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ICPAK03/2012 - POSITION PAPER ON THE VAT BILL 2012

The Institute of Certified Public Accountants of Kenya (ICPAK) is the professional organization for Certified Public Accountants in Kenya established in 1978 by the Accountants Act, CAP 531. ICPAK is dedicated to development and regulation of the accountancy profession in Kenya so as to enhance its contribution and that of its members to national economic growth and development. In this regard, ICPAK wishes to advise the public that an Accountant by Law is an individual who has qualified by passing the three levels of the CPA examinations and is duly registered by the Institute of Certified Public Accountants of Kenya.

Prepared by ICPAK on 30 August 2012

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ICPAK POSITION PAPER ON THE VAT Bill 2012 1.0 Objective The objective of this position paper is review and makes various proposals on the VAT Bill 2012. The VAT Bill 2012 aims to reform the legal framework governing administration and enforcement of the VAT regime in Kenya.

2.0 Background The process of reforming the VAT regime in Kenya started in the financial year 2011/11 with the then Minister of Finance, Hon. Uhuru Kenyatta undertaking a complete overhaul of the VAT law. The Minister’s desire for a complete overhaul of the VAT system was indicative of the complexity of the VAT Law that yielded serious administrative challenges to the tax administrator, the Kenya Revenue Authority. The current VAT Act grants exemption to 395 goods and 22 categories of services while at the same time granting zero rated status a total of 416 supplies both goods and services. The long list of the zero rated supplies has on top of contributing to the complexity of the system, yielded unprecedented volume of VAT refunds which is estimated to grow at a rate of KShs 1.5 billion every year, a position further exacerbated by the Withholding VAT system which while abolished now has left taxpayers with increased VAT refunds.. The situation gives rise competition between processing refunds to tax payers and meeting the costs of basic services to the general public. Treasury has in this regard focussed on paying for services hence the growing refund position.

The refund menace characterizing the Kenyan VAT regime therefore is a major problem that the reform exercise must focus on. In an attempt to address the anomaly in the VAT system, the proponents of the Bill have created a situation of moving from too many zero rated supplies to none. This is in our view too drastic a move whose costs will more than definitely wipe-out any expected benefits.

The design of a tax system by global best practice should be driven by its productivity in terms of revenue yield. Reform of the VAT regime is
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one of the essential facets of tax reform to be undertaken in Kenya with the objectives of increasing tax revenues, achieve satisfactory wealth distribution and development of a sustainable yet simplified tax system that is efficiently and effectively administered to generate enough revenues to fund government projects. Such a tax system will succeed as a pathway to a prosperous economic future for Kenya.

ISSUES INFORMING THE REVIEW OF THE VAT BILL 2012 The Enactment of Constitution of Kenya 2010 The Constitution of Kenya 2010 upon being enacted made certain provisions that would require existing legislations to be amended to bring them in tune with the provisions there-in. Article 201 prescribe the Principles of Public Finance key of them in this regard is the provision of Article 201 (1) (b) (i) that the burden of taxation shall be shared fairly. Article 210 of the Constitution is even more explicit to the extent that it out-laws any form of tax exemption. Article 210 (3) has in express terms decreed that no law may exclude or authorize the exclusion of a State Officer (hitherto, the beneficiaries of tax exemption) from payment of tax whatsoever. This must provide the thrust to see through the reform of the VAT Law.

Unpaid VAT Refunds Arising out of the complexity of the current VAT Law, we are faced with a huge VAT refund problem. The KRA estimates that the problem of VAT refunds rises to approximately KShs 1.5 billion every month. This is indeed unsustainable. The magnitude of the refunds implies committing capital that would have otherwise been applied by the private sector in productive ventures. On the flip side, it presents an administrative challenge to the KRA as additional resources that would have otherwise been engaged in efforts to enhance level of compliance is now committed to operational functionalities around refunds. It therefore became a necessity to address the root cause of the VAT refund problem by seeking to reform the VAT Law.
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Efficiency in Implementing the VAT Law The current VAT Law is very complicated to administer and comply with for the KRA and tax payers respectively. Successive studies on ease of doing business give Kenya a low-rating in the global ranking. VAT Compliance has been singled out as a major contributor to this. The studies have indicated that it accounts for approximately 70% of the total time spent on compliance related issues. This is indeed an appalling situation that does not auger well with our desire to be a leading destination for foreign direct investment. In an effort to change this situation and make Kenya the preferred destination for FDI, the reform of the VAT law, among other reform measures, became necessary.

Costs of administering the VAT Act have been considerably high as compared to the other forms of tax. Owing to the complexity of the VAT law, it becomes necessary to establish elaborate systems to check on compliance and this turned out to be overly expensive to the revenue authority. The review thus further aimed at simplifying the law to make it easier to administer and comply with.

Enhance Revenue Collection The complexity of the existing VAT Law provided significant loop holes that have yielded revenue leakages. When considered against the increasing demand for government services at all levels, efforts must be instituted that will ensure that all collectible taxes end up in the government exchequer account. The exercise to review the VAT Law regime is intended to seal these loop holes to enhance revenue productivity. Scrapping of exemptions will directly bring in money to the exchequer. Minimizing the list of the zero rated supplies and moving them to standard rating would in effect result in reduction of VAT claims of input tax component against output tax. This has the direct effect of growing the revenue yield.

We wish to take this opportunity to highlight the fact that it is imprudent to focus only on the revenue side of the equation. Equal measure of
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effort should be directed at the expenditure side. This should yield expenditure rationalization that will bring under check, the government’s appetite for revenues. There must be efforts aimed at curbing wasteful government expenditures. We must at the same time make deliberate effort to focus the government’s fiscal policy towards capacity enhancing expenditure programmes that will yield greater opportunity for growth and hence create larger pools of taxable units.

POSSIBLE EFFECTS OF THE VAT BILL 2012 IN ITS CURRENT FORM The VAT Bill 2012 is a great improvement on the current VAT Law. It is mush simpler to internalize from both ends of the spectrum – administration and compliance. However we are of the view that it proposes a significant shift from one extreme of far too many exemptions and a long list of zero rated supplies to another extreme of no exemptions, no zero rating or no macro-important remissions. The situation has resulted in bringing under standard rating basic commodities, a fact that quickly gave rise to the current emotional debate.

A more progressive VAT Law must take into account the economic realities that are unique to Kenya. There is a general concurrence that the Bill is good but with minor adjustments to address the concerns raised about the cross-impact it will result in a piece of legislation that could transform the business and governance environment in Kenya. In our view, the salient and direct impact of the VAT Bill 2012 on the economy is as follows:

Increase in Revenues On simplicity grounds, the VAT Bill will definitely enhance revenue collection by proposing to reduce number of supplies of both the exempt and zero-rated items. By this proposal, the Bill proposes creating a wider pool of taxable supplies that complimented with administrative reforms at the KRA should result in significant growth in revenues. The KRA can achieve this by leveraging on automation. It is noteworthy that it is the
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act of zero rating most supplies which gave rise to huge amounts of tax refunds owed by Government to business. We must face the reality of public finance economics, a tax system should yield revenues and not refunds.

Compliance Time Significantly Reduced Simplicity of the VAT law would make it easier to comply and hence serve address the concerns of business that too much time is committed to VAT compliance, valuable time which would otherwise have been committed to value enhancing activities. The indirect effect of this is that it will enhance the country’s outlook in attracting investors and thus contribute to economic growth of the country.

Address the VAT Refund problem going forward It is acknowledged that the desire of the VAT Bill 2012 is to reduce the list of zero rated supplies is to address the consequential problem of huge VAT refunds. It is noteworthy that this is a futuristic outlook but does not address the existing outstanding VAT refunds. There should be provisions over the transition period addressing the outstanding refunds as it an issue of direct bearing on business. It will add value to provide a mechanism by which to deal with the outstanding VAT refund problem. Going forward, it may be prudent to consider fast-tracking verification of the outstanding VAT refunds and possibly provide mechanisms for write-offs against future VAT obligations over a period of time.

Increased Burden on Consumption The dysfunctional nature of the current VAT Act has provided an impetus for revising the VAT Act with the VAT Bill 2012 attempting to address the challenges facing businesses and the country as a whole. Nevertheless, the VAT Bill 2012 is not devoid of challenges. It has been stated that upon its enactment, there would be an increase in prices of basic commodities such as maize flour, milk, bread, among others, by 16%. While the VAT Bill proposes charge at zero rate unprocessed foods, it may be more prudent to define basic commodities and ensure that
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these are subject to a zero rate. From the hypothetical case below; we seek to demonstrate the effects of exempt, zero rate and standard rate status:
Exempt – KShs Cost of Raw Materials Input VAT Overheads Input Tax on the Overheads Total Claimable Input Tax Effective Total Cost Mark-up at 25% Selling Price- No output VAT Output VAT Final Selling Price 100.00 0.00 50.00 8.00 158.00 0.00 158.00 39.50 197.50 0.00 197.50 Zero-Rated – 0% 100.00 0.00 50.00 8.00 158.00 8.00 150.00 37.50 187.50 0.00 187.50 Standard Rated – KShs 16% 100.00 16 50.00 8.00 174.00 24.00 150.00 37.50 187.50 30.00 217.50

From the scenario analysis, it is apparent that standard rating would indeed bring about increased costs. This should be addressed through establishing an acceptable middle ground for the both the short and long term benefit of all sector of the economy.

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ICPAK PROPOSALS ON THE BILL Kenya’s economy is fragile and must be cushioned against external incursions by cheap imports from the more developed economies. Our taxation policies must be structured to offer that support, a vital step in reforming the tax system for efficiency and effectiveness. It heralds a big component in growing tomorrow’s economy for Kenya. In order to move forward, consideration should be given to amending the Bill to take into account the weighty concerns raised.

Vision 2030 envisages a Kenya that enjoys macro- economic stability for long term development as evidenced by low levels of underlying inflation, interest rates, limited public sector deficits, stable exchange rates, and enhanced equity and wealth creation opportunities for the citizens. An amended VAT Bill 2012 should help this course in simplifying the taxation system and generating additional internal revenues to reduce public sector deficits, curb inflation and finance the development of infrastructure in Kenya. Arising from reduction in public sector deficits and in inflation at manageable levels, entrepreneurs will be more confident in pursuit of business ventures.

Treatment of Basic Commodities We have noted that the Bill is a significant improvement on the current VAT Act. However, it does not take cognizance of the potential impacts of standard rating all supplies including the basic commodities. It has been demonstrated that upon enactment, the new VAT Act would increase prices of basic commodities such as maize flour, milk, bread, among others that were hitherto zero rated by 16%. For its intent and purpose, the Bill should provide a middle ground in the treatment of basic commodities. The counter argument against blanket zero rating would be that such a system would extend this benefit to the rich and undeserving segment of society and that Government would work ways and means of administering subsidies to cover the poor. Historically this has been a feat hard to
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achieve and the concerned benefits would in our view not reach the intended disadvantaged part of our society not to mention to consequential costs. We will attempt to define basic commodities as the essential goods that support life and the desire would be to link these goods to what social scientists would define as the goods meeting the basic core needs. Given the diverse nature of the people of Kenya, it may not be tenable to prescribe a conclusive list of the basic commodities. Consequently, it will add value to consider empowering the Cabinet Secretary to prescribe the commodities to be considered as basic commodities. The defined basic commodities would then be taxed at zero rate to accrue cost savings to consumers. Remissions on VAT The Draft VAT Bill 2011 published for public debate had acknowledged and provided for VAT remissions. The VAT Bill 2012 has abolished the important facet of taxation aimed at facilitating development of critical sectors of the economy. It is astounding that Bill proposes do away with remissions on one hand yet there are developments at advanced stages to streamline public private partnership as a mechanism for developing key infrastructural developments that are key for the long term goal of economic development of the nation under the Vision 2030 blue print. We do acknowledge that VAT remissions under the current VAT Act have been grossly abused. This is however no sufficient reason to scrap it wholesomely given the potential macro impacts it can generate if well administered. From the foregoing, we are of the opinion that administrative reforms on the system of VAT remissions should be undertaken and an objective system clearly spelt within the VAT Law to rule out indiscretion and abuse of the system. An effective VAT Remission system is informed by objective criteria that support investment in the critical sectors that drive the economy. As a starting point, the criteria should identify the critical sectors to which VAT remission would be accessible. Thereafter, the criteria should prescribe threshold of amount of investment to qualify for VAT Remission.
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Transition Clauses on Remissions granted under the current VAT Act From the discussion above, we note that the VAT Bill 2012 seeks to scrap VAT Remission in totality. It is surprising that the Bill is silent of transitional arrangements for remissions granted under the current VAT Act. It is noteworthy that system of VAT remissions is a mechanism for granting favourable tax treatment to facilitate investment. There are a number of investors who committed to investing in the productive sectors of the economy on the strength of remissions they were granted under the current law. The scrapping of remissions will serve to paint our economy as lacking policy stability and scare away not only potential investors, but equally those investors who had invested on the strength of remissions signed and granted under the current Act. The VAT Bill 2012 should provide fro transitional arrangements for VAT remissions to secure the stability of our policy environment and retain the investments. By way of international comparison it is perhaps worth considering the recent move by the Government of India to introduce retrospective taxation of transactions and the considerable back lash that was seen from foreign investment. Sensitive Sectors of the Economy The VAT Bill 2012 has been drafted in total disregard of the prevailing business environment in Kenya. There are some critical sectors of the economy that must be cushioned against incursion from cheap imports. We need to also take into account the prevailing economic environment within the East African region. Inputs for productive but sensitive and critical sectors such as agriculture and tourism have been proposed for standard rating. The eventual effect is that the policy proposal would be in disconnect with the other government policies that have identified such sectors as critical players towards economic development. We need to synchronize the tax treatment to the overall government policy. We therefore propose that inputs to critical but sensitive sectors of the economy be zero-rated. Tax under Dispute

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Section 51 (1) (a) of the VAT Bill proposes that a tax payer who disputes an assessment by the Commissioner shall be only have his appeal heard before the Tribunal upon depositing thirty per cent of the disputed amount with the Commissioner. Section 51 (3) (b) has exacerbated the problem by requiring that if a tax payer were to appeal the decision of the Tribunal at the High Court, the appeal can only be heard after the tax payer deposits the full amount of the tax under appeal. By these provisions, a tax payer is adjudged guilty to the extent of the amount demanded. We are of the view that by these provisions, a rogue revenue authority focussed on meeting revenue targets will definitely to raise frivolous assessments knowing very well that the process of refund is long and very complex. Of paramount significance is the fact that these provisions are in total regard of the Constitution of Section 47 that enshrines a right to a fair hearing and Article 50 (2) stipulates that one is presumed innocent until proved otherwise. In light of this, we wish to propose that the Section 51 (1) and (3) be amended to bring them in congruence with the Constitution. However for taxes under dispute, they Commissioner should be barred from demanding any portion of it until the dispute is settled. Prescribed Timelines The VAT Bill 2012 has provided for timelines that in our view fail practical tests. We have identified two timelines which in our view will constrain the tax payer. As we think of reform tax laws, the process should be done to create a system that builds relationships between the revenue authority and the tax payer with the long-term benefit of enhanced level of compliance. We will specifically address ourselves to Section 16 (1) of the Bill limiting the duration for issuance of credit notes to six months down from twelve months in the current VAT Act. Similarly, Section 17 (2) proposes to reduce the period within which a tax payer would be expected to claim input tax from twelve months to three months. In our view the provisions in the current VAT Act has served well and there would be no course for proposing changes. Hence we recommend re-instatement of the periods to twelve months in both cases.

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Transitional Arrangements on Outstanding Refund Claims The Bill does not make reference to refunds outstanding on account of the current VAT Act. There should be provisions in the Bill to address transitional arrangements to guide retirement of outstanding VAT refunds. It has been argued strongly that at the centre of the clamour for the review of the VAT Law was the desire to address the refund problems that dogged the current law. It is commendable that the Bill is drafted with the thought of finding lasting solution to the refund problems, a fact that the provisions have effectively addressed. It however fails to prescribe solutions to the existing refund menace. It must be made clear that of the total outstanding refund claims, there are those that are not genuine. Our concern is to create transitional mechanism in law that obligates government to commit to refund any claims that its agent, the KRA, would have certified as genuine within a reasonable period of time and we propose three months. Any such claims that remain outstanding after the prescribed period should attract a penalty at the same rate of two per cent for every additional month that it remains outstanding. This will serve to bring parity in the treatment of outstanding amounts of taxes to government and refunds to business respectively. There have been claims that some tax payers are in the habit of submitting frivolous claims with a view to defrauding government. To bar such tendencies, the Bill should provide for very tough penalties against any fraudulent claims. We propose a fine of ten million shillings or a prison term of 5 years or both. General Comment It has been said that the noble idea of reforming the VAT law is driven by the desire to simply the VAT regime for ease of administration and consequently compliance. The potential impact of the proposed system has been argued to portend significant effect to critical sectors of the economy or the consuming public. Section 5 (2) of the VAT Bill has proposed two rates; 0% and 16% but with express powers to the Cabinet

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Secretary under Section 6 (1) to amend it either way within a deviation of a maximum of twenty five per cent. In arguing for an acceptable middle ground that secures simplicity of the tax system and at the same time taking care not to significantly increase the costs of doing business and cost of living, can we give thought to the idea of reducing the standard rate of tax within the limits prescribed in Section 6 (1). In this regard, we propose a reduction of the standard rate by two to four percent of the proposed rate (16%). We further propose a restriction of zero rating supplies to export supplies only. Summary of Submissions

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Section Of Proposed Amendment Bill Introduce a definition for ‘ basic commodities as follows; Sec 2Interpretation • ‘essential goods that support life • ‘goods meeting the basic core needs’

Justification We are of the considered view that the position fronted by the Bill to scrap all zero rated good may be illinformed. We must do so taking cognizance of the economic realities facing Kenya. We must extend tax benefits to the less privileged by managing the cost of basic needs are maintained as affordable as possible. We are of the opinion that tax administration needs to be operationalized within bounds of independence. This should be achieved by de-linking the powers to arrest from the powers to provide as assessment. We see the need for Revenue Police in circumstances where the tax payer is uncooperative with the revenue officers..

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Amend the Section as follows: Section 4 – Powers of 1. “For the purposes of carrying out the provisions of this police Officers Act, authorized officers shall be accompanied by Revenue Protection Police of the KRA as shall be deemed necessary.” 2. “In circumstances where in-depth analysis of records of tax payers is necessary, the tax payer shall be provided with sufficient notice.”
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Section Of Bill Section 7 – Zero rating

Proposed Amendment Introduce a sub clause 3 under Section 7 to read as follows; ‘The Cabinet Secretary with the approval of Parliament shall prescribe the inclusion of items that qualify to be basic commodities for inclusion in the second schedule’

Justification Given the diverse nature of the people of Kenya, it may not be tenable to prescribe a conclusive list of the basic commodities. Consequently, it will add value to consider empowering the Commissioner to prescribe the foodstuff to be considered as basic commodities. The defined basic commodities would then be taxed at zero rate to accrue cost savings to consumers.
Section 13 (3) appears to be erroneous. In its current form it denotes the fact that taxable value will be an accumulation of the variables a, b and c. Provisions a and b are mutually exclusive. It should be that the higher value would be amalgamated with c to arrive at the taxable value.

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Amend Sec 13 (3) by introducing the rejoinder “or” between Section 13 – Taxable Value provision a and b. of Supply

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Section 16 Debit and Credit

Amend Section 16 (1) by deleting “six” and substituting with “twelve”

The VAT Bill 2012 has provided for timelines that in our view fail practical tests. As we think of reform tax laws, the process should be done to create a system that builds relationships between the revenue authority and the tax payer with the long-term benefit of enhanced level of compliance. The timeline provided for issuance of credit note is too short considering that it may take longer than the three months to obtain the necessary documentation. In our view the provision of the current VAT Act has served well and we see no need for amendment.

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Section Of Bill Section 17 (2) Credit for input tax against output tax Section 30 – Refund of tax paid in error

Proposed Amendment

Justification

Amend the second paragraph of Section 17 (2) to provide as follows: We note that the limitation by the allowable period of Provided that the input tax shall be allowable for a deduction within twelve months after the end of the tax period in which the supply or importation occurred. Amend paragraph two of Section 30 to extend the period allowable to claim taxes paid in error from three months to twelve months. The proposed paragraph shall read as follows: “A claim for tax paid in error shall be lodged no later than twelve months from the date the tax became due and payable under Section 19.”

three months does not take into account the business realities. A period of twelve months appears more realistic. We must endeavour to incorporate administrative fairness in the provisions of the Law. We are of the view that three months is too short for a tax payer to put in place a case for the refund. How would this compare with Section 32 that obligates a tax payer to refund any taxes payable on demand? We do not see limitations on the KRA in obtaining monies that may have been refunded erroneously. A twelve month window is in our view a good compromise. A seven day period is in our view impractical. We wish to propose that to consider practicality of the limitation, we consider a thirty day window.

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Section 36 – Cancellation of Registration

Amend to require that application for cancellation shall be done within one month (30 days)

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Section Of Bill Section 49 Power of Inspection

Proposed Amendment
Provide for an additional provision under Section 49 (11) addressing the period for completion of the audit. The provision shall be as follows: 11 (a) Any audit or examination of tax payer records shall be finalized within six (6) from the date it commenced. b) In the event that the audit is not completed within sic (6) months, the authorized officers shall seek authority to extend the audit which shall be made available to the tax payer. c) Subject to b above, the tax payer shall if required, be issued with an interim certificate for the progress made.

Justification
Section 49 (10) provides for audits or records examination. It is important to establish timelines for audits to lend certainty to the exercise. Tax audits are intensive exercises which must be operated within defined timelines. It is also critical to ensure that the KRA plans well to synchronize its time table so that we do see a scenario where different categories of audits are initiated all at the same time. It is time consuming for the tax payers.

10 Section 51 – Appeals

We propose an amendment to Section 51 (1) (a) and (3) (b) as The proposal is founded on the Constitutional provisions under Articles 47 and 50 which prescribe that a person has follows; Provided that in a case of a dispute arising out of an assessment by the Commissioner, a) Pay in full to the Commissioner any taxes not in dispute; b) Any tax in dispute shall not be paid directly to the Commissioner until the dispute is heard and determined. c) If determined that the tax is indeed payable, the taxes shall be payable immediately
a right to administrative action that is reasonable and procedurally fair and one is presumed innocent until proven guilty. The current provision by which a tax payer will be required to deposit a proportion of the tax in dispute is in our view in direct contravention of the Constitution as it amounts to adjudging one before being heard. At worst, we can consider a system where the deposit of the disputed tax is deposited with a neutral body awaiting the determination of the appeal.

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Section Of Bill 11 Remissions

Proposed Amendment Introduce a part in the VAT Bill 2012 and subsequent VAT Act to address VAT remissions as previously provided under Section 23 of the current VAT Act. The VAT Remissions must be targeted and shall be guided by objective criteria unlike the current treatment. 1. Introduce a clause to identify the critical sectors in line the provisions of the Vision 2030 to which VAT remission would be granted; 2. Prescribe a threshold of amount of investment to qualify for the VAT Remission.

Justification
Tax remissions are aimed at facilitating development of critical sectors of the economy. We do acknowledge that VAT remissions under the current VAT Act have been grossly abused. This is however no sufficient reason to scrap wholesomely given the potential macro impacts it can generate if well administered. From the foregoing, we are of the opinion that administrative reforms on the system of VAT remissions should be undertaken and an objective system clearly spelt within the VAT Law to rule our indiscretion and abuse of the system. An effective VAT Remission system should be informed by objective criteria in support of investment in the critical sector that drive the economy. We argue for targeted remission system. We wish to propose that we limit the targeted sectors for VAT remissions to those identified as being key to realizing Vision 2030. Further, we propose a threshold of investment of an equivalent of US$ 5 million dollars.

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Section Of Bill 12 Sec 81 – Repeal of CAP 476, transitional and savings provisions

Proposed Amendment 1. Introduce a sub clause 5 to provide for transitional arrangements for VAT remissions granted under the repealed VAT Act Cap 476 to safeguard investments undertaken on the strength of those remissions.

Justification
The VAT Bill 2012 seeks to scrap VAT Remission in totality. The Bill is silent of transitional arrangements for remissions granted under the current VAT Act. It is noteworthy that remissions are a mechanism for granting favourable tax treatment to facilitate investment.

2. Introduce a sub clause 6 to provide for transitional The scrapping of remissions will serve to paint our arrangements to guide retirement of outstanding VAT economy as lacking policy stability and scare away not only refunds potential investors, but equally those investors who had a. We propose a period of three months with any such claims that remain outstanding after the prescribed period should attract a penalty at the same rate of two per cent for every additional month that it remains outstanding. b. In the event that a tax payer submits frivolous claims with a view to defrauding government the bill should provide for very tough penalties against any fraudulent claims. We propose a fine of ten million shillings or a prison term of 5 years or both.
invested on the strength of remissions signed and granted under the current Act. The Bill does not address the problem of refunds outstanding on account of the current VAT Act. There should be provisions in the Bill to address transitional arrangements to guide retirement of outstanding VAT refunds. Our concern is to create transitional mechanism in law that obligates government to commit to refund any claims that its agent, the KRA, would have certified as genuine within a reasonable period of time. There have been claims that some tax payers are in the habit of submitting frivolous claims with a view to defrauding government. To bar such tendencies, the Bill should provide for very tough penalties against any fraudulent claims.

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Section Of Bill 13 Second Schedule

Proposed Amendment Amend Part A of the second schedule to include a provisions 10 as follows; ‘Inputs to critical but sensitive sectors of the economy as the Cabinet Secretary may prescribe in
accordance with the adopted development policies of Government.’

Justification There are some critical sectors of the economy that are key to the realization of the Vision 2030 and must be cushioned against incursion from cheap imports. Inputs for productive but sensitive & critical sectors such as agriculture and tourism have been proposed for standard rating. The eventual effect is that the policy proposal would be in disconnect with the other government policies that have identified such sectors as critical players towards economic development. We need to synchronize the tax treatment to the overall government policy.

CPA Patrick Mtange, Chairman, Institute of Certified Public Accountants of Kenya

For more information on this position paper and other papers on Governance and Accountability please contact us on governance@icpak.com.

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