DRAFT VAT BILL, 2011 FACES ACID TEST
BY JACKSON OKOTH

The next President of the Republic of Kenya will be required by law to pay Value Added Tax (VAT). This is if proposals contained in the draft VAT Bill 2011, is passed into law.
Similarly, members of the armed forces, who have previously obtained their supplies from duty free canteens within the barracks, will now be taxed at 16 per cent.
The draft VAT bill 2011, now under scrutiny, also plans to rope those previously VAT exempt including charitable organizations, British Council, the Aga Khan Development Network and Kenya Military and Police Officers returning from the United Nations peace keeping missions outside Kenya.
While more privileged classes in society will come under the tax bracket, the ordinary consumer will also hurt. This is because milk and cream, maize and wheat flour, computer software, animal feeds, agrochemicals, sanitary towels, medical dressing, exercise and textbooks and newspapers, all previously zero rated, will now attract a 16 per cent VAT.
The cost of electrical energy and heavy diesel, previously taxed at 12 per cent, will now be subject to 16 per cent, pushing up the price of an already expensive electricity supply.
Suggestions have been made that this increase will inevitably lead to increases in the cost of electricity and therefore locally manufactured goods. Treasury had been urged to be prudent and retain the 12 per cent rate or introduce a lower 10 per cent applicable to electricity and industrial oils as these have far reaching effects on the cost of commodities.
Plans to overhaul the VAT legislation comes when this tax system has been under a lot of strain, especially a cumbersome refund process that is seriously hurting businesses. The draft VAT bill is less voluminous and aims to fine tune current provisions.
But even as parliament prepares to debate the VAT Bill 2011, there is already a feeling that some of the proposed tax reforms contained here piecemeal, unwarranted and not focused.
“It appears that there is a clear lack of creativity to expand the tax base. For instance, why bring text books, sanitary pads or even bread and milk under VAT while there is no effort to tax a booming real estate in this country,” said Davis Adieno, national coordinator, National Taxpayers Association (NTA).
At present, the tussle between Members of Parliament (MPs) and the Kenya Revenue Authority (KRA) on whether legislators should pay tax remains unresolved.
Further, the economy is estimated to be losing billions each year in capital flight as multinationals operating in the country set up in tax havens abroad to avoid the country’s tax system. This is through what is known as transfer pricing.
“We have a bubbling informal sector that is still outside the tax bracket. What KRA should be thinking about is how to get this segment of the economy in to the tax bracket,” said Adieno.
He adds that the inability by KRA to resolve the prevailing tax refunds problem, where the authority is holding billions belonging to businesses, is unfair.
“This process should be streamlined to ensure that those business affected do not remain vulnerable and exposed as they are now,” said Adieno.
The tax association feels that subjecting things like computer software and text books to VAT could jeopardize efforts by the country to achieve its Vision 2030 economic goals.
To deal with VAT refunds, the draft bill proposes that any excess VAT shall be paid to the registered person by the commissioner where this officer is satisfied that such excess arise from making zero rated supplies.
“A requirement of an auditor’s certificate has been dropped in the bill. This will however lead to delays in processing of refunds as KRA may not cope with the processing of refunds,” said a report by Ernst & Young.
Of all the changes proposed in this VAT bill, the status of items listed in the first and second schedule to the bill are considered most profound and far reaching.
“Items constituting basic commodities such as processed milk, maize flour, and wheat flour should continue to enjoy zero rated status,” said Nikhil Hira, a tax partner at Deloitte&Touche.
With the proposed increase in electricity rate to 16 per cent, it is feared that cost of manufactured goods will increase. On the other hand, zero rating electricity could provide ordinary consumers with the much needed reprieve.
The VAT Bill 2011 provides the legal framework upon which KRA will impose value added tax on goods and services delivered in or imported into Kenya.
An overhaul of the VAT system is coming when this type of tax is riddled with complains from the public over the fact that it is cumbersome, patched up and outdated.
“We are committed to reforming entire tax system, including VAT, whose compliance burden is huge,” said Geoffrey Mwau, Economic Secretary, Ministry of Finance in a previous interview.
VAT is an indirect tax, which is collected on the value added proportion of goods and services occurred in all the processes, ranging from manufacturing, circulation, provision of services to consumption.
Pressure has been building on Treasury to reform the VAT system, owing to its cumbersome, patched up and complex nature.
GLANCE BOX
• The 125-page VAT Bill, 2011 contains far reaching alterations to the present law as was promised by the Finance Minister Uhuru Kenyatta when he presented the budget on June 8th, 2011.
• The present VAT system has been described as cumbersome and difficult to implement. It is also riddled with many exemptions with three different rates charged on various goods and services.
• Under the proposed VAT law, the only tax rates proposed are 16 per cent and the zero rates. However, there are concerns that this increase in the VAT rate for certain supplies such as electricity will inevitably increase their prices and therefore hurting consumers.