Understanding the tax regime key to mitigating compliance risks

Regular reviews of product offerings by a company can identify opportunities for VAT optimisation. [iStockphoto]

The government's new plans to raise taxes to fund its operations are in disarray after a court suspended the implementation of the new Finance Act, 2023.

Even as the three-judge bench looks into the civil suit, businesses need to familiarise themselves with various existing regimes and plan accordingly.

Traditionally, raising revenue for public spending is informed by policies aimed at ensuring a fair distribution of tax burdens.

First, tax is raised through Value Added Tax (VAT) currently set at 16 per cent, the standard rate for taxable goods and services, as well as imports.

Secondly, we have a zero-rated tax regime where unprocessed agricultural products and agricultural services, medical supplies (like physiotherapy accessories, treadmills, and ventilators) and financial services and insurance are not taxed. Under this category, a business can claim input VAT refund for items it bought for its processes,

Thirdly, we have a VAT-exempt products category where a business can't claim input VAT for purchases made and cannot issue a tax invoice for the sale of exempted goods or services.

In essence, each of these categories holds significant importance to every Kenyan and often sparks heated debates whenever a tax amendment looms.

From an equity standpoint, taxing certain goods to raise funds for the provision of government services based on household sizes can be more progressive than zero-rating food.

Applying taxes to necessities like food can spur policymakers to prioritise giving preferential treatment to other goods.

Additionally, the government should continuously review and revise the list of zero-rated and VAT-exempt products, considering sectors that would benefit from these classifications.

But there have been calls to expand the list of zero-rated and VAT-exempt products as this will enhance access to essential products by vulnerable populations, promote local industries, and stimulate economic activity.

Sectors such as renewable energy, affordable housing, and essential services like healthcare and education require attention to foster sustainable growth to meet social needs.

For example, providing zero-rated or VAT-exempt status to renewable energy equipment and affordable housing materials can spur uptake thereby igniting demand for the products, unlocking new value chains from the training of technicians, the opening of supply chains from importers, distributors, retail outlets to last mile installers.

It will help combat climate change and create jobs across the value chain as well as give Kenyans a new platform for technology transfers.

New investments will also take place thereby creating new avenues for the government to attract new revenue.

Expanding the list to include sanitary products, sporting activities, medical equipment, and digital educational services would go a long way in addressing critical social needs and fostering sectoral growth.

To adapt to pricing strategies, businesses must stay informed about tax regulations by leveraging technology and seeking professional tax advice that can help companies to navigate the evolving tax landscape.

Regular reviews of product offerings by a company can identify opportunities for VAT optimisation.

Professional tax advice from risk advisory firms such as Minet Kenya will help businesses to ensure compliance and identify any potential cost-saving measures within the existing tax framework.

It is also imperative that the government carefully evaluates the implications and potential revenue losses associated with these tax structures to strike a balance between generating revenue and promoting inclusive economic growth.