VAT Changes with finance bill 2023

The Finance Bill 2023 proposed some changes on VAT effective 01 July 2023 should the Parliament
pass the bill into law turning it into the finance act 2023.

VAT exemption on exportation of Taxable Services

The Bill proposes to exempt from VAT the exportation of taxable services which are currently subject to VAT at the rate of 16% except business process outsourcing.

The Finance Act, 2022 reclassified the VAT status on exported taxable services from VAT exempt to a standard rate of 16% on all other exported taxable services except for Business Process Outsourcing (BPO) services. This was considered controversial because the VAT Act did not define BPO services. This amendment into law in 2022 was a departure from the International VAT/GST Guidelines and the OECD’s “destination principle” which recommend that VAT on cross-border transactions should be neutral. The amendment was also a result of numerous disputes at both the TAT and the Courts on the VAT status of exported services.

The proposed VAT exemption on exportation of taxable services will not make the country competitive with other jurisdictions as the VAT exemption status limits taxpayers from claiming any input VAT incurred in relation to the exported services.

Abolishment of VAT on Transfer of business as a going concern.

VET Transfer of business as a going concern

The Bill proposes to exempt from VAT the transfer of a business as a going concern (TOGC). Whilst TOGC is currently chargeable to VAT at the standard rate of 16%, TOGC has undergone various reclassifications in the recent past which brings uncertainties to taxpayers. It is noteworthy to mention that despite the aforesaid amendments, no express definition exists in the VAT Act to elaborate on what transfer of a business as a going concern actually entails.

VAT on Liquefied Petroleum Gas scrapped

The Bill proposes to exempt Liquefied Petroleum Gas (“LPG”) from VAT.

The supply of LPG is currently subject to VAT at the rate of 8%. This proposal is aimed at lowering the prices of LPG in a bid to lower the cost of living.

Notable also, the Bill has proposed to exempt Railway Development Levy (RDL) and Import Declaration Fee (IDF) levies on the importation of LPG which is likely to further lower the prices of LPG.

Stringent measures prior to the deductibility of input VAT

The Bill proposes to impose two mandatory conditions a taxpayer must meet before claiming input VAT. First, the taxpayer will be required to have in possession the appropriate transaction documentation stipulated by Section 17(3) of the VAT Act. Subsequently, the supplier should have declared the corresponding output VAT. This proposal is a departure from the current provision which requires taxpayers to meet either of the above conditions before claiming input VAT.

If enacted, this proposal will pass the burden of monitoring if suppliers have declared output VAT on to taxpayers, a role which currently is vested on the KRA and imposes undue compliance burden on taxpayers in relation to the claimability of input VAT. This comes at a time when the government is implementing e-tims which is an online platform that will enable taxpayers to declare their revenue on real-time time basis hence enhancing VAT compliance.

Read More: Our Analysis of The Finance Bill 2023

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