Rotich now makes U-turn on removal of withholding VAT

Treasury secretary Henry Rotich has reinstated withholding value added tax (VAT), making a U-turn on its supposed repeal in January.

The recently assented to Finance Bill 2016 has re-introduced six per cent withholding VAT, and backdated the effective date to January 19, in what is likely to hit suppliers and commercial property owners and tenants.

Withholding VAT allows the taxman to collect six per cent of the levy in advance at the point of payment for suppliers, with the remaining 10 per cent being paid in due course.

Shitul Shah, a partner at Daly & Inamdar Advocates, said the comeback of withholding VAT is meant to improve government cash flow given that it allows the government to collect the levies beforehand through withholding agents.

“I think it is more of a strategy to improve cash flow,” said Mr Shah in an interview with the Business Daily.

The Kenya Revenue Authority (KRA) has consistently failed to meet its revenue targets amid increased State expenditure on a bloated civil service, devolved units, infrastructure, and debt repayments — and the shortfall has occasionally resulted in a biting cash crisis in government.

Going forward, for instance, supplies to a sacco appointed as a VAT withholding agent will see a trader deducted six per cent levy at the point of payment for direct payment to KRA and the remaining 10 per cent payable by the trader.

The changes carried in the Bill bring to an end a nine-month tussle between the taxman and tax experts, with the KRA insisting that withholding VAT was still applicable.

READ: Taxman insists withholding VAT still on

But the Tax Procedures Act (2015) had earlier deleted provisions in the VAT Act that allowed the use of agents, effectively nullifying withholding VAT, tax experts argued.

The ensuing impasse left former withholding VAT agents and suppliers of taxable supplies in a quandary and Mr Rotich’s move offers clarity to the market.

Mr Rotich’s about-turn now allows KRA to ride on parastatals, banks, credit unions, contractors and insurance companies among others to act as agents to collect the tax.

However, tax experts have questioned the validity of backdating withholding VAT saying it is likely to create a legal and financial crisis for taxpayers.

“A key question is whether the retrospective amendment, which imposes an obligation and potential penalties for non-compliance can stand the legal test,” analysts at KPMG said in a research note.

“In any event, the law requires withholding VAT agents to withhold VAT when making payments, an obligation that cannot apply to payments made between 19 January 2016 and the publication of the Finance Act 2016 when there were no enabling provisions.”

The backdating of the law and the punitive measures that accompany it given the Tax Procedures Act offers amnesty on penalties and interest to landlords for all rental income earned in 2014 and 2015 provided they declared such rental income by 30th June 2016.