VAT move spells more pain for households

Personal Finance

VAT move spells more pain for households

Monday, April 20, 2020 22:00

By MAURICE MWANIKI |

Across the world, leaders are monitoring the rapidly unfolding coronavirus pandemic and doing whatever is necessary to address the crisis, including country-wide lockdowns. For those in the tax world, many are advocating for fiscal liquidity steps, for example tax measures that help businesses and people hold on to some cash during this time.

Kenya is also playing its part in implementing measures geared towards cushioning businesses and its people. Towards this end on March 25, 2020, President Uhuru Kenyatta outlined tax and fiscal measures to support the economy. Specifically, the President in his speech to the nation announced four measures, namely a reduction in corporate tax for companies from 30 percent to 25 percent; 100 percent tax relief for persons earning gross monthly income of up to Sh24,000; Reduction of the marginal tax rate for Pay as You Earn “PAYE” from 30 percent to 25 percent; and the reduction of the VAT rate from 16 to 14 percent.

The President directed the National Treasury to effect the reduction of the standard VAT rate from 16 to 14 percent with effect from April 1, 2020. The Cabinet Secretary in charge of the National Treasury proceeded to issue a Gazette notice on March 26, to reduce the VAT rate to 14 percent.

The President’s directive presents a welcome reprieve for all as it will lower the cost of production for businesses and reduce the cost of goods and services for end consumers.

In his speech on March 25, Mr Kenyatta directed the Kenya Revenue Authority (KRA) to pay all verified VAT refund claims to the tune of Sh10 billion within three weeks. If effected, this will come as a relief for businesses involved in cross-border trade such as those in the horticulture and floriculture value chains, whose operations have been adversely affected by the slowdown of the global economy.

Expedited VAT refunds are also critical for manufacturers of zero-rated goods that are essential in the economy. In addition, the President ordered the Kenya Revenue Authority to allow for the offset of Withholding VAT against other tax obligations as an alternative to payment of refund claims. With the President’s directive taxpayers have started seeing the KRA commence the process of verifying taxpayers’ credits, which is a relief to many taxpayers who are keen to utilise the credits to offset other pressing obligations will start to see their credits verified and where appropriate set off against their other obligations such employee taxes and withholding tax.

LONGER TERM TAX POLICY MEASURES

Further to the presidential directive of March 25, 2020, on April 2 the National Treasury released the Tax Laws Amendment Bill, 2020. The bill proposes a raft of changes covering corporate income tax, VAT, excise duties and miscellaneous levies that will lead to greater revenue generation for the government. A highlight of the Tax Laws Amendment Bill is that it seeks to amend the VAT Act by standard rating numerous goods and services that are currently either zero-rated or exempt and also proposes to move a number of items from being taxable at the zero rate to being exempt.

VAT is a consumption tax borne by final consumers of taxable goods and taxable services. The VAT rate applicable on taxable supplies is either the standard rate, 14 percent or zero percent. Zero-rating of goods or services means that such supplies are taxable but at the rate of zero percent, while exemption means that such supplies are not taxable. While it may appear as if zero-rating and exemption have the same final impact on the price of any commodity or service, this is not the case.

Where supplies are zero-rated, the supplier is eligible to claim input tax credits in relation to VAT incurred in making such supplies. VAT does not result in additional cost, arising from unclaimed input tax, to be passed on to the final consumer. On the contrary, for exempt supplies, the supplier is not eligible to claim any input tax credits in relation to the VAT incurred to make such supplies. Accordingly, all the uncalmable input tax is factored in the price charged to the final consumer thus making such supplies costlier.

SHORT-LIVED VAT RELIEF ON ESSENTIAL GOODS

It is apparent that the National Treasury is back seeking to exempt from VAT essential goods with a view to reducing its obligations for VAT refunds. The proposed changes in the Tax Laws Amendment Bill 2020 are, however, bound to increase the costs of certain goods and services to taxpayers and the government should consider this as the Bill is debated at the National Assembly. If the bill is enacted into law as is, the overall net implication will be an increase in the prices of basic commodities such as milk, bread and medicaments and the timing could not have come at such a time when the population is facing an uncertain future.