Close

TAX MEASURES

Manufacturers to benefit from new VAT refund formula

In Summary

• 23 manufacturers were owed Sh3.59 billion by August 2018.

• This comprised Sh2.68 billion in withholding VAT dues and Sh908.6 million in VAT export refund claims.

Trade PS Chris Kiptoo with KAM chairman Sachen Gudka, January 17
Trade PS Chris Kiptoo with KAM chairman Sachen Gudka, January 17
Image: ENOS TECHE

Manufacturers in Kenya who have been largely operating below capacity are set to benefit from the new formula on VAT refunds.

Under the VAT Amendment Regulations, 2019 effected yesterday, the state opted to revert to the previous system where tax refunds were based on the difference between output and input tax.

This is expected to boost the manufacturing sector which is one of the key pillars under President Uhuru Kenyatta’s Big Four Agenda.

“The proposed measure to revert to the previously applied formula will grow our exports as a country by enabling flow of the required working capital. Consequently, this will improve liquidity in the market,” Kenya Association of Manufacturers chairman Sachen Gudka said.

 

He said the formula which has been in play has long restricted VAT refund amounts by calculating refunds using net position for the month and allowing a percentage of export sales to total sales as refund amount.

A survey dubbed the Manufacturing Barometer for the first quarter of 2019 shows 47 per cent of industries were operating at about half capacity, 33 per cent operated at 75 per cent of installed capacity and a fifth of them operated at near full capacity.

The report stated delays by the Kenya Revenue Authority in processing tax refunds were likely to hurt manufacturers' cash flow.

“The formula has been punitive to manufacturers and more so to exporters who are already in a continuous credit position,” Gudka said.

Data by the manufacturers’ lobby shows 23 manufacturers were owed Sh3.59 billion by August 2018, comprising Sh2.68 billion in withholding VAT dues and Sh908.6 million in VAT export refund claims.

During his budget reading, Treasury CS Henry Rotich said the ministry would establish a team to promptly validate outstanding refunds with a view to clear them within the next two months.

VAT withholding tax has also been sliced down to two per cent from six per.

 

“This will improve liquidity for many manufacturers and open up cash flow precipitating high productivity in their supply and value chains,” Gudka said.

Last year, the sector grew by 4.2 per cent, contributing 7.7 per cent of the country’s GDP. This was a drop from eight per cent contribution reported in 2017.

The manufacturing sector, which is expected to contribute 15 per cent to the economy in the next two years, has been falling gradually since 2014 when it stood at 10 per cent.