Withholding VAT Is Independent Of The Suppliers' VAT Registration Status

The Tax Appeals Tribunal (“TAT”) recently ruled in County Government of Kisii v Commissioner of Domestic Taxes,  on whether Withholding Value Added Tax (“WHVAT”) is chargeable on payments made to suppliers who are not registered for VAT. Generally, WHVAT is a system where certain taxpayers are appointed to deduct and remit 2% of the taxable value of a good or service to Kenya Revenue Authority (“KRA”) when paying for goods or services.

In this particular case, KRA issued tax demands to the County Government of Kisii for, among other taxes, WHVAT on payments for various supplies. According to the County Government, WHVAT should only apply if the supplier is registered for VAT and actually charges VAT on their invoice. The County also pointed to KRA's own guidelines for withholding VAT agents, which they said confirm that WHVAT does not apply to payments for taxable supplies from suppliers who are not registered for VAT. KRA on the other hand argued that the wording of the law which imposes the WHVAT obligation focuses on whether the supply itself is taxable (i.e., goods or services that would normally attract VAT) rather than whether the supplier of such goods / services is registered for VAT.

In dismissing the appeal, the TAT upheld KRA's view holding that the trigger for WHVAT is the nature of the supply (whether it is taxable under VAT rules) and not the supplier's registration status. Further, the TAT sought to clarify the guidelines issued by the KRA. According to the TAT, the guidelines specify that WHVAT shall not be applied on payments for taxable supplies to non-VAT registered persons and not the payments to non- registered non-VAT persons.

The outcome of this judgement creates a few practical points that taxpayers should consider. Generally, WHVAT acts as an advance VAT payment that a supplier credits against their own VAT liability when they eventually file their monthly VAT returns. But, unlike VAT-registered suppliers, unregistered suppliers do not file VAT returns or have a VAT account that allows them to recover VAT withheld. Given that unregistered suppliers cannot claim the withheld amount back through the VAT system, the 2% effectively reduces what they receive. This can feel like an extra tax burden on them, and they may feel the need to adjust their prices upwards to cater for it pricing themselves out of the market over time. In the alternative, it may force them to apply to the KRA voluntarily for VAT registration.

Ultimately, this judgment overturns the general market understanding that WHVAT should only apply on supplies where VAT has been levied and calls upon WHVAT agents as well as other taxpayers to review their procurement policies, contract terms and compliance frameworks to align with this position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.