Value Added Tax (VAT) is consumption-based taxation commonly charged by many authorities. In Kenya, it is charged on supply of taxable good, services, importation of products and services.
Supplies for VAT purposes are categorised into three i.e. standard, zero-rated and exempt. The VAT status assigned to any particular supply affects the overall price.
In case of standard-rated goods or services, the supplier is entitled to claim input VAT incurred. This in turn affects commodities prices by the element of VAT addition.
For exempt status, suppliers are not entitled to claim any input. This results to adjusting price to cover for input VAT incurred thus making products relatively expensive.
On the other hand, zero-rating allows suppliers to claim input VAT incurred. Implication of this is delivering supplies whose price are competitive courtesy of absence of VAT element. Zero rating, for VAT purpose, is the most favourable status to consumers since they are able to enjoy supplies in absence of VAT element. Exports for that reason, are ordinarily granted zero-rated status to enable them remain competitive.
Export activities accrues significant benefits to many governments. Foreign exchange earnings, jobs creation and contribution to GDP are among some of the fruits. It is for this reasons that exports are zero rated for VAT in Kenya.
Ironically, for export of services, the government seems to have looked the other way. The Kenya Revenue Authority has waged protracted court battles against exporters of service. Having lost tax cases in the corridors of justice to that effect, pushed for amendments of the VAT Act of 2013 in the year 2020 to expressly classify exports of services as exempt.
The said changes inevitably increased the cost of Kenyan exported services definitely affecting competiveness globally.
The government via the Finance Act of 2022 made a U-turn by restoring the status of export of services to zero-rated. The move though laudable, has equally brought confusion to exporters of services.
The VAT Act now limits what qualify as exports of services to Business Process Outsourcing (BPO). The lwa, howevers does not define BPO exporters of services and the KRA and taxpayers are likely adopt conflicting interpretation of the law thus leading to uncalled tax disputes.
The exponential growth of service exports ought to be encouraged due to its great potential just like exports of goods that have traditionally benefited from government incentives.
In order for the government to harvest the fruits of growing global service exports, Parliament should consider amending the VAT Act of 2013 to provide clarity on what constitute export of service and consider dropping the restriction of export of services to BPO.