TAX NEWS - June 2010

Kenya Tax: Proposed overhaul of VAT Act to boost revenue collection

Tax experts have praised Finance minister Uhuru Kenyatta's decision in last week's budget to review the VAT Act, saying it will update the country's taxation system in line with modern trends.

They said they expected the review to lead to a shift in the country's revenue base from income levies to consumption, enhancing tax equity.

It would also address the thorny issue of óver-taxation especially for those in the formal employment who end up paying income and consumption tax.

"The current VAT Act is archaic with provisions that not only inhibit tax collection, but is cumbersome in terms of implementation due to its numerous provisions that contradict each other," said Steve Okello, the head of Tax Services at PricewaterhouseCoopers (PwC).

He said the government had been carrying out patchy reviews of the VAT Act and the planned overhaul would simplify the legislation.

"The current VAT Act has been subjected to patchy review since its establishment hence making it unsuitable to the modern business environment and need to be discarded and a new one enacted".

Mr Kenyatta said in his budget proposals last week: "I intend to overhaul the Value Added Tax to come up with modern tax legislation in line with best practice with the new VAT Act expected to be tabled in this house by June 2011."

The decision is expected to bring the country's VAT legislation in line with modern practice.

Mr Kenyatta intends to form a task force that will review the Act for the purpose of amending it.

Countries such as Uganda, Tanzania and Rwanda, which are part of the East African Community, are said to have a more friendlier, simplified and easy to administer VAT law than Kenya.

Kenya's VAT system is largely based on the British model, while the other EAC countries' VAT system in modelled on the New Zealand system.

Tax experts reckon that the decision is long overdue as the country VAT law is archaic and fails to take into account recent global developments.


Consumption tax

Other tax experts indicate that the review will allow the country's revenue base to shift from income dependence to consumption in line with other countries' practice across the world.

"We need to shift our principal revenue base from income sources to consumption, which has a wider scope of collecting more revenue especially due to our small formal income base," said Martin Kisuu, a tax partner at PKF audit firm.

By shifting to consumption tax as the main source of revenue, Mr Kisuu said, the country stands a better chance of collecting more revenue thereby improving on the equitable tax criteria.

Currently, the tax base regime is said to be disproportionate due to its heavy reliance on revenue from income tax which in effect makes those in formal employment to bear the burden of the country's revenue base.

For instance, income tax is estimated to constitute 35 per cent of the total government receipts while VAT accounts for 26 per cent.

The tax experts expect review of the VAT Act to push VAT receipts to account for more than half of the government annual receipts.

"By simplifying the Act through elimination of the numerous exempt items and zero rating them, the government will be able to collect more revenue through increased consumption due to overall low prices for goods and services," said Rajesh Shah, a tax partner at PwC.

Mr Shah gave the example of bread.

Whereas wheat is exempt from VAT, other accompanying materials used in making bread such as packaging materials are not.

"The existence of a myriad of exempt products even for materials used in producing a product add up to the final cost of production, which is passed down to the final consumer lowering their consumption power and expected tax".