Relief for firms as Rotich halts penalties for withholding tax
Treasury secretary Henry Rotich has ordered the taxman not to penalise companies for failing to pay withholding value added tax (WVAT) deemed to have accrued over five months since early this year.
The order, through a special legal notice published on June 21, marks a big win for businesses that had fretted over the possibility of incurring hefty, backdated tax liabilities.
An amendment to the law that took effect on January 19 scrapped the Kenya Revenue Authority’s (KRA) power to appoint withholding agents, prompting tax experts to interpret it as an indication that suppliers were not obligated to pay up.
The KRA however maintained that the tax was still applicable despite the changes to the law, warning suppliers they would incur interest and penalties if they did not pay up.
In his June 8 Budget speech, Mr Rotich through the Finance Bill 2016 reinstated KRA’s powers to appoint the agents effective January 19, retrospectively penalising those who had not paid or collected the tax due to the law change.
Mr Rotich has now, through a special legal notice dated June 21, settled the simmering tax disagreement, notifying businesses that they will not be required to pay interest or penalties that the taxman has been demanding.
“This provision shall not be construed to impose a penalty whatsoever on any such person who ceased to withhold tax for any period following the repeal of that section up to the June 8,” the CS said through the legal notice.
The withholding value added tax was first introduced in 2004 to ensure that contractors who charged the government 16 per cent VAT remitted the same to the taxman.
This tax was stopped in 2011 following realisation by authorities that it was the single-largest source of refund claims that had at the time accumulated to Sh30 billion.
It was however reintroduced through the Finance Act 2014 in what was widely interpreted as an attempt to bring suppliers for government goods and services into the tax dragnet.
KRA implemented a double declaration system of VAT by both the supplier and the purchasing government agency or department that has been appointed as a withholding VAT agent.
Appointed agents withhold six per cent while the supplier is required to submit the other 10 per cent in order to make the total VAT payment at the standard 16 per cent.
The agents, who include government agencies, ministries and corporations as well as large and medium-sized companies, submit returns twice a month through commercial banks to a special VAT account at the Central Bank of Kenya.
However, Parliamentarians recently deleted a section of the Tax Procedures Act (TPA) that empowered KRA’s commissioner general John Njiraini to appoint agents to collect the tax.
The amended law took effect on January 19, causing confusion that pitted the KRA against suppliers, agents and tax experts who claimed collection of the levy had essentially been stopped.
“With effect from January 19, 2016, the commissioner has no legal basis to appoint a taxpayer as a withholding agent and, it appears, any withholding VAT agent no longer has a basis to withhold VAT,” Robert Waruiru, a tax director at KPMG Advisory Services, said in an opinion.
This interpretation was shared by audit and advisory firm PricewaterhouseCoopers which informed its clients that “the withholding VAT provisions in the VAT legislation are no longer applicable” from the same date.
By pushing the effective date of the amendment to June 8, tax experts say Mr Rotich has avoided lengthy court battles over the matter.
