Requirements for Claiming Input Vat
Value Added Tax (VAT) is a tax chargeable on supplies of taxable goods and services in Kenya made by a registered person, or an importer of taxable goods and services as stipulated in the Value Added Tax (VAT) Act 2013 (the “Act”).
VAT is a tax which is eventually borne by the final consumer of the taxable goods or services but it is collected at each stage of the production and distribution chain. The registered supplier is obligated to charge VAT as output tax and a registered purchaser has the right to claim the VAT as input tax.
The Kenya Revenue Authority (KRA) has been verifying through the iTax system, the validity of input VAT claimed by matching input VAT to sales declared by suppliers in their VAT returns. This was done through VAT Auto Assessments (VAA) and notices that were sent to taxpayers highlighting mismatches and disallowing input VAT claimed. The VAA module identifies any inconsistencies between input tax claimed by a purchaser and the corresponding output tax declared by the seller and in case of any mismatched invoices the purchaser and the seller will receive an inconsistency report by email and they are required to reconcile the inconsistency within 15 days, with a further 15 days thereafter being allowed. If the inconsistency is not resolved, the input tax in question is automatically disallowed.
However, the VAA has faced a number of challenges and concerns by taxpayers. Aggrieved taxpayers pushed back at the KRA citing that the assessments were not procedural, contrary to the VAT Act and that the purchasers had no legal obligation to enforce declaration of output tax by suppliers. Even though the VAA imposes additional obligations on the purchasers to ensure the seller declares the output tax in its returns, it did not have any legal backing.
As a result of these, KRA has issued Public Notices on improvements on the VAA module on iTax following feedback received from taxpayers and other stakeholders. There have also been several recent amendments to the VAT Act 2013. The latest being the Finance Act, 2020 which has, effective June 30th 2020, introduced additional burden on the purchaser for claiming input VAT.
Section 17(2) of the VAT Act 2013 has been amended to read:
If, at the time when a deduction for input tax would otherwise be allowable under subsection (1)—
- the person does not hold the documentation referred to in subsection (3), or
- the registered supplier has not declared the sales invoice in a return,
the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation:
Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.
The effect of this amendment is that the purchaser now has to not only have a valid tax invoice from the supplier, but also to ensure that the supplier has also declared that particular sale in their VAT return for the month. The purchaser also has to ensure this is done within six months of the supply in order to be able to claim the input VAT, otherwise he will bear the cost of the input VAT.
While this new requirement now makes the KRA’s VAT Auto Assessments lawful, it poses a significant challenge on the purchasers as they have no basis of forcing or even knowing, through iTax, whether their suppliers have declared the sale in their VAT return. If a supplier does not co-operate, the only option a taxpayer has will be to report the matter to the KRA, despite which their input VAT will still not be allowable.
It is likely that the KRA will continue its efforts to verify input VAT claimed and this new requirement will mean that purchasers who have had their input VAT disallowed may have no legal recourse should their suppliers remain un-compliant.
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