SEVERE

Manufacturers claim new VAT refund formula is even more adverse

This in addition to reduction in VAT withholding from six per cent to two per cent.

In Summary

• Manufacturers have rejected the proposed Value Added Tax refund formula, citing a deeper negative impact on their cash flow and liquidity.

Treasury. Photo/Monicah Mwangi
Treasury. Photo/Monicah Mwangi

Manufacturers have rejected the proposed Value Added Tax refund formula, citing a deeper negative impact on their cash flow and liquidity.

The National Treasury, in the VAT Amendment Regulations, 2019 want to retain the 2017 formula on tax refunds that ensure traders only claim refunds for zero-rated supplies as part of the VAT regulations.

This in addition to reduction in VAT withholding from six per cent to two per cent.

 

Kenya Association of Manufacturers however told the Star, the system would further shrink their returns and discourage investments.

KAM said the government would rather return to the previous system where it was based on difference between output and input tax applied before September 2017.

The system imposed in 2017, has posed to challenges to sector among them huge credits to the businesses.

In a statement, KAM said it was punitive to manufacturers, those exporting their manufactured goods.

They said the current VAT export refund formula is a disincentive to exports because as manufacturers increase their domestic sales and export volumes, input VAT claims on exports increase

“As a result, some manufacturers have stopped exporting in order to reduce the impact of non-refunded excess VAT on their cash flows,” it read.

KAM said they new formula reintroduced is not different to one introduced in 2017.

 

The changes to reduce the withholding VAT tax to two per cent eliminate the need for Kenya Revenue Authority to make refunds and accumulated credits.

The sectors data indicate that 23 manufacturers were owed Sh3.59 billion by August 2018, comprising of Sh2.68 billion in withholding VAT dues and Sh908.6 million in VAT export refund claims.

The VAT refunds owed in billions has led to a huge financing gap with companies forced to finance their operations at the market-rate loans.

According to a report by Cytonn Investments, the industry contributed majorly to the high Non-Performing Loansratio for banks in the three months of the year to 10.4 per cent, from 9.6 per cent in Q1 2018.

Bad loans in the sector stood at Sh51.6 billion in June 2018 from Sh39.6 billion in December 2017 and Sh37.1 billion recorded i n September the same year.

Its demand for credit is expected to increase despite the slow economic recovery.

According to KRA Service Charter, refunds should be paid within a period of 60 - 90 days, but this period is surpassed most times.

“Some of the reasons for the delay include the requirement that money must be remitted to the exchequer before it is released by the National Treasury to be paid back to the claimant through KRA," it added.