Indirect Tax Alert | 31 January 2014

Kenya enacts new VAT act

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On 2 September 2013, Kenya's VAT Act 2013 came into effect. There were numerous challenges faced by the Government and the business community in implementing the VAT Act. The VAT Act 2013 has drastically changed the content of the repealed VAT legislation by removing some provisions and introducing several new provisions. Notable changes include removal of VAT remission, removal of reduced VAT rate of 12%, incorporation of the previous subsidiary legislation into the principal legislation, reduction of schedules from eight to two schedules and bringing into tax charge previously zero rated and exempt supplies.

To assist in the appreciation of VAT Act 2013 and its impact and to improve compliance, this Alert summarizes the key changes designed to mitigate the non-compliance risk associated with the overhaul of the VAT legislation. Various clarifications are expected to the provision of the overhauled VAT Act, some of which have been communicated while others are expected so as to clear ambiguities and errors under the VAT Act 2013.

The key provisions and changes are outlined below.

New VAT Act 2013 provisions

Deduction of input tax

Previously, the deduction of input tax on items such as furniture, household electrical appliances, staff housing among others was restricted. Currently, the deduction of input tax on these items is allowed. Input tax on passenger vehicles is restricted unless acquired for the exclusive purpose of making a taxable supply of the automobile in the ordinary course of continuous and regular business. In addition, input tax on accommodation, restaurant and entertainment services is deductible as far as it is incurred while the recipient is away from home for purpose of business.

The period of claiming input tax was reduced from 12 to 6 months of the issuing of the respective invoice. This calls for speedy processing of invoices to avoid some of the input tax being time barred.

Advance ruling

The VAT Act 2013 provides for public and private rulings. A public ruling is the Commissioner's interpretation on the application of the Act and it is binding on the Commissioner. On the other hand, the Commissioner can, on application by a taxpayer, issue a private ruling setting the Commissioner's interpretation on the application of the Act in relation to a proposed transaction. While the ruling is binding on the Commissioner, it is not binding on the taxpayer it is issued to. These provisions are likely to play a key role in streamlining the ambiguities in the VAT Act.

Objection against VAT assessment

Where a taxpayer receives an additional VAT assessment which he is not in agreement with, he is entitled to raise an objection to the Commissioner within a period of 30 days from the date of the additional assessment. Upon receipt of the objection, the Commissioner is required to respond within 60 days. Failure to do so results in the objection being deemed to have been accepted. This is a positive step for taxpayers as the Commissioner has to fast track objections.

Zero rated and exempt supplies

Most of the goods which were previously zero rated have become taxable at the standard rate with a few becoming exempt. Various goods/services that were formerly exempt have also become taxable. This brings these supplies under the VAT net and therefore reduces the number of companies claiming for VAT refund as a result of making zero rated supplies.

There is however the challenge of ambiguity as to whether some supplies are covered under the list of exempt or zero rated supplies. In this regard, some clarifications have been given through public rulings and more rulings are expected, both public and private, aimed at clarifying the ambiguities.

Information technology

The VAT Act 2013 provides for use of information technology for most tax formalities and procedures. This includes registration, electronic returns, tax payments and notices and guidelines on the use of tax computerized system. The introduction of the provisions legitimizes the online tax management system (iTax) which is already operational as well as paving way for new services via information technology.

Returns and records

The VAT Act 2013 clarifies the procedures for amending VAT self-assessment returns, further giving the Commissioner discretion to accept or deny their subsequent amendment. In addition, it provides for the extension of time for submission of a return. An application is to be made in writing before the due date for submission. However, a mere application does not exclude the applicant from applicable penalties, if any.

The VAT Act 2013 recognizes the use of a certified copy of a tax invoice. This was previously not acceptable.

Transfer of a business as a going concern

The transfer of a business as a going concern by a registered person to another registered person, which previously required approval for exemption under the repealed VAT Act is now explicitly zero rated. This is a positive move since no approval will be required which will improve the speed at which such transactions are concluded.

Tax representatives

A person required to apply for VAT registration who does not have a fixed place of business in Kenya is required to appoint a tax representative. The registration should be in the name of the nonresident person.

Provisions dropped in the VAT Act 2013

Withholding VAT system

Effective 1 July 2011, withholding VAT agents were de-registered. However the provisions on withholding VAT remained in the VAT Act. The VAT Act 2013 eliminated the withholding VAT system.

VAT rates

The repealed VAT Act provided for a reduced VAT rate of 12% on electrical energy and heavy industrial oils. The reduced VAT rate of 12% was scrapped implying that the supplies are now subject to 16% VAT. In addition, the Cabinet Secretary can vary the standard rate by a maximum of 25% of the current rate, which would translate to a 4% increase or decrease.

VAT remission

Provisions for VAT remission have been dropped. VAT remission approved before the enactment of VAT Act 2013 will however be valid for the next five years. Businesses planning to undertake huge capital outlay projects will be affected negatively. Supplies to mining, oil/gas and geothermal exploration companies will qualify for exemption instead. This minimizes administrative bottlenecks in the processing of remissions.

VAT regulations

The VAT Act 2013 provides that regulations (referred to as “subsidiary legislation”) under the repealed Act will remain in force as long as it is consistent with the VAT Act 2013 and until new regulations are enacted. It is however notable that a number of regulations were incorporated into the main VAT Act.

Reverse charge VAT relating to taxable supplies

Registered persons will only be required to account for reverse charge VAT to the extent it relates to exempt supplies. This is a positive move since it will lessen the burden of compliance and improve business cash flow. There is however a contradiction under the VAT Act 2013 as to whether businesses that are not registered for VAT should account for reverse charge VAT, since the VAT Act is silent on accounting for VAT for those businesses that are not registered for VAT. The issue has been raised with the Kenya Revenue Authority (KRA) to clarify the matter.

The VAT Tribunal

Though the repealed VAT Act provided for lodging of VAT Appeals within 30 days of receipt of the non-agreed amended assessment or confirmation notice, the VAT Act 2013 does not have provisions for lodging an appeal. This is an oversight and the issue has been raised with the KRA. It's also noted that a Tax Appeals Tribunal was established to deal with all tax appeals.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi
  • Geoffrey Karuu
    + 254 020 2728305
  • Catherine Mbogo
    + 254 020 2715300
Ernst & Young (China) Advisory Services Limited, Pan African Tax Desk, Beijing
  • Rendani Neluvhalani
    +86 10 5815 2831
Ernst & Young LLP, Pan African Tax Desk, New York
  • Dele A. Olaogun
    +1 212 773 2546
  • Mzukisi Ndzipo
    +1 212 773 9917
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
  • Leon Steenkamp
    +44 20 7951 1976

EYG no. CM4145