First published in the Business Daily on November 4, 2019.
The Statute Law (Miscellaneous Amendment) Act, 2019 has made it possible for suppliers of goods and services who are registered for Value Added Tax (VAT) to offset or get a refund of excess VAT credits arising from tax withheld by appointed Withholding VAT (WHVAT) agents. The Act was published on September 03, 2019 with a commencement date of July 23, 2019.
Previously, the VAT Act, 2013 only allowed refunds relating to zero-rated supplies, mainly exports. Credits arising from WHVAT were not refundable. This led to many traders accumulating VAT credits with no prospect of utilization or refund which greatly reduced their working capital and increased the cost of doing business.
The most affected businesses were those dealing with low profit margin products/services and businesses whose major customers had been appointed as WHVAT agents. These businesses have continuously accumulated VAT credits with no prospect of utilization or refund in the foreseeable future.
Business predominantly dealing with zero-rated supplies were also affected since most of their local customers are WHVAT agents. The output VAT received from sales to local customers after deducting WHVAT is not sufficient to cover the corresponding input VAT. As such, these businesses end up in a perpetual credit position which keeps on growing hence straining their cash flow position.
These businesses had resorted to applying to the Commissioner for exemption of their suppliers from the application of WHVAT on the basis of the amendment to the Tax Procedures Act by the Finance Act, 2017. The amendment empowers the Commissioner to exempt any supplier from WHVAT provided that such a taxpayer can sufficiently demonstrate that they are going to be in a continuous VAT credit position as a result of the nature of the taxpayer’s business and as a result of the application of the provisions of WHVAT.
This has not worked since KRA has been reluctant to grant such exemptions mainly because of the requirements in the Act and the wide discretion accorded to the Commissioner in granting the exemption. Taxpayers are required to demonstrate that they are going to be in a continuous credit position for a period of not less than 24 months. This is an uphill task especially to business that have been in operation for less than two years since it is a necessary prerequisite for the businesses to demonstrate that they were persistently in a VAT credit position for a period of not less than 24 months as a result of WHVAT for such application to be granted. This is to justify that having been in a credit position for the last 24 months, the situation was expected to continue for the next 24 months.
The other challenge is the inability by taxpayers to claim refund on the entire credit on iTax as the system only allows a refund of tax on the credit arising from the sale of zero-rated supplies. The iTax system also does not adjust for the WHVAT deducted at source by the customers against the output before reflecting the balance due for refund. Instead, it only provides for excess credit for refund and does not adjust the balance to take into account the WHVAT credits. As such, the entire credit arising from WHVAT is not adjusted against output VAT, leaving taxpayers with growing credit without any prospect of recovery.
The introduction of WHVAT also resulted in a compliance burden to taxpayers since they had to dedicate additional resources to ensure compliance with WHVAT requirements. This is more so with organization