Withholding Tax Vagueness is a Raw Deal for Industry

By Phyllis Wakiaga

Since the introduction of the Tax Procedures Act (2015) many businesses are grappling with the question of the legality of the Witholding Tax. The main reason for this is that the new Act, though welcome, for many reasons scrapped a number of provisions from the Value Added Tax (VAT) Act 2013. Key among this is the provision in Section 25 on the appointment of withholding VAT Agents.

Section 25A of the VAT Act (2013) reintroduced the powers of the Kenya Revenue Authority (KRA) to appoint withholding VAT agents. These agents are commissioned to withhold 6% of the 16% VAT payable and then remit it to KRA. The agent would therefore withhold 6% and pay 10% to the supplier including the invoice value. The supplier would get a credit for the 6% withheld. The appointed agents would be drawn from government ministries, departments, agencies, or any other person appointed by the Commissioner. This provision had previously been amended by the 2015 Finance Act, but the Tax Procedures Act (2015) did away with it.

However, the KRA public notice in March 2016 cautioning agents to continue withholding VAT despite the amendments to the Act has brought about an ambiguity in this regard that threatens to further increase the cost of doing business for many.

Additionally, this has created a legal lacuna, spurring uncertainty as to which directives industry should adhere to. If business community follows the KRA directive, they will be in direct contravention of the law and could be later accused of withholding tax unlawfully. A conducive business environment entails, in part, observance of due process enacted to facilitate trade and investments.

The amendment of the law was altogether a welcome relief for taxpayers appointed by KRA to withhold tax for a number of reasons.

One of these reasons is that taxpayers appointed as VAT agents have to deal with numerous transactions and the lack of a threshold on the amount to be withheld mean that agents to withhold VAT on all taxable transactions, regardless of their value. This make is a very cumbersome and costly process undermining the trade and investment environment.

The lack of VAT refunds has resulted in an unfavourable cash flow position for suppliers whose withholding VAT credits exceed their output VAT as there are no credits available for refund. Prior to the VAT ACT 2013, a refund of tax credits arising from withholding VAT was provided for.

Add on to that the compliance burden for medium and large taxpayers who are appointed agents. The appointment takes effect immediately and they have to modify their systems to comply. The additional cost for this change is unfortunately not borne by KRA but by industry.

While we believe that KRA will soon look into this in the next financial year, it is apparent that this directive in its current state is in breach of the law in its insistence to appoint withholding VAT agents as well as instructing agents to withhold VAT after assent of the Tax Procedures Act. Meanwhile, it is in the best interest of manufacturers and the business community to uphold the law by abiding by the Tax Procedures Act (2015). As we seek to achieve our country’s economic goals, of industrial transformation, we urge for high commitment to trade facilitation laws both by responsible agencies and the business community at large.

The writer is the CEO of the Kenya Association of Manufacturers and can be reached on ceo@kam.co.ke
By Phyllis Wakiaga

Since the introduction of the Tax Procedures Act (2015) many businesses are grappling with the question of the legality of the Witholding Tax. The main reason for this is that the new Act, though welcome, for many reasons scrapped a number of provisions from the Value Added Tax (VAT) Act 2013. Key among this is the provision in Section 25 on the appointment of withholding VAT Agents.

Section 25A of the VAT Act (2013) reintroduced the powers of the Kenya Revenue Authority (KRA) to appoint withholding VAT agents. These agents are commissioned to withhold 6% of the 16% VAT payable and then remit it to KRA. The agent would therefore withhold 6% and pay 10% to the supplier including the invoice value. The supplier would get a credit for the 6% withheld. The appointed agents would be drawn from government ministries, departments, agencies, or any other person appointed by the Commissioner. This provision had previously been amended by the 2015 Finance Act, but the Tax Procedures Act (2015) did away with it.

However, the KRA public notice in March 2016 cautioning agents to continue withholding VAT despite the amendments to the Act has brought about an ambiguity in this regard that threatens to further increase the cost of doing business for many.

Additionally, this has created a legal lacuna, spurring uncertainty as to which directives industry should adhere to. If business community follows the KRA directive, they will be in direct contravention of the law and could be later accused of withholding tax unlawfully. A conducive business environment entails, in part, observance of due process enacted to facilitate trade and investments.

The amendment of the law was altogether a welcome relief for taxpayers appointed by KRA to withhold tax for a number of reasons.

One of these reasons is that taxpayers appointed as VAT agents have to deal with numerous transactions and the lack of a threshold on the amount to be withheld mean that agents to withhold VAT on all taxable transactions, regardless of their value. This make is a very cumbersome and costly process undermining the trade and investment environment.

The lack of VAT refunds has resulted in an unfavourable cash flow position for suppliers whose withholding VAT credits exceed their output VAT as there are no credits available for refund. Prior to the VAT ACT 2013, a refund of tax credits arising from withholding VAT was provided for.

Add on to that the compliance burden for medium and large taxpayers who are appointed agents. The appointment takes effect immediately and they have to modify their systems to comply. The additional cost for this change is unfortunately not borne by KRA but by industry.

While we believe that KRA will soon look into this in the next financial year, it is apparent that this directive in its current state is in breach of the law in its insistence to appoint withholding VAT agents as well as instructing agents to withhold VAT after assent of the Tax Procedures Act. Meanwhile, it is in the best interest of manufacturers and the business community to uphold the law by abiding by the Tax Procedures Act (2015). As we seek to achieve our country’s economic goals, of industrial transformation, we urge for high commitment to trade facilitation laws both by responsible agencies and the business community at large.

The writer is the CEO of the Kenya Association of Manufacturers and can be reached on ceo@kam.co.ke