vat bill 2012 review & critique

VAT Bill 2012: Review and Critique

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


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



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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