Withhold VAT to stop revenue leaks
By Jediel Kimathi
| June 11th 2015
Withholding VAT (WH VAT) was first introduced in Kenya in 2003 as a reinforcement measure to mitigate against government revenue loss through non-remitted VAT.
When a person supplied goods or services to specific recipients, the payment would be received less the VAT charged. The WH VAT agents would issue WH VAT certificates to the suppliers indicating VAT withheld.
The certificates would then be used by the suppliers to lodge refund claims for the withheld VAT to avoid double taxation. This regime was characterised by non-compliance on the part of some WH VAT agents and VAT refunds owed to the suppliers often resulted in cash-flow challenges for them. Due to these challenges, WH VAT was abolished in 2011.
Since its abolishment, Treasury has continued to lose VAT revenue from supplies made to the government and other recipients that previously acted as WH VAT agents. The revenue losses are primarily associated with supplies to the government where the suppliers are paid for their supplies but fail to remit the VAT charged.
In mitigation against the revenue loss, the government through the Finance Act 2014 reintroduced WH VAT with certain variations to its operation.
Unlike the previous regime where the entire VAT amount was withheld by the recipient of the goods or services, under the reintroduced regime, only a portion of VAT is withheld.
While the VAT law provides for the withholding of VAT at six per cent of tax payable, KRA has issued guidelines VAT must be withheld at the rate of six per cent on the value of taxable supply.
This contradicts the VAT law. If the intention of the legal drafters was as interpreted by KRA, the law needs to be amended to reflect such intention.
Any delays by agents in providing the certificates can hurt the suppliers’ cash-flows leading to distressed businesses. The suppliers’ are required to pay VAT charged on their sales in the month the invoices are issued. However offsets for the VAT already withheld are only possible in a later month after receipt of the certificate.
In mitigation of the above effects to the suppliers, the VAT law should be amended to provide for a penalty on any WH VAT agents that fail to provide certificates within a month of VAT withholding.
With the roll-out of the iTax system (iTax) by the KRA to boost tax compliance and the Integrated Financial Management System (IFMS) by the National Treasury to improve public funds accountability, it would be useful if the registration and compliance with WH VAT was done through iTax and linked to the various government agencies through IFMS.
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