In a move targeted at enhancing revenue collections and enforcing compliance, the concept of withholding value added tax (WHVAT) was reintroduced via the Finance Act 2014. Simply put, WHVAT places a burden on appointed WHVAT agents to withhold and remit VAT at the rate of six per cent - of the taxable value - at the time of making payments to their suppliers. Ideally, through this mechanism, the revenue authority would ensure that leakages in the VAT net would be minimised. Suppliers who would previously attempt to game the system by not remitting VAT to the KRA seem to be the intended targets of this mechanism.
However, on implementation of WHVAT it was noted that there were key scenarios whereby WHVAT tended to adversely affect suppliers. Particularly, WHVAT as reintroduced, failed to effectively consider the impact that the mechanism would have on suppliers faced with a continuous credit position.
Suppliers, in order to arrive at the VAT to be remitted to the revenue authority, are required to net off VAT on taxable purchases (input tax) against VAT on taxable sales (output tax). Any excess output tax is due for onward remission to the KRA by the 20th day of the following month. As VAT is a consumption tax borne by the final consumer, this system ensures that VAT, rather than being a tax burden to the supplier, is passed onward to the final consumer. WHVAT, however, throws a spanner in the works.
By requiring WHVAT agents to withhold and remit VAT at six per cent on payments to their relevant suppliers, the process of determining a supplier’s VAT position is tampered with. Ideally, suppliers making taxable supplies (either standard rated or exempt supplies) should not be affected. However, suppliers making zero-rated supplies, or mixed supplies (both taxable and zero-rated suppliers) stand to be affected. In many instances, the latter suppliers tend to have more input VAT as compared to output VAT – leaving them in a VAT credit position. WHVAT thereby places an unfair burden on those in perpetual VAT credit positions, who would ideally not remit VAT to KRA, to suffer VAT at six per cent.
With this in mind, the Finance Act 2017 entitled suppliers to exemption from WHVAT, provided that certain criteria are met. This was later followed by WHVAT guidelines released by the revenue authority highlighting the relevant criteria. In order to qualify for exemption from WHVAT, a burden is placed on suppliers to adequately demonstrate to the Commissioner of Domestic Taxes that application of WHVAT would likely result in a continuous credit position for 24 months or more.
This measure not only ensures that the KRA prevents VAT leakages through the WHVAT mechanism, but further protects suppliers from potential adverse tax implications of the same mechanism. It is hoped that going forward, similar loopholes and inefficiencies in the taxation system will be expeditiously weeded out.