Can VAT on export be amended to spur growth?

By John Njiraini and Benson Kathuri

Kenyan companies providing exported services are finding themselves operating in a more hostile environment, especially with the Kenya Revenue Authority (KRA) interpreting the provisions relating to the zero-rated status of exports slowly being distorted.

The KRA has recently sought to clarify the interpretations of the definitions of terms relating to exported services and place of supply.

These interpretations by the KRA are bent on enhancing the collection of VAT on exported services. Local companies are, therefore, placed in a position where they are slowly being subjected to VAT in various aspects relating to exported services, despite the stiff competition from suppliers of similar services in other parts of the world.

In order for the Government to stimulate economic growth and employment and establish the country as a preferred provider of exports, the Minister for Finance should look into sealing the existing loopholes with a view to making the export business attractive.

Electronic items are fertile ground for VAT charges. Although exporters can recover the Value Added Tax paid as a refund, this move increases operation costs for traders.

In the 2008 Budget, the Minister of Finance introduced a regulation in the VAT Act defining the conditions under which a service is deemed to be supplied in Kenya. The definition, as many would perceive, is a contradiction to the definition of services exported from Kenya set out in the Act. On the one hand, services exported out of Kenya have been defined in the VAT Act as ‘services provided for use or consumption outside Kenya, whether or not the service is performed inside or outside Kenya.’

On the other hand, the regulations introduced in the 2008 Budget provide that services are deemed to have been supplied in Kenya where the physical service has been performed in Kenya.

The rules indicate that any service performed in Kenya is deemed to be a local supply hence making it chargeable to VAT. Although these regulations were introduced to curb fraudulent evasion of VAT, the contradiction has not served to promote or control exports.

guiding principle

Essentially, the guiding principle for exports must be ‘use’ or ‘consumption’.

However, ‘use’ or ‘consumption’ in Kenya is not necessarily based on the consumer having physical presence in Kenya.

If, for example, a supplier in Kenya provides a service to a non-resident company for use by their resident affiliate or branch office, the service is for consumption by the Kenyan branch – and hence would be considered a local supply.

On the other hand if the supplier provides, for example, a consultancy service to a Kenyan office for use by their a non-resident office, then this will be deemed to be an export and hence zero-rated for VAT.

However, should we use the ‘place of supply’ as a guiding principle, then the transaction in the second scenario will be viewed as a local supply, which essentially will attract VAT. The regulation should therefore not apply in determining exported services as the majority of them will be subject to VAT.

The Government trend on changes in the VAT treatment of exports dates back to 2002, when all taxable supplies to exporters were no longer zero-rated, but subject to VAT at the standard rate.

Although exporters can recover the VAT paid as a refund, this move increased operating costs, as VAT refunds are not given immediately.

Consequently, our exports have been subjected to ‘the time value of money cost’ due to increased administrative costs, hence becoming less competitive in foreign markets as they were operating on very thin margins due to immense competition in the international markets.

compete effectively

To ensure the Kenyan exporters remain competitive in the global environment, the Treasury should also consider putting up a system that enables faster processing of VAT refunds. This has been one of the biggest challenges facing exporters as a vast majority of them have outstanding refunds dating as far back as five years ago or more.

Every year, it has been expected that the Minister for Finance will address the headache of obtaining VAT refunds.

To enable exporters to compete effectively, the Minister should put in place measures to ensure that taxpayers receive their refunds within the shortest time and ensure that the KRA is allocated sufficient funds to pay outstanding VAT refunds.

This would boost exporters’ cash flows thereby reducing their need to borrow and its associated finance costs. This would in turn boost their competitiveness.

Perhaps the inclusion of interest on delayed repayments may focus the mind.