The government is considering bringing back the law that will allow withholding of VAT following a weak VAT collection in 2011/2012. VAT grew only 6.7% in the year to KES 183.4 billion from KES 171.9 billion in 2010/2011. The same had grown 21.7% between 2002/2010 and 2010/2011 and the treasury attributes this fall in growth of ordinary revenues from VAT to the removal of the withholding tax.
Finance Minister Njeru Githae said during the Medium-Term Expenditure Framework (MTEF) and 2013/14 Budget forum at the Kenyatta International Conference Centre, that most firms have failed to comply to paying their full VAT dues after withholding tax was removed. It’s removal meant that firms wont surrender cash and reclaim it from the Kenya Revenue Authority (KRA). The move to remove this form of tax took effect on July 1 2011 and it sought to reduce the amount of VAT refund claims.
Auditing Large Tax Payers
The treasury has therefore ordered KRA to audit large taxpayers. According to KRA’s Large Taxpayers’ Office (LTO), it’s mandate covers the administration of Income Tax, VAT, Domestic Excise and Agency Taxes and Levies in respect of the following:
- All Companies with annual turnover in excess of KES 750 million plus their Subsidiaries and Associates
- Banks and Insurance companies irrespective of turnover threshold
- Manufacturers of Wines and Spirits irrespective of turnover threshold.
- State Corporations with annual turnover/budget in excess of KES 750 million
- Head Office operations of Central Government Ministries and Departments
- Local Authorities with City status.
- Individuals of High Net Worth (Kenyans earning an annual income of KES 44 million)
As of September 2010, there were approximately 1100 institutions contributing about 75% of Domestic Taxes revenue.
[Read: Taxman Goes After Super Rich]
What is Withholding VAT?
Withholding VAT is a system which involves the declaration of VAT by both the supplier and his customer who has been appointed as a withholding VAT Agent. Institutions appointed as withholding VAT Agents are Government institutions, parastatals, banks, financial institutions, Co-operative Societies, Insurance companies and regular exporters.
How Withholding VAT System Works
When a taxpayer (trader) supplies and invoices an appointed withholding VAT Agent the payment for supply is made less VAT charged or that which ought to have been charged. The Agent withholds VAT irrespective of whether the supplier is registered for VAT or not. The Agent issues a withholding VAT certificate to the supplier indicating the VAT withheld. This certificate entitles the trader to claim back the withheld VAT to avoid double taxation since the same tax is declared and paid by the trader through a VAT 3 return. Withholding VAT on taxable supplies not charged VAT is computed using the formula X – X/1.16 where X is the total value of the invoice or taxable supplies.