Kenya Tax Appeals Tribunal Clarifies Withholding VAT Rules for Unregistered Suppliers
The Tax Appeals Tribunal (TAT) of Kenya recently issued a ruling in the case of County Government of Kisii v Commissioner of Domestic Taxes, addressing a critical question regarding Withholding Value Added Tax (WHVAT). The ruling clarifies whether WHVAT is applicable to payments made to suppliers who are not registered for Value Added Tax (VAT).
Understanding Withholding Value Added Tax (WHVAT)
WHVAT is a mechanism employed by tax authorities to collect VAT at the point of transaction. It requires designated taxpayers (WHVAT agents) to deduct 2% of the taxable value of goods or services and remit it to the Kenya Revenue Authority (KRA) when making payments to suppliers.[1]
The Case: County Government of Kisii v Commissioner of Domestic Taxes
In this case, the KRA issued tax demands to the County Government of Kisii, including WHVAT on various supplies. The County Government argued that WHVAT should only apply when the supplier is VAT-registered and charges VAT on their invoice. They also referenced KRA guidelines, which they interpreted as confirming that WHVAT does not apply to supplies from unregistered suppliers. The KRA countered that the law focuses on the taxable nature of the supply itself, regardless of the supplier’s VAT registration status.
The Tribunal’s Ruling
The TAT dismissed the County Government’s appeal, upholding the KRA’s position. The Tribunal ruled that the trigger for WHVAT is the nature of the supply – whether it is taxable under VAT rules – and not the supplier’s registration status. The TAT also clarified its interpretation of the KRA’s guidelines, stating they specify that WHVAT should not be applied to taxable supplies to non-VAT registered persons, not payments to non-registered persons generally.
Implications for Taxpayers
This judgment has several practical implications for taxpayers:
- Advance VAT Payment: WHVAT functions as an advance VAT payment, which VAT-registered suppliers typically credit against their VAT liability when filing returns.
- Impact on Unregistered Suppliers: Unregistered suppliers cannot claim withheld amounts back through the VAT system, effectively reducing their revenue. This may necessitate price adjustments or encourage voluntary VAT registration.
- Review of Procurement Policies: The ruling necessitates a review of procurement policies, contract terms, and compliance frameworks by WHVAT agents and other taxpayers to align with the new interpretation.
Looking Ahead
This judgment represents a shift in the understanding of WHVAT application in Kenya. Taxpayers should carefully review their processes to ensure compliance with the TAT’s ruling and avoid potential tax liabilities. It is recommended to seek specialist tax advice to address specific circumstances.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.