The taxman is seeking to make it mandatory for all businesses to register as Value Added Tax (VAT) agents, adding a fresh reporting obligation to small traders and triggering a rise in price of a range of goods and services.
The Kenya Revenue Authority wants the threshold for VAT registration cut to zero from the current Sh5 million.
This means that all businesses, including shops, wines and spirits outlets, will need to register for the consumption tax, and will be required to charge the 16 percent VAT on sales of goods and services not exempted from the duty.
Small traders dealing in products such as the sale of mobile phones, soft drinks, bottled water, cosmetics, snacks, cooking gas and petroleum products will charge VAT and remit the collections to the KRA every month.
This sets the stage for a rise in the costs of the commodities in businesses that currently generate less than Sh5 million in sales annually and have not been factoring in the consumption tax.
Consultants will also be required to factor in the 16 percent VAT charge on their services.
Goods exempted from VAT include food items such as maize flour, unprocessed green tea, raw milk and bread as well as medical products like syringes.
The tax agency reckons that the move will help Kenya increase revenues from VAT to over Sh1 trillion from the current Sh653 billion.
“Remove the VAT threshold of Sh5.0 million to broaden equity,” says a KRA document seen by the Business Daily.
“Remove tax expenditures and rationalise zero-rating while cushioning the vulnerable household. Include payment service providers and aggregators for tax at source collection. Enhance transaction traceability across the value chain,” added the document that will influence the shape of the Finance Bill for the year starting July.
If adopted, Section 34 (1, a) of the VAT Act, which provides only businesses whose annual turnover exceeds Sh5 million should mandatorily register as VAT agents, will be repealed.
Going this route would mean that the vast small business segment of the economy would be roped into VAT registration, and meet a set of obligations or risk fines and jail.
Small traders will be required to file and pay the VAT by the 20th of every month. They will need to keep sales records to support their VAT returns and will have to notify the KRA of changes to their business name, address and nature of business.
The traders will also be required to use the electronic tax invoice management system (eTIMS) for tax invoices, which must be transmitted to the KRA.
A new law that took effect in December 2004 freed small firms with annual sales of below Sh5 million from issuing electronic invoices, removing a compliance hurdle that had made it difficult for micro traders to supply big companies with goods and services.
The KRA has previously reckoned that the exemption has slowed the roping in of the hard-to-get informal traders into the tax bracket, denying the State the ability to rev up income.
The authority says about 41.0 percent of the targeted non-VAT registered taxpayers have onboarded eTIMS, erecting a hurdle in tracing economic transactions.
Before December 2022, the law demanded that all suppliers, regardless of their size, issue an electronic invoice to show proof of sales, which would also be reflected at the KRA as an expense for the big firms buying goods and services.
This allowed the KRA to track the sales of the small traders while keeping tabs on the cost of big firms, which helped curb the practice of companies inflating their costs to lower tax obligations.
Big firms were dropping small traders without the ability to generate eTIMS as their suppliers in the push to be compliant with the law, prompting the change in regulations.
Electronic invoice
Now, the big firms buying goods and services from suppliers with annual sales of less than Sh5 million are responsible for producing the electronic invoice under reverse invoicing.
Doing away with the Sh5 million annual turnover for VAT registration is among the raft of proposals that are being explored in the race to raise Sh219.4 billion additional revenue for the year starting July, pushing the targeted revenue to Sh3.53 trillion.
The removal of the threshold is hinged on the KRA disclosure that the country currently has 230,000 registered VAT taxpayers against the projected 800,000.
“Key challenges in closing Kenya’s Sh378.0 billion VAT gap include threshold exclusion which limits the taxbase; high VAT leakage through exemptions; weak visibility of the informal economy and a narrow taxbase with just 230,000 VAT taxpayers registered,” the KRA document says.
Kenya has had the Sh5 million annual turnover threshold for VAT registration since 2007 when it was increased from the previous Sh3.0 million.
The Treasury is going slow on imposing significant new taxes or increasing existing ones, fretful of protests.
This has seen the KRA get aggressive, with tax cheats flagged after it conducted a series of background checks, lifestyle audits and vetting.
The agency is leveraging increased use of data and linkages between the KRA systems with third parties such as banks and mobile money platforms like M-Pesa to track taxpayers’ activities, use of internet-enabled cameras at excisable goods processing plants and full rollout of digital electronic tax registers (ETRs) to grow revenue.
In terms of tax collected as a proportion of annual economic output, Kenya has been underperforming other nations like South Africa, the State House said.
Body cameras
A strategic plan indicates that body cameras will be used by staff attached to customs, border control and enforcement as a means of enhancing transparency during interactions with taxpayers.
Some of the KRA’s staff have been under scrutiny for suspected collusion with tax dodgers, negatively impacting revenue collection targets.
The cameras will record interactions with taxpayers, capturing issues raised in real time and how they were resolved—a move expected to serve as a deterrent to rogue employees who have, over the years, amassed fortunes through bribery while turning a blind eye to tax cheats.
