Withholding tax is no longer tenable in Kenya

In presenting the Budget Policy Statement, Cabinet Secretary for National Treasury Henry Rotich was cautious about raising tax rates, saying that Kenya Revenue Authority (KRA) needs to do a lot more in ensuring that the revenue leakage is minimised. On this basis, KRA’s revenue target for the financial year 2016-17 has been set at Sh1.3 trillion.

Despite not meeting its revenue target in the recent past, and in some cases missing the target marginally, KRA has done a commendable job. Picture this: in 2002-03, the total revenue collection was Sh185 billion.

Shortly thereafter, the VAT rate dropped to 16 per cent from 18 per cent and in 2005, following the implementation of the East Africa Community Customs Union, import duty revenues dropped.

KRA has leveraged information technology such as the 2005 Simba Customs System and the ubiquitous iTax platform, to drive enhanced and efficient revenue collections. iTax has, for example, made it difficult for taxpayers who previously evaded tax to transact with tax compliant taxpayers. One of the other initiatives that were adopted to enhance VAT collections was withholding VAT (WHVAT).

In 2004, the Government first introduced WHVAT to ensure that suppliers accounted for VAT, particularly on supplies made to Government departments and agencies. As a result of the WHVAT, taxpayers accumulated huge VAT refund claims, which saw the VAT refund claims balloon to an estimated Sh30 billion.

In addition to the huge VAT refund claim backlog, the WHVAT system was very manual and involved a tremendous amount of effort on the taxpayers’ part. Ultimately, the WHVAT system was scrapped in 2011, much to the relief of taxpayers and WHVAT agents.

In 2014, although not part of the Cabinet secretary’s proposed amendments to the VAT Act, Parliament amended the Finance Bill through Section 25A to re-introduce WHVAT for Government ministries, departments and agencies. In 2015, the VAT Act was further amended to expand WHVAT obligations by empowering the Commissioner to appoint any person as a WHVAT agent.

The Commissioner has since exercised this power to appoint several WHVAT agents.

However, the Tax Procedures Act, 2015 (TPA), which came into force on 19 January 2016, deleted Section 25A of the VAT Act.

Therefore, with effect from 19 January 2016, the Commissioner has no legal basis to appoint a taxpayer as a WHVAT agent and, it appears, any WHVAT agent no longer has a basis to withhold VAT.

Was it Parliament’s intention to scrap WHVAT? Probably not, given that the TPA was intended to consolidate tax administration and shore up tax revenues.

Indeed, Section 2 of the TPA contemplates a situation where WHVAT could exist, but Section 110 and the Second Schedule to the same TPA deleted WHVAT.

Thus, while “withholding tax is a tax that a person is required to withhold”, there is no obligation to withhold in the absence of Section 25A of the VAT Act.

This state of affairs leaves the KRA and Treasury in the unenviable position of amending either the VAT Act to re-introduce WHVAT in the 2016/17 budget or amending the TPA to either delete the erroneous repeal of the WHVAT provisions or include the substantive provisions of the deleted Section as a clear provision under the TPA.

Amending the TPA shall however be tricky in view of Parliament’s Standing Orders which prohibit a motion to amend a law within 6 months of the law coming into force. The TPA can therefore only be procedurally amended sometime after 18 July 2016.

As the policy makers mull over this, can the Commissioner appoint you as a WHVAT agent and do you still have an obligation to withhold VAT?

Despite what may be considered as a drafting error, I think not!