Last week, the country’s attention was focused on Cabinet Secretary (CS) Henry Rotich’s budget speech. Despite presenting Kenya’s biggest budget ever, the National Treasury has given a good account of itself and especially since the CS proposed few tax rate increases, which is not surprising. The focus this year was on the continued reform of tax administration in Kenya. Tax reform is predicted to drive the enhanced revenue collection of KShs 1.375 trillion that Kenya Revenue Authority (KRA) is expected to collect in the financial year 2016/17.
Part of the reforms in tax administration and the efforts that National Treasury and KRA have deployed over the last 12 years is withholding VAT (WHVAT). WHVAT was first introduced in 2004 to identify and bring into the tax bracket, briefcase contractors who charged government 16% VAT but failed to remit to KRA the VAT so collected. By asking government ministries, departments and agencies to withhold VAT and remit it to KRA, KRA collected VAT from both the government ministry and the contractor creating a huge VAT refund headache for the private sector. But more importantly, KRA obtained crucial data on contractors to facilitate the contractor’s settlement of other tax obligations like corporation tax thereby sealing avenues of tax leakage.
In 2014, WHVAT was reintroduced in the VAT Act, 2013 after being scrapped in 2011. By what many think to have been an inadvertent drafting error in the Tax Procedures Act (TPA), WHVAT was again scrapped on 19 January 2016 following the deletion of Section 25A of the TPA that empowered the Commissioner to appoint WHVAT agents.
The Finance Bill, 2016 has amended the TPA in Section 42 by introducing Section 42A of the Tax Procedure Act to permit the Commissioner to appoint a WHVAT agent. This amendment is a clear statutory admission that WHVAT was indeed deleted by the TPA. Otherwise, why re-introduce WHVAT?
The Finance Bill, 2016 amendment which has an effective date of 19 January 2016 is, in my view prone to legal challenges because it invariably and incurably exposes taxpayers who did not comply with the WHVAT obligations after 19 January 2016 when the TPA repealed the Commissioner’s power to appoint WHVAT agents and the WHVAT regime, to non-compliance penalties.
Although I wouldn’t go so far as to say, like the Americans, that such an amendment is "dead on arrival", this amendment will cause confusion if the Finance Bill, 2016 is enacted into law as published. There are two key procedural problems with an effective date of 19 January 2016.
First, Under the National Assembly’s Standing Orders, an Act of Parliament cannot be amended before expiry of 6 months after it is passed into law. The TPA was assented to on 15 December 2015, published on 18 December 2015 and came into force on 19 January 2016. An amendment of 19 January 2016 as proposed in the Finance Bill, 2016, is barely within one month of the TPA being passed into law and is in breach of the Standing Orders.
Secondly, the amendment cannot have been made on 19 January 2016 and the public notified on 8 June 2016, which is the date the Finance Bill, 2016 was published. The fundamental question that a court would need to consider is whether a taxpayer can be expected to have known of an amendment with an effective date of 19 January 2016 before 8 June 2016 when the amendment was gazetted. This to my mind, is the biggest hurdle that National Treasury and KRA will need to get past in re-introducing WHVAT and constitutional lawyers will no doubt have a field day arguing amongst other things, unfair administrative action under Article 47 of the Constitution.
Is WHVAT useful? Certainly, in so far as it expands the tax base and ensures that all citizens contribute to the exchequer. So what are National Treasury’s real options? The easiest and smartest thing to do is change the effective date of the amendment re-introducing WHVAT to 8 June 2016. Such an amendment clarifies taxpayer’s obligations, minimizes disputes with KRA and ensures all eligible taxpayers pay their taxes. Until then, WHVAT is not yet out of the woods!
© 2020 KPMG Advisory Services Limited, a Kenyan Limited Liability Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.