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The reintroduction of Withholding Value Added Tax system (WHVAT) is a welcome change as the government seeks to increase revenue collection, but its implementation poses some challenges.
For instance, whilst the law provides for the amount of VAT to be withheld as six percent of the tax payable, KRA has issued guidelines stipulating that VAT must be withheld at the rate of six percent on the value of taxable supply.
This contradicts the VAT law; if the intention of the legal drafters was as interpreted by KRA, the law needs to be amended to reflect such intention. Secondly, in the following month, after VAT has been withheld, the supplier of the goods/services are allowed to offset the VAT withheld against output tax subject to being in possession of WHVAT certificates.
Any delays by WHVAT agents in providing the certificates can negatively affect the suppliers’ cash flows leading to distressed businesses. The suppliers’ are required to pay the output VAT in the month that the invoices are issued but offsets for the withheld VAT are only possible in a later month after receipt of the certificate.
In mitigation of the adverse impact for the suppliers, the VAT law should be amended to provide for a penalty on any WHVAT agents that fail to provide certificates within a month of VAT withholding.
Thirdly, the VAT Act does not provide a legal mechanism for VAT refunds resulting from WHVAT as refunds are restricted to VAT credits resulting from zero-rated supplies. This leads to unrecoverable VAT credits which may not have been the intention of the WH VAT regime.
Perhaps, the VAT Act should be amended to allow suppliers the right to lodge VAT refund claims for any VAT credits that arise from the WHVAT process.