In Kenya, VAT is charged on supply of goods and taxable services produced locally and imported. The VAT Bill 2012 is part of the ongoing tax reforms in the country which aim at increasing revenues, in order to achieve desirable distribution of wealth. The Bill also targets the setting up of a simplified tax system that can be effectively administered so that taxpayers stop viewing taxation as a burden, but rather a runway to economic bliss.
The Bill seeks to reduce the period of lodging refund claims from 12 months to 3 months, thus refund claims shall be paid within 3 months. This will enable businesses to have optional investments hence increasing their profitability because their funds will not be held up for long periods. Under the current VAT Bill, refunds are deducted from the current period VAT hence reducing your tax liability.
What are VAT refunds? Well, for each month, tax registrants calculate the tax collected on their taxable supplies .They then remit the amount in excess of the taxes paid during the month on their purchases of inputs. If the difference is negative, however, registrants can claim the difference as tax refunds. Therefore, a VAT Refund occurs when a trader pays more input tax than charges output tax.
The VAT 2012 bill seeks to introduce an interest rate of 2% on any outstanding refunds, as opposed to the current VAT rules which do not give any interest on any outstanding refunds. Therefore the government will have to pay refunds on time, meaning that businesses will have their amounts released timely for further investments as working capital.
The Nine Schedules in the current VAT Act have been merged or reduced to two Schedules in the Bill. The First Schedule contains exempt
supplies.
First Schedule to the Bill contains exempt supplies and has been limited to the following;-
- a) Unprocessed agricultural produce
- b) Financial and Insurance services
- c) Medical, agricultural, veterinary
- nursing and educational services
The Second Schedule contains zero rated supplies:-
- • Export supplies ( excluding exempt
- services)
- • Institutions with diplomatic privileges
Under the current Act 394 goods are exempted from VAT while 416 others are zero-rated. This big number of tax exempt and zero- rated goods brings about complexity in administering tax as well as ensuring compliance. This affects both the business community and the tax man, Kenya Revenue Authority.
So what does Exemption mean? Exemption means goods or services fall outside the VAT net. The exempt firm (manufacturer) pays VAT on its inputs and charges no VAT on its output without claiming any refund, thus, the consumer is not taxed, but the producer is.
..and what is Zero-rating? Zero-rating means goods are wholly in the VAT system – at a rate of zero.
The VAT Bill 2012 therefore proposes a uniform rate and reduces the number of goods which are exempt or subject to a zero rate, thereby simplifying calculating and complying with VAT requirements.