The Value Added Tax Act (the “Act”) was published in the Kenya Gazette on 23rd August, 2013 and in the Kenya Gazette dated 30th August, 2013, the Cabinet Secretary announced a commencement date of 2nd September, 2013. The Act introduces a raft of far-reaching changes to the Value Added Tax (“VAT”) regime and we would like to highlight some of the changes.
The commencement date of 2nd September, 2013 was announced one working day prior to it. As such, suppliers are facing implementation challenges as they update their point of sale, accounting and ERP systems to accommodate the changes to the vatable and non-vatable supplies introduced by the new Act.
Supplies that have been re-classified for VAT
The eleventh Parliament bowed to public pressure and categorized certain essential supplies as VAT exempt e.g. unprocessed milk, maize flour, wheat flour, some medicaments and sanitary towels.
However, as the suppliers of these items will be unable to recover their input VAT, the pricing of these items may be adjusted upwards as suppliers try to salvage their shrinking margins.
Items which were previously VAT free and which are now vatable include processed milk, cooking gas, periodicals, text books, phone handsets, mosquito nets and wooden coffins. Petroleum oils and gasoline will be vatable in 3 years time. Newly vatable services include credit rating bureau services and travel agency services.
Supplies (excluding motor vehicles) to licensed oil, gas, mining and geothermal exploration companies are now VAT exempt, subject to the recommendations of the Cabinet Secretaries for Energy or Mining.
Similar supplies used to construct a power generating plant by approved companies are likewise exempt.
Alarmingly, it appears that the sale of commercial buildings is now subject to VAT (previously it was only the letting of commercial property that was vatable). Given the high value of commercial property in Kenya’s booming real estate sector, there is potential for a staggering amount of VAT on this.
Previously, the VAT Act allowed the Treasury to grant remission of tax for capital items purchased as part of an investment project, subject to certain conditions. The new VAT Act does not contain provisions on remission but where remission had already been granted, it will continue in force for 5 years from the commencement date.
Under the new Act, input tax is allowable as a deduction within 6 months of the month in which the supply occurred (this was previously allowed for 12 months). In addition, for credit notes, VAT can only be claimed where the credit note is raised within 6 months of the issue of the invoice.
Where a registered person has excess input tax, this will only be refunded by the Commissioner where it arises from the making of zero rated supplies (which are now very limited) e.g. the exportation of goods and services. In other instances, the excess input tax will simply be carried forward to the next period.
Imported and exported services
Persons who import services and who are entitled to claim the full input tax in respect of those services can indicate the value of the taxable services as zero (and enjoy the resulting cash flow savings).
A supply of services is made in Kenya if it is made from the supplier’s place of business in Kenya. However, there is no guidance on when the supply is considered to have been used or consumed outside of Kenya. It is therefore unclear when a service will qualify as an exported service that is zero rated for VAT.
Persons who do not have a place of business in Kenya but who qualify for registration e.g. if they physically provide services in Kenya that are worth Kshs. 5 million per annum, are required to appoint a local tax representative.
VAT rulings, audits and disputes
The new Act states that audits must be completed within 6 months from the date they commence (unless the Commissioner grants an extension). In addition, where a taxpayer lodges an objection against an assessment, the Commissioner is deemed to have agreed to amend the assessment unless he/she communicates their decision within 60 days of receiving the objection.
The Commissioner can now make a public ruling setting out his/her interpretation on the application of the Act. The ruling must be published in at least 2 daily newspapers of national circulation.
The ruling is binding on the Commissioner but not on the taxpayer.
The Commissioner can also issue private rulings on specific transactions but there are a number of circumstances under which the Commissioner can decline to do so e.g. insufficient information, where the matter is already the subject of an assessment, where the request is vexatious or frivolous or where the issue is already covered by a public ruling etc.
Notably absent from the Act are provisions on appeals to a VAT Tribunal. This is because this issue is the subject of a separate Bill issued in June 2013 referred to as the Tax Appeals Tribunal Bill.
The Commissioner is now empowered to seek High Court approved freezing of assets for 30days where there is a suspicion that attempts to collect tax will be frustrated. The KRA must determine the tax due and issue an assessment within the 30 day window. The taxpayer can, within 15 days, apply to the High Court to discharge or vary the order.
The Government is likely to realize a significant increase in VAT collections (and reprieve from the clamouring of taxpayers who have hitherto had large VAT refunds payable). For the taxpayers, there will be a challenge around timely implementation of the new provisions. Further clarification is required on the thorny issue of exported services and we hope that the Commissioner will soon issue a public ruling on this subject.