Tax system calibration major test for KRA in 8pc fuel levy
1 months ago, 18 Sep 16:43
Measured against the intense pain and financial burden that the new 16 per cent Value Added Tax (VAT) on fuel has caused across the Kenyan economy, the proposed reduction of the rate to eight per cent must have come as big relief for fuel marketers, distributors and consumers.
No one can deny that the lower VAT rate is a better option than the previous exemption regime, which among other challenges did not allow fuel distributors’ credits for the VAT incurred in the business of supplying fuel.
Consequently, all non-recoverable VAT was loaded on the final pump prices and borne by the consumer.
With a lower VAT rate, however, the fuel marketers and other players in the fuel supply chain will now be entitled to a recovery of the VAT incurred by their businesses.
The expectation is that the final pump price will go down and that the government will actualise its revenue collection target. On the balance of things this policy shift appears to result in a win-win situation for all stakeholders.
Yet for the eight per cent proposal to become effective, Parliament must amend the Finance Bill, 2018 in line with President Uhuru Kenyatta’s recommendation.
Otherwise, Parliament has the right through a two-thirds majority vote to pass the Bill a second time without amendment, or with amendments that do not fully accommodate the President’s recommendations.
In the latter case, the Bill will have to be re-submitted to Mr Kenyatta for his assent within seven days.
The question is whether Parliament’s approval of the presidential proposal is the only requirement needed to operationalise the lower VAT rate. The answer is, certainly not!
Unfortunately, the lower VAT rate of eight per cent that Mr Kenyatta has proposed is not supported by the provisions of the VAT legislation.
This is because the Value Added Tax Act, 2013 only allows the National Treasury Cabinet Secretary (CS), subject to Parliament’s approval, the discretion to vary the rate of VAT by either decreasing or increasing the rate by four percentage points.
This means that the existing VAT rates, 0 per cent and 16 per cent, may be varied from zero to four per cent, a reduction from 16 per cent to 12 per cent or an increase to a maximum rate of 20 per cent.
Ultimatley, if parliament adopts the 8 per cent VAT, further amendments to the provisions of the VAT laws will be required to enable the CS vary the existing rate beyond the four percentage points provided for in law.
Otherwise, the lower eight per cent VAT rate proposal will contradict the provisions of the existing VAT law and potentially open the new tax to legal challenge.
It is also apparent that if Parliament adopts the lower VAT rate the Kenya Revenue Authority (KRA) will have to make various amendments to its administrative framework to accommodate the new rate.
This is because the KRA’s online platform, the iTax, makes a special provision for a lower rate of 12 per cent, which is not activated.
The KRA will need to activate this provision on ‘other rated sales’ for eight ...
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