A businessman on his deathbed called his friend and said, “John, I want you to promise me that when I die, you will have my remains cremated.” John responded, “And what do you want me to do with your ashes?” The businessman said, “Just put them in an envelope and mail them to the Kenya Revenue Authority. Include a note that says, “Now, you have everything.”
Last week a renowned tax guru from Deloitte provided a stream of critical but very informative tidbits on the VAT Act 2013 on Twitter. I engaged this virtual source further and by the end of our discourse, I was certain that the 349 members of parliament were fast asleep when the VAT bill sailed through parliament some weeks ago. Actually, no, they weren’t asleep. They were simply not there. Only because no one in their right mind would have allowed that bill to sail through all its readings without raising a right royal ruckus unless they were incentivized to look the other way, which of course never happens in Kenyan parliaments. So – and I take in a deep breath as I say this – here’s one interesting item you folks over in the national assembly missed while you were away.
According to the tax lessons from the guru, VAT is now payable on sales of commercial buildings. Yeah, I know you don’t really care do you? Business people do, though. They buy commercial buildings or commercial space within buildings for business use. Before the tornado that is the VAT Act 2013 (VATA) made landfall, a purchaser of a property would contend with paying 4% of the property’s value as stamp duty and not less than 1% of the property’s value in legal fees. So total cash outflow would be not less than 105% of the property’s sale price for such a transaction. Tornado VATA touched down and the total cash outflow now required for such a transaction is not less than 121%. Here’s a basic example. John wants to buy a floor in a recently completed commercial property development. The sale price is given as Kshs 10 million. He has to fork out 4% stamp duty – Kshs 400,000 – and legal fees of about Kshs 100,000 bringing his total extraneous costs to Kshs 500,000. Following Tornado VATA, he now has to add Kshs 1.6 million (16% VAT) to the cost of the purchase bringing his total extraneous costs to the not so trifling amount of Kshs 2.1 million
But wait a minute. VAT paid is recoverable right? Of course Mr. MP, glad to see you’re awake. By paying the Kshs 1.6 million VAT, John pays what is termed as input tax and can recover it. KRA allows John to net off what he has paid in input tax against the VAT that he charges his customers, called output tax. You see John is a businessman and sells goods that require him to charge 16% VAT. He promptly remits this tax to KRA by the 20th of every following month. The net off system allows him to deduct whatever input tax he has already paid to KRA. So technically speaking, if he sells goods worth Kshs 10 million and raises output tax of Kshs 1.6 million he can net off the amount against the input tax he paid when buying the property and essentially get his money back simply from the cash his business is generating daily. (Oh and by the way, he now has only 3 months within which to make that input tax claim)
But Mr. MP, I said IF he sells goods worth Kshs 10 million. The assumption here is that he is a prosperous trader whose goods are flying off his shelves and whose customers pay him in cash on the spot. Not all businesses operate on that cash flow model. Goods and services are often sold on credit and your typical SME entrepreneur will not be making sales that can offset the 16% VAT that he has just paid on the purchase of a commercial property. So John will have to wait to generate enough sales to offset the VAT and hopefully recover that much needed cash that his business is now starved of. And Mr. MP here’s something you can take to the bank: no financier will provide financing to pay VAT. Ahh, I forgot, you’re already at the bank screaming blue murder now that you have discovered that they are levying 10% excise duty on your transactions right? Well, join the queue boss, we’re already ahead of you.
The American Revolution in the 18th century, which eventually led to America’s independence, was started for a number of reasons. A key driver was the clarion call by some activists for “no taxation without representation.” The British who had colonized America were levying all manner of taxes on the colony but there were no American representatives in the British parliament to essentially ensure that their taxes were being used efficiently for their benefit. This clarion call forms the basis of many a democratic tenet. You as the people’s representative are supposed to ensure that the taxes endured by the populace you represent are fairly levied and efficiently utilized to pay for car grants, salaries, sitting allowances – oh sorry that’s yours alone. The taxes should be used to pay teachers, doctors, nurses, infrastructure development, healthcare and all the other goodies that the government is supposed to provide to the rest of us citizens. The taxes are certainly going to hurt, but that’s what you are there for: to ensure that they don’t unreasonably hurt business or raise the general cost of living to the detriment of the people who exercised their democratic right to elect you.
I haven’t even touched on the impact of the other items that were removed from the previous zero rating into the 16% standard rating. I’ll tell you what though: I guess we can send you our ashes once we burn ourselves to death from paying all our taxes.