Experts from the International Monetary Fund (IMF) and the Kenya Government are working on a plan to overhaul the entire Value Added Tax (Vat) system.

The product of the high level talks will be in the form of a Vat Bill, to be prepared by Treasury and presented in Parliament before the 2011/12 Budget is read, Financial Journal has established.

This is happening at a time the Government is retooling its budgetary plans, putting more pressure on Kenya Revenue Authority (KRA), which is already falling behind in meeting its tax revenue targets, to tighten collections.

"While an overhaul of the entire Vat system is welcome, we hope there will be a reduction in the rates to increase collection, as well as ironing out all the patched repairs already made to it," said Nikhil Hira, a tax leader at Deloitte Kenya.

Since its introduction in 1990, Vat has been a subject of heated debate with billions of shillings in refunds belonging to the business community still held by KRA.

Vat Refunds

While KRA has always promised to sort out the Vat refunds issue, an audit of the entire system that it had promised to undertake is reportedly taking too long.

Although Treasury and KRA officials have been refining and redesigning the entire Vat system, it still remains complicated, cumbersome and subject to abuse.

"Reform of Vat has been a case of too many patched up repairs and many changes with the tax payer having no certainty," said Hira.

Experts also contend that the present Vat system gives the KRA Commissioner General too much discretion, making matters worse for taxpayers who have to deal with a system that is highly unpredictable.

While reform of Vat is long overdue, analysts have also urged for an overhaul of the decades old Income Tax Act. This is to make it more responsive to the realities of Kenyas present business environment.

"There is need for the tax authority and Treasury to think long-term and outside the box rather than acting in the short-term just because KRA is not collecting enough," explained Hira.

While Vat initially had a different rate for over 50 items, the rate has since been harmonised to a single one, at 16 per cent. This is except for Vat on such items as power and electricity.

The introduction of zero rated and exempt items under Vat has also complicated matters.

"If some of the items that are currently Vat exempt were to be taxable, we would end up with them becoming more expensive. On this list are things like certain foodstuffs and medicine," said Hira.

Though reforms to the somewhat cumbersome consumption tax is in the pipeline, Treasury officials have also said they are working on simplifying the entire tax system.

"We are working on the tax law to make it simple to enhance compliance by taxpayers," Finance Minister Uhuru Kenyatta told a recent Revenue Mobilisation conference in Nairobi.

Cut on exemptions

According to Treasury insiders, the proposed changes in Vat will among others help speed up the process of Vat refunds and cut on exemptions.

"We intend to remove some incentives in our Vat regime that have not been helpful, " explained Uhuru.

Without saying whether the changes will involve an increase of Vat from the current level of 16 per cent, Uhuru only hinted that the new measures will be unveiled in the new budget.

"Measures to simplify the tax system, expand tax base, rationalize tax incentives and exemptions and expand the tax net to include the informal sector are necessary for the improvement of compliance and increased revenue yield in Africa," Uhuru told delegates.

The IMF welcomed Kenyas efforts to transform its tax system administration saying it will broaden the tax base by eliminating exemptions that have proved costly with little impact on investment.

An IMF senior official Mark Plant reckoned that the new Vat law will bring Kenyas Vat management into line with international best practice by accelerating refunds, reducing exemptions, and streamlining procedures.

Value Added Tax is an indirect tax, which is collected on the value added proportion of goods and services occurred in all the processes, ranging from manufacturing, circulation, provision of services until consumption.

Vat Law applies to individuals, organizations and legal entities, both domestic and foreign, that carry out business, manufacturing, and services, as stipulated in this law.

Pressure to overhaul Vat system is happening when KRAs collection targets are under severe pressure.

Tax receipts

For instance, as at the end of February 2011, cumulative revenue receipts collected by the Revenue Authority amounted to Sh394.5 billion against a target of Sh426.4 billion.

The underperformance was Sh31.9 billion deficit, broken down into Sh13 billion in ordinary revenue and Sh18.9 billion in appropriations-in-aid (revenue raised by various ministries).

The 2011 Budget Policy Statement (BPS), recently tabled in parliament by Uhuru Kenyatta, attributes this underperformance in ordinary revenue collection to Vat withholding challenges experienced early in the financial year.

KRA has also been unable to meet its collection targets owing to increased competition in mobile telephony sector, a fact that has lowered calling tariffs and therefore its excise duty on airtime.

The authority has also seen its collection from the alcohol and tobacco industry, major contributors to their kitty, dwindle as new regulations and changes in taxation affect the beer and cigarette industry respectively.

However, the BPS projects that for the remainder of this year, we should expect the shortfall in ordinary revenue to narrow further.

The revised ordinary revenue for 2010/11 financial year is expected to be Sh605.9 billion, down from Sh609.6 billion in the budget. Going by the current revenue shortfall, it is likely that the financial year target for ordinary revenue will be missed by about Sh3.7 billion.

Source: http://m.standardmedia.co.ke/fjM.php?id=2000032092