Taxman speaks on controversial VAT law

September 24, 2013
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Milk prices have skyrocketed   after changes to VAT Act/XINHUA
Milk prices have skyrocketed after changes to VAT Act/XINHUA
NAIROBI, Kenya, Sep 23 – Since the Value Added Tax Act went into effect in the beginning of September, traders have taken advantage of the already financially strained Kenyans by unnecessarily hiking the prices of tax exempted commodities.

The move has compelled the Kenya Revenue Authority (KRA) to take action against the traders who have abused the controversial VAT Act which introduces a 16 percent tax on some goods.

Capital FM Business spoke to the Senior Deputy Commissioner in charge of Marketing and Communication Kennedy Onyonyi, to shed some light on some of the changes which have been brought about by the new VAT Act.

Q: First of all, what do we mean when we say goods are either zero rated, tax exempted or under the 16 percent VAT?

A: These are the basics terms that the traders have used to confuse Kenyans hence manipulate them. When you talk of a zero rated item, it means that there is no tax to the consumer, the tax is zero. But the suppliers or the sellers can claim money (from KRA) which they paid in the course of doing business that generated that sale.

For tax exempt items, the tax is still zero to the consumer, but as the seller or the manufacturer you cannot claim back the taxes you paid in generating that income. On the 16 percent VAT, the consumer takes the entire burden, and once the sellers have collected the taxes, they deduct what they spent while buying the same commodity and remit the difference to the government. However, the government has decided to exempt some goods which were supposed to be under 16 percent tax like wheat, rice, maize flour, and the like, but traders are still charging Kenyans, which is wrong.

Q: Some have argued that KRA took a shortcut to increase its tax revenues by introducing direct taxes to Kenyans. What is your view?

A: It’s not actually looking for the shortcut, but looking for the most appropriate and cost effective means of administering the tax. Generally, it is much easier to get people to pay tax at the consumption level. But when it comes to the income, people can easily vanish and not trace them through income. There are so many people especially in the informal sector who earn income and are not easy to get them. If we were to do so, we would employ thousands of people and that will be counterproductive.

Q: What are the real benefits of the new VAT Act or was it just meant to oppress Kenyans and help KRA raise its revenue?

A: I liken taxation with medication. If the doctor prescribes an injection, the latter is not sweet at all. It is painful. But the ultimate results are that you are going to get treated; and that is the benefit. What we need to focus is how the money collected is going to be used to provide the services needed by Kenyans. For the traders, the system has been simplified because it does not generate unnecessary tax refunds. You know any tax systems that compel government to give money than to receive is not the best. The claims reached a level which was not sustainable. For example the manufactures, we owe them close to Sh30 billion. This is because over 400 items were zero rated a number that has been reduced to around 40. Such a system will attract more investment hence ease of doing business, increase manufacturing and in the country; a long term benefit.

Q: Which goods should attract VAT and from which companies?

A: For a company to charge VAT, you must reach some specific income threshold, which is Sh5 million. You should register and be remitting the VAT to KRA. Below that, you don’t have to register to charge VAT on your processed goods, but instead for turnover tax where you are going to pay tax at the rate of three percent of your gross income. Failure to comply with VAT Act comes with severe penalties.

Q: MPs from the CORD coalition are pushing to have some of the food items exempted from tax. What happens if this goes through?

A: We are the implementers of the law and not lawmakers. The laws are made by the parliamentarians. Even if they remove everything, we will just implement. But if we also face implementation challenges, we tell them. For us now, we are concerned when we see the law being violated and oppressing Kenyans unnecessarily. We had an operation and we netted about 50 traders. What they are doing is either charging VAT on goods which are exempt or charging VAT yet they are not registered.

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