Kenya first introduced Withholding VAT (WHT-VAT) in 2003. The country introduced the system, suspended it, and again re-introduced it. Also, the withholding rates have moved from 16% to 6% to the now proposed and affected 2% as of this article’s date.
Table of Contents
The country has faced many WHT-VAT challenges. In the following sections, we will highlight some of those challenges.
Withholding VAT System
The Withholding VAT (WHT-VAT) System was first introduced at 16%, the standard VAT rate in Kenya then. This meant that all the VAT amount was remitted to KRA. This was againist the VAT system design. Proper application of the VAT system requires that the net amount on the credit side of the VAT return (input VAT, credit carried forward, withheld VAT, etc.) is deducted from the amounts on the debit side of the VAT return (output VAT) for every tax period.
However, introducing the WHT-VAT at 16% meant that the taxpayers did not receive any output VAT from their clients or customers. Therefore, the taxpayers could not deduct the VAT input or use the VAT credits carried forward. Hence, the WHT-VAT system created VAT credits in place of withheld VAT, making the operation of the VAT system in Kenya impossible.
During those periods, VAT Act Cap 476 (the Act under which VAT was levied) allowed the claiming of refunds of any VAT credits resulting from the WHT-VAT. The affected taxpayers lodged WHT-VAT-based refund claims almost every month, but the refund claims were not paid on time.
Not paying refund claims on time created many cash flow problems for the taxpayers and the tax commissioner because many people were seeking VAT refunds overnight. However, the government allocation for VAT refunds was not enough. This resulted in an accumulation of WHT-VAT-based refunds, negatively affecting the taxpayer’s operating capital and, eventually, all tax revenues in the country.
The WHT-VAT credits were the taxpayer’s operating capital.
Withholding VAT System Suspended and Re-introduced
The WHT-VAT was suspended for some time, and when it was re-introduced, it was not at 16% but at a rate of 6%. However, there was a problem. The VAT Act (2013) was introduced and replaced VAT Act Cap 476. The new Act outlawed VAT refund claims based on WHT-VAT.
The option given to the taxpayers was to seek WHT-VAT exemption, and the accumulation of VAT credits continued for over 24 months. This created another problem because many taxpayers had VAT credits based on WHT-VAT, yet they could not apply for a refund because of their unique business operations.
This effectively meant that the WHT-VAT credits ”hang” in the taxpayer’s VAT system without being used.
The WHT-VAT credits are the taxpayer’s operating capital, which negatively affected taxpayers ‘ cash flow. Without care, the system can ground many businesses, ultimately negatively affecting their survival and the country’s tax revenue. Granting the WHT-VAT exemption was another nightmare for taxpayers because the process took many months while the WHT-VAT credits continued to accumulate.
During the 2019 national budget, a proposal to reduce the WHT-VAT rate from 6% to 2% was made. It was hoped that this lower rate would solve the problems taxpayers experienced when accumulating WHT-VAT credits. However, while this move was laudable for future operations, it did not solve the problems experienced by taxpayers who had accumulated WHT-VAT credits.
When the WHT-VAT was introduced in Kenya, it was for all VAT-registered taxpayers. However, the re-introduction was done in phases, starting with large taxpayers and government bodies as tax agents and then medium taxpayers as tax agents.
Withholding VAT System Challenges
Confirming the genuineness of the WHT-VAT certificates was difficult, especially because many VAT-registered taxpayers issued them. The tax commissioner did not have the capacity to do it. Also, storing certificate copies that were returned to the tax commissioner was chaotic.
Then the tax commissioner introduced the i-Tax system and everything changed. Currently, the WHT-VAT certificates are being generated by i-Tax, and this only happens after the agent has remitted the deducted money to the tax commissioner.
Previously, there was need to clarify when the WHT-VAT agents were required to remit the deducted VAT to the tax commissioner. Remittance was expected by the 20th day of the following month after deducting the WHT-VAT. This meant that some WHT-VAT agents, especially government bodies, failed to remit the WHT-VAT on time or did not remit at all.
Government institutions only issued manual certificates, and the taxpayers claimed the WHT-VAT, which still needed to be remitted. This explains why, even after many years, many taxpayers who applied for WHT-VAT refunds have never been refunded. Yet, government institutions (and therefore the government, by extension) deducted the WHT-VAT. This amounted to open theft from taxpayers by government institutions.
However, in Kenya, the law is currently clear on when the WHT-VAT is supposed to be remitted to the tax commissioner. It is remitted within 14 days or such other time as the tax commissioner may require (check commissioner’s website) after being deducted. If this does not happen within the month, the taxpayers cannot use the WHT-VAT in their monthly tax returns for that period.
Documentation, especially by government institutions, was also a problem initially. This resulted in government institutions withholding VAT and not returning copies of WHT-VAT certificates to the KRA. This was another reason some taxpayers could not be refunded the WHT-VAT-based refund claims. It is a problem that is still being sorted out many years later.
Current Situation
i-Tax has sorted out many of the challenges and the tax commissioner has continued to reduce the time within which to remit the WHT-VAT. However, there is still one problem that needs to be addressed and we hope that with time, it will. Many taxpayers cannot utilise the WHT-VAT in the month that it is remitted. They can only use it in subsequent months.
Conclusion
Kenya is still experiencing other challenges, but we are optimistic that we shall overcome them. However, despite all the challenges, WHT-VAT is a very productive tax system for collecting VAT, as highlighted in our earlier article ”Withholding VAT in Kenya”. That is why the government suspended the system and re-introduced it later.
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Disclaimer
This post is for general overview and guidance and does not amount to professional advice. Hence, www.taxkenya.com, its owner or associates do not take any responsibility for the results of any action taken based on the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from the KRA. The tax industry in Kenya is very dynamic.
