Time for KRA to review taxation model

It comes as a relief to already hard hit households and low-income earners that new Value Added Tax (VAT) Bill, to be discussed by Parliament, will not include putting food on the list of those items to be taxed.

While we are alive to the fact that the Treasury has limited options when raising tax revenue, including the fact that a large bulk of the economy is still informal and therefore not registered tax payers, bringing food items such as maize and wheat flour under VAT is unpopular and punitive.

Huge burden

One viable option remains finding a way of widening the tax, bringing such people as legislators under the tax bracket. It is also time for tax authorities to make all informal business regular without unnecessarily putting a huge burden on the vulnerable poor.

There is a feeling that the Government should concentrate on widening the tax bracket to include all people instead of putting more items under VAT.

Kenya Revenue Authority (KRA) ought to come up with a way of having a single point of taxation so that those who are charged pay as you earn or income tax should not also pay VAT, a case of double taxation.

When the VAT Bill comes for debate before Parliament, we expect our MPs to put their discussions in deep thought and consideration, given the impact this piece of legislation will have on the economy in general.

It is important to note that the VAT Bill has a reduced list of zero-rated items. A vast number of items currently zero-rated, such as food items, will now be standard rated at 16 per cent. It is due to intense lobbying by civil society that food has been removed from the list. Items that could have been affected include milk, rice, bread and wheat flour.

But with food items eliminated from the list, we expect the price of fertilizers, LPG and computers to go up if the Bill becomes law.

The list of exempt goods is also vastly different under the new VAT Bill and includes kerosene which is currently zero-rated.

It is unfortunate that the debate surrounding the new VAT bill has concentrated on food items without looking at what will happen to the price of mobile phones, newspapers and books which will now be standard rated at 16 per cent.

The new VAT Bill also proposes to remove the 12 per cent tax on electricity and industrial oils, replacing this tax band with a 16 per cent standard rate.

This increase in the VAT rate on these items will increase cost of electricity thereby pushing up the cost of all consumer commodities, not to mention higher price for power.

It is notable that all registrations, filing of returns, payments or prepayments as well as documentation to KRA will be done using technology platforms. The impact of this is that all registered persons will be required to register and account for tax electronically.

Collection

The move is meant to phase out manual systems of accounting for VAT and is also expected to improve the administration and collection of tax.

We expect Parliament to also discuss and come out with a road map on how to deal with mounting VAT refunds, estimated to be running into billions of shillings, still sitting within the cash vaults of KRA.

There are several options open to MPs during their discussions, which includes setting aside funds in the budget to audit all VAT claims. But this could be a challenge given the budget deficit. KRA has previously explained that the delay in paying VAT refunds to a huge number of fraudulent claims.

While the KRA needs funds to undertake an audit of VAT claims, tax experts insist that a time frame should be introduced within which claims must be settled.

There is need to set up a time limit within which refunds must be settled after which interest should be charged. Kenya is not the only East African economy experiencing a problem with VAT refunds.

Uganda and Tanzania also have problems with refunds from supplies that are zero-rated. But while Uganda and Tanzania withholding tax incur reverse VAT, which is treated as mere book entries, companies in Kenya have to physically pay input tax and then reclaim it from KRA.

It is imperative for MPs to put on their thinking caps when deliberating this piece of legislation so as to strike a balance between protecting the poor with the need for the Treasury to fund the Government’s wide budget deficit.