List of Proposed Revisions to Kenya’s Value-Added Tax (VAT) System: Analysis of Finance Bill 2024
The Finance Bill 2024 has introduced suggested revisions to the Value Added Tax (VAT) system, as announced by the government.
These changes involve the removal of VAT exemptions on certain financial services, modifications to VAT refund procedures, adjustments to VAT registration criteria, and updates to VAT exemptions affecting tourism and insurance sectors.
The intention behind these proposed amendments is to transform the VAT framework in Kenya; however, they are anticipated to elicit varied responses from stakeholders representing various sectors.
Let’s examine the main proposals and the possible consequences they may entail;
1. Removal of VAT Exemptions for Financial Services:
The Finance Bill 2024 proposes the elimination of VAT exemptions on various financial services, such as issuing credit and debit cards, telegraphic money transfer services, and handling, processing, clearing, and settling of cheques, including special clearance or cancellation of cheques.
Additionally, it includes the issuance of securities for money, like bills of exchange, promissory notes, money, and postal orders, as well as the assignment of debt for consideration and financial services conducted on behalf of others on a commission basis.
Critics expressed concerns that these changes could hike costs for consumers and create complexity in VAT management for financial institutions.
2. Enlargement of Electronic Tax Invoices:
Another measure outlined in the Finance Bill 2024 is the incorporation of electronic tax invoices. This adjustment aims to harmonize VAT regulations with existing tax legislation.
 If enacted, businesses will be mandated to issue electronic tax invoices for transactions starting from July 1, 2024. Analysts perceive this alteration as a move towards modernizing tax administration in Kenya.Â
Nevertheless, certain businesses may encounter difficulties in transitioning to electronic invoicing systems.
3. Alterations in VAT Refund Regulations:
The proposed bill outlines various adjustments to the VAT refund system, which include alterations in the handling of surplus input tax and the timeframe allotted for submitting refund requests.
Though intended to streamline the refund procedure, there are concerns about their potential repercussions on enterprises, especially manufacturers involved in projects supported by official aid.
4. Elevation of VAT Registration Threshold:
The Finance Bill suggests elevating the obligatory VAT registration threshold from KES 5,000,000 to KES 8,000,000.
This amendment seeks to alleviate the regulatory burden on small-scale enterprises.
Nevertheless, some stakeholders contend that the revised threshold might still fall short, given the prevailing inflation rate and economic circumstances in Kenya.
5. Exemption for Transfer of Business as a Going Concern:
Proposed revisions entail exempting the transfer of a business as a going concern from VAT.
Although widely embraced, apprehensions have surfaced regarding potential implications on vendors’ input tax deductions.
6. Limitation of VAT Exemption on Insurance Services:
The legislation proposes restricting VAT exemptions on insurance and reinsurance services solely to premiums.
This adjustment has sparked constitutional concerns due to its potential to heighten costs for consumers and diminish the competitiveness of the insurance industry.
7. Removal of Tourism Sector VAT Exemptions:
Among the proposed amendments is the elimination of VAT exemptions designed to bolster the tourism sector.
Critics contend that such alterations might deter investments in tourism infrastructure and impede the sector’s expansion.
8. Proposal to Standardize Taxation of Betting, Gaming, and Lotteries Services:
In the Finance Bill 2024, there’s a suggestion to eliminate the VAT exemption for betting, gaming, and lottery services, subjecting them to VAT at the standard rate of 16 percent.
This proposal has sparked discussions within both the gambling industry and among policymakers.
Advocates argue that levying taxes on these services could lead to significant revenue generation for the government.
However, concerns have been raised regarding the practical application of VAT on betting and lottery transactions.
It’s not entirely clear how VAT will be computed for such services, especially since many betting companies don’t directly charge fees but instead earn revenue from the wagers or stakes made.
With an estimated turnover of KES 50 billion in 2022 and around 170 registered firms operating in the sector, the potential impact of this proposal on the gambling industry is considerable.
Stakeholders are eagerly awaiting further clarification on the ramifications of these changes and how they might influence consumer behavior and industry dynamics.
9. Standard Rating of Locally Assembled and Manufactured Mobile Phones:
The Finance Bill suggests applying the standard VAT rate to the sale of locally assembled or manufactured mobile phones.
This suggestion emerges as Kenya aims to strengthen its local manufacturing capacity, especially in the tech domain.
Yet, some experts argue that maintaining the zero-rated status for locally assembled mobile phones would better encourage investment and spur sectoral growth.
With Kenya recently launching its inaugural phone assembly plant, stakeholders stress the need to uphold incentives for local manufacturing to nurture innovation and competitiveness.
10. Removal of VAT Exemption for Persons with Government Contracts:
According to the Finance Bill 2024, the VAT exemption for taxable goods supplied to individuals with government contracts before April 25, 2020, would be revoked.
This proposal has sparked concerns regarding the government’s commitment to contractual obligations and its potential ramifications for businesses operating under such agreements.
11. Proposal to End Zero-Rated Status for E-Mobility Sector Goods:
The Bill suggests ending the zero-rated status for certain goods within the e-mobility sector, bringing them under the standard VAT rate of 16 percent. This adjustment would impact products like electric bicycles, solar and lithium-ion batteries, and electric buses.
Since its introduction in 2023, aimed at fostering the use of green energy in transportation, these incentives have spurred the adoption of e-mobility solutions in Kenya.
However, subjecting these goods to standard VAT could potentially hike their prices, potentially hindering sector growth and presenting challenges for startups and businesses involved in this field.
Amid ongoing discussions concerning the Finance Bill 2024, stakeholders within the e-mobility sector are urging for measures that promote sustainable development and innovation while also considering fiscal implications.
12. Further Alterations to VAT Treatment for Various Items:
The Bill suggests a range of adjustments to the VAT treatment of different goods and services. Previously exempt items will now be subject to standard VAT treatment, while others will maintain their exemption from taxation.
List of Proposed Revisions to Kenya’s Value-Added Tax (VAT) System: Analysis of Finance Bill 2024
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