Kenya first introduced Withholding VAT (WHT-VAT) in the year 2003.
The country introduced the system, then suspended it and then reintroduced in. the withholding rates have moved from 16% to 6% to the now proposed and effected 2%.
The country has faced various challenges and the following are some of those challenges.
Challenges
WHT-VAT was first introduced at the rate of 16% which is the standard VAT rate in Kenya. This meant that all the VAT amount was remitted to KRA. Proper application of VAT system dictates that the net amount on the credit side of the VAT return (input VAT, credit carried forward, withheld VAT etc.) is deducted from the debit side of the VAT return (output VAT) for every tax period.
However, introducing the WHT-VAT at the rate of 16% meant that the taxpayers did not have any output VAT and therefore, they could not deduct the VAT input, nor utilize the VAT credits carried forward. Hence, the WHT-VAT system created VAT credits inform of withheld VAT that made the operation of the VAT system in Kenya impossible.
During those periods, the VAT Act Cap 476, allowed claiming of refunds of any VAT credits resulting from the WHT-VAT. The affected taxpayers lodged WHT-VAT based refund claims almost every month. The refund claims were not paid on time.
Failure to pay refund claims on time created a lot of problems for the taxpayers and the revenue authority because overnight, there were very many people who were seeking VAT refunds yet the government allocation for VAT refunds was not adequate. This resulted in huge accumulation of WHT-VAT based refunds which negatively impacted on the taxpayer’s operating capital and eventually all tax revenues in the country.
The WHT-VAT credits were the taxpayer’s operating capital.
The WHT-VAT was suspended for some time and when it was re-introduced, it was not at the rate of 16% but the rate of 6%. However, there was a catch to this. The VAT Act (2013) outlawed VAT refund claims based on WHT-VAT. Essentially, the VAT Act (2013) does not allow any claim of refund of any VAT credits based on WHT-VAT.
The option given to the taxpayers was to seek for WHT-VAT exemption in cases where the VAT credits accumulation continued for over 24 months. This created another problem because many taxpayers currently have VAT credits based on WHT-VAT yet they cannot be refunded because of their unique business operations.
This effectively means that the WHT-VAT credits ‘hang’ in the taxpayer’s VAT system without being utilized.
The WHT-VAT credits are the taxpayer’s operating capital. This has negatively impacted on taxpayers cashflow. Unless care is taken, the system can ground many businesses which will ultimately negatively impact on the business survival and the country’s tax revenue. Granting of the WHT-VAT exemption is another nightmare for taxpayers because the process takes many months while at the same time the WHT-VAT credits continue to accumulate.
During this year’s national budget (2019), there was a proposal to reduce the WHT-VAT rate from 6% to 2%. It is hoped that this lower rate will sort out the problems experienced by taxpayers from the accumulation of the WHT-VAT credits. However, while this move is laudable for future operations, it does not sort out the problems currently being experienced by taxpayers who have accumulated WHT-VAT credits.
Initially, when WHT-VAT was introduced in Kenya, it was done for all VAT registered taxpayers. However, the re-introduction was done in phases starting with large taxpayers and government bodies as the tax agents, and then the medium taxpayers as tax agents.
Initially, WHT-VAT agents were required to issue pre-printed manual WHT-VAT certificates. The certificates were given to taxpayers by KRA. This may have created opportunities for some not very honest persons to misuse the system and generate their certificates and claim VAT refunds based on WHT-VAT system.
Confirming genuineness of the WHT-VAT certificates was difficult especially because they were issued by many VAT registered taxpayers. Also, storing of certificate copies that were returned to KRA was chaotic. However, currently, the WHT-VAT certificates are being generated by i-Tax and this only happens after the agent has remitted the deducted money to KRA.
Previously, it was not clear when the WHT-VAT agents were required to remit the deducted VAT to KRA. It was assumed that remittance was by the 20th day of the next month after deducting the WHT-VAT. This meant that some WHT-VAT agents especially government bodies failed to remit the WHT-VAT on time or did not remit at all.
The government institutions only issued the manual certificates and the taxpayers went ahead to claim the WHT-VAT which was not remitted. This explains why even after many years, numerous taxpayers who applied for WHT-VAT refunds have never been refunded yet government institutions (and therefore the government by extension) deducted the WHT-VAT. This amounts to theft from taxpayers by government institutions.
However, currently in Kenya, the law is clear on when the WHT-VAT is supposed to be remitted to KRA. It is within 14 days after being deducted. If this does not happen within the month, the taxpayers cannot be able to utilise the WHT-VAT in their monthly tax returns for that tax period.
Documentation, especially by government institutions, was also a problem initially. This resulted in the government institutions withholding the VAT and not returning the WHT-VAT certificate copies to KRA. This was another reason why some taxpayers were not refunded the WHT-VAT based refund claims. It is a problem that is still being sorted out many years later.
Conclusion
Kenya is still experiencing other challenges but we are positive that we shall overcome. However, despite all the challenges, WHT-VAT is a very productive tax system of collecting VAT as highlighted in our earlier article ‘Withholding VAT in Kenya’. That is why the government suspended the system and re-introduced it latter.
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Disclaimer
This post is for general overview and guidance and does not in any way amount to professional advice. Hence, www.taxkenya.com, its owner or associates do not take any responsibility for results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. Tax industry in Kenya is very dynamic.
