing to provide taxable
supplies.

Penalties - S 37

Default penalties in the current Act for various offences including

 failure to register,
 failure to apply or incorrect application for cancellation of
registration and


 failure to pay output tax on deregistration have been removed
and replaced in the proposed Act with a fine not exceeding Shs
200,000 or to an imprisonment not exceeding 2 years, or both.

Implication

A number of offences that were subject to a default penalty are now
punishable by a fine and/or imprisonment.

Use of Information Technology - S 38 to S 41

Unless specifically exempt by the Commissioner, the application for
registration; filing of returns and statements; payments and refunds; and
issue of notices or other documents to be issued by the commissioner will
be done using information technology.

Implication

This move is a positive one as it will improve the administration and
collection of tax. The proposed Act also provides for exemption from the
requirements for any person or class of persons, which may be
necessary e.g. if special concessionary treatment for SMEs is legislated.

 The proposed Act also provides for stiff penalties for
unauthorized access or submission of falsified records.

Extension of Time - S 44

The proposed Act allows for an extension of time to file a VAT return
provided the application is made before the due date for the submission
of the return.


Implication

This is a positive move especially where there are unavoidable
circumstances where a taxpayer is not able to meet the deadline.
However, it is hoped that the KRA internal procedures will be
streamlined to allow for timely processing of such applications.

Time Limit for Issue of an Assessment - S 45 and S 46

The proposed Act introduces a time limit of 5 years for the
Commissioner to issue an assessment or an amended assessment.
This time limit does not apply in cases of gross or willful neglect,
evasion or fraud.

Implication

This is positive as it brings to certainty the period for which an
assessment can be issued, as currently this was at the total discretion
of the Commissioner. It also aligns the assessment period with the
period for which VAT records are to be kept.

Appeals to the Tribunal - S 51

Where an appeal is made to the Tribunal, 30% of the tax not in
dispute and the entire tax not in dispute will have to be paid.

The Tribunal will now have powers to extend the time within which an
objection can be filed.

Implication

This proposal is better than the current scenario (100% of tax has to
be deposited) however it is still not fair as one is fined before being
proven guilty. There is also no clear process on the refund of this
deposit, which further increases the cost of doing business. The
objective might be to deter people from making frivolous objections.


Public and Private Rulings - S 71 to 76

 The Commissioner will have powers to make binding public rulings
which are binding on him. Such rulings will not be binding on the
taxpayer and will become binding from the date specified in the
ruling and shall be published in two daily newspapers with national
circulation. The Commissioner has the powers to withdraw such
rulings from a date specified in the notice of withdrawal, but the
withdrawal shall not affect transactions done during the time the
ruling was in force.
 The Commissioner will also have powers to make private rulings
which are binding on him but not on the registered person to
whom they are issued. The Commissioner has the powers to
withdraw such rulings from a date specified in the notice of
withdrawal, but the withdrawal shall not affect transactions done
during the time the ruling was in force.

Implication

This is a welcome move as it is in line with global best practice.
however, there is still no provision for the Commissioner to make a
no-name ruling which is in some cases required to seek clarifications
on border-line tax interpretations without subjecting the taxpayer to a
risk of audit or to assist tax agents in the interpretation of legislation.

Tax Avoidance Schemes - S 79

The proposed Act gives powers to the Commissioner to determine,
within a period of 5 years, the tax liability of a person who has
obtained a tax benefit as a result of entering into a tax avoidance
scheme.


 This provision exists in the Income Tax Act but is rarely used in
practice. The provision makes it necessary to plan any scheme to
ensure that it is not an anti-avoidance scheme.

Regulations and Transitional Provisions - S 80 and S 81

The Cabinet Secretary has powers to make regulations for the better
carrying out of the provisions of the proposed Act.

 The provisions of the current Act shall remain in force for the
purposes of assessment and collection of any taxes, interest and
penalties outstanding at the date of commencement of the
proposed Act.
 Any subsidiary legislation made under the current Act will also
remain in force provided it is not inconsistent with the proposed Act.
 While the transitional provisions are clear in respect to collection
of taxes, they do not cover issues like refunds lodged under the
current Act or remissions obtained on long-term projects which
will cross over into the proposed Act.

A number of provisions in the regulations made under the current
Act have been captured into the proposed Act including the refunds
and appeal rules, while some provisions like remissions have been
made redundant. Based on this, it appears that the only subsidiary
legislation that will survive under the proposed Act include:

 Some provisions of the VAT Regulations, 1994;
 The Value Added Tax (Appeals) Rules, 1990;
 The Value Added Tax (Distraint) Regulations, 1990; and
 The Value Added Tax (Electronic Tax Registers) Regulations, 2004.


Way Forward

As there are a number of inconsistencies between the proposed Act
and the current subsidiary legislation, it would be useful if all the
subsidiary legislation is revised to be consistent with the proposed Act
to avoid confusion in practice.

NB: The Bill uses the designation Cabinet Secretary (as in the “new
constitution” rather than Minister for Finance, hence it is future looking
or the Minister for Finance does not expect that it will be passed
before the general election.


Vat Bill 2012 Review & Critique

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