Withheld VAT cut by two-thirds to ease cash flow

Treasury Secretary Henry Rotich has proposed to cut withholding Value Added Tax (VAT) rate to two from six per cent in a bid to reduce its impact on cash flow, especially for exempt exporters.

Lack of an appropriate law has prevented companies from lodging withholding VAT claims, leading to accumulation of refunds since September 2017.

This created a cash crunch for some firms, especially those in the export business.

The value of withholding VAT had crossed Sh2.68 billion by August 2018, the Kenya Association of Manufacturers (KAM) estimated in April. It has since gone up.

“The implementation of the (Value Added Withholding Tax) system has encountered challenges, the major one being a build-up of huge credits, yet the law does not provide for refund of the same to the taxpayers,” Mr Rotich said in budgetary proposals on Thursday.

“In order to address these challenges, I propose to reduce the rate of VAT Withholding from six per cent to two per cent. This will not only help reduce the build-up of VAT refunds, but will also help enhance the cash flow of our business community and stimulate economic activities and job creation.”

Through the Statute Law (Miscellaneous Amendment) Bill 2019, the Treasury is also seeking approval from legislators to empower the Commissioner of Domestic Tax to allow withholding VAT to “be applied against any tax payable under this Act”.

“The Bill seeks to amend the Act to provide for a taxpayer to apply any withheld tax to his credit to offset any other tax liability due from the taxpayer,” the brief memorandum accompanying the bill reads.