Finance Act 2023; Part II: Amendments to the VAT Act, No. 35 of 2013

FINANCE ACT NO. 4 OF 2023

PART II: VALUE ADDED TAX (VAT) ACT NO. 35 OF 2013, LAWS OF KENYA

The highly controverted Finance Bill of 2023 was assented into law by H.E President William Ruto on the 26th of June 2023. The commencement dates for the tax proposals are: the 1st of July 2023; the 1st of September 2023; and the 1st of January 2024.

Below is a discussion on some of the amendments and tax regulations introduced to the Value Added Tax (VAT) Act under the Finance Act 2023 that both businesses and individuals should take note of in order to be tax compliant:

A. Amendment of Section 5 of the VAT Act with respect to the rate of taxes

Section 5 of the VAT Act has been amended and the provisions of Section 5(2)(aa) and (ab) have been deleted. These paragraphs previously provided for a tax rate of 8% on the supply of liquefied petroleum gas including propane; and on the goods listed in Section B of Part I of the First Schedule to the VAT Act.

B.???Taxation of Compensation received by a Bonafide owner for loss of taxable supplies

Section 17 of the VAT Act has been amended and Section 17(9) has been introduced providing that; Where a bona fide owner of taxable supplies, who has deducted input tax is compensated for the loss of the taxable supplies, the compensation shall be treated as a taxable supply and:

• if the compensation includes value added tax, the compensation shall be declared and the value added tax thereon remitted to the Commissioner; or
• if the compensation does not include value added tax, the compensation shall be declared and subjected to value added tax.

C.??Refund of tax on bad debts

Section 31 of the VAT Act has been amended and Section 31(1) introduced. This new provision stipulates that a person may apply to the Commissioner for refund of tax where the said person made a supply and has accounted for and paid tax on that supply, but has not received any payment from the person liable to pay the tax on that supply.

He/she may, after a period of three years from the date of the supply or in the case where the person to whom the supply was made has been placed under statutory management, apply for refund of the tax paid.

Further, it is stated that this refund shall be made in compliance with Section 47(5) of the Tax Procedures Act, and no application for refund shall be allowed after the expiry of 10 years.

D.???Application for VAT registration by persons supplying Imported Digital Services

Section 34(1) of the VAT Act has been amended and the provision stating that registration shall not apply to persons supplying imported digital services over the internet or an electronic network or through a digital marketplace in respect to a turnover threshold of five million shillings, has been deleted.

It is now stated that registration is mandatory for persons supplying imported digital services, irrespective of whether their taxable supplies meet the turnover threshold of five million shillings.

E.????Amendment of the First Schedule to the VAT Act on applicable Tariffs

The applicable tariffs on exempt supplies as specified under the First Schedule to the VAT Act have been amended. Some of the affected items include:

• Medicaments containing alkaloids or derivatives thereof, put up in measured doses or in forms or packings for retail and sale;
• Weighing machinery (excluding balances of a sensitivity of 5 cg or better), of tariff number 8423.10.00 purchased or imported by registered hospitals upon approval by the Cabinet Secretary responsible for matters relating to health;
• Discs, tapes, solid-state non-volatile storage devices, "smartcards" and other media for the recording of sound or of other phenomena, including matrices and masters for the production of discs;
• Infusion solutions for ingestion other than by mouth not put up in measured doses or in forms or packings for retail sale and other medicaments consisting of two or more constituents which have been mixed together for therapeutic or prophylactic uses, not put up in measured doses or in forms or packings for retail sale;
• White absorbent cotton wadding, impregnated or coated with pharmaceutical substances, or put up in forms or packings for retail sale for medical, surgical, dental or veterinary purposes;
• Medicaments containing hormones or other products of heading no. 29.37, not put up in measured doses or in forms or packings for retail sale; and
• Medicaments containing antibiotics, put up in measured doses or in forms or packings for retail sale.

F.????Amendment of the Second Schedule to the VAT Act on Zero-Rated Supplies

The notable changes made to the Second Schedule on zero-rated supplies include:

• Deletion of the supply of maize (corn) flour, cassava flour, wheat or meslin flour and maize flour containing cassava flour as a zero-rated supply;
• Introduction of new zero-rated supplies including: Inbound international sea freight offered by a registered person; supply of Liquefied Petroleum Gas; supply of all tea and coffee locally purchased for the purpose of value addition before exportation subject to approval by the Commissioner-General; the supply of locally assembled and manufactured mobile phones; the supply of motorcycles of tariff heading 8711.60.00; and the supply of electric buses of tariff heading 87.02.