Analyse withholding VAT in the region

Government should analyse the challenges posed by withholding VAT in the region before implementing it

Government of Uganda recently released tax proposals for the coming fiscal year include the introduction of withholding Value Added Tax (“WH VAT”). This is reflected in Section 2 of the VAT (Amendment) Bill 2018.

Under the proposed WH VAT system, designated persons will be required to withhold 50% of the VAT charged on payments for taxable supplies. The designated persons will be appointed by the Minister of Finance through a Gazette notice. These persons will be required to withhold the VAT on payment for supplies from a) registered taxpayers and b) unregistered persons who are required to be registered on invoice amounts of Ushs 37.5 million and above.

According to Government, the purpose of introducing WH VAT is to curb revenue leakage stemming from non-compliant suppliers who charge their customers VAT but do not remit it to the Uganda Revenue Authority (URA). It is anticipated that Ushs 40 billion will be collected from the introduction of WH VAT.

While the Government has good intentions in introducing WH VAT, it is important that before implementing the proposal, Uganda picks lessons from neighboring countries like Zambia and Kenya that are currently running similar WH VAT systems. Uganda can then avoid some of the challenges that the WH VAT system has posed in these countries.

The WH VAT proposal by the Minister is similar to the current WH VAT system in Kenya. Currently, under the Kenyan WH VAT system, designated WH VAT agents are required to withhold 37.5% of the VAT payable (i.e. 6% out of the total standard VAT rate of 16%) at the time of paying for the supplies and remit the same directly to the Kenya Revenue Authority (KRA).

The WH VAT system in Kenya was initially introduced in 2004. Upon its introduction, designated WH VAT agents were required to withhold 100% of the VAT on paying suppliers and remit it directly to KRA. However, due to the numerous challenges posed by the system at the time, Government repealed it in 2014. These challenges included large VAT refund claims due to suppliers that found themselves in a VAT refund position owing to the withheld VAT, non-remittance to the KRA of the tax withheld by certain WH VAT agents, delays in issuance of withholding tax credit certificates to suppliers by the WH VAT agents and failure by suppliers to provide support documentation in relation to WH VAT refund claims.

Subsequently, upon fully rolling out the iTax electronic tax system, the Government of Kenya re-introduced the WH VAT system in 2016. While this has managed to address some of the administrative challenges that WH VAT initially posed to taxpayers, the system continues to present critical cash flow challenges for suppliers who are obligated to pay KRA the total output VAT without the right to offset the withheld VAT against their output tax since the tax credit certificates are not issued on a timely basis.

Further, the Kenyan system does not provide for exemption of compliant tax payers from WH VAT and neither does it provide a value threshold on which VAT should be withheld. This means that the administrative burden of complying with the WH VAT requirements applies equally to compliant taxpayers which ignores the purpose of its introduction in the first place.

In Zambia, the WH VAT system was introduced in January 2017 and the Government of Zambia appointed various players in the manufacturing, mining and Government sectors as WH VAT agents.  A Zambian designated WH VAT agent is required to withhold 100% of the VAT payable and remit it directly to the Zambia Revenue Authority (ZRA). However, unlike the Kenyan system (and the proposed approach in Uganda), the Zambian supplier is not also required to pay the output VAT to the ZRA. Instead, the supplier is only required to reflect the withheld VAT in their monthly VAT return, making reference to the respective tax credit certificates that support the withheld VAT.

While the WH VAT system in Zambia may be administratively cumbersome for the WH VAT agents, this approach eliminates the strain on business cash flows for suppliers since they do not suffer a double cash outflow through having to simultaneously pay the output VAT to the tax authority.

It is important to note that none of the countries in the region with a WH VAT system have a parallel withholding tax (WHT) system similar to Uganda’s, where  the Income Tax Act  requires designated withholding tax agents to withhold 6% WHT on payments to non-exempt suppliers for goods and services.

Accordingly, supplies in Uganda will be subject to double withholding since the Government will be  taking advance tax of 15% i.e. (9% WH VAT and 6% WHT) which will cause significant cash flow challenges to affected taxpayers. For example; where a VAT registered supplier issues a VAT inclusive invoice of Ushs 100,000 to a person who is designated to withhold both VAT and WHT, the designated agent will pay the supplier Ushs 87,288 and withhold tax of Ushs 12,712 (i.e. VAT of Ushs 7,627 and WHT of Ushs 5,085).  If the supplier is unable to claim the WH VAT credit immediately, they will also be required to pay the full 18% VAT output tax of Ushs 15,254 to the URA with their monthly VAT return, meaning that they are left with a cash balance of only Ushs 72,034.   

In this regard, Government ought to consider options like exempting compliant taxpayers from WH VAT (perhaps in a similar manner to the current WHT exemption list) and setting an invoice value threshold below which VAT should not be withheld. Furthermore, as Government rolls out the use of electronic tax invoicing, it is expected there will be greater transparency in the tracing of VAT transactions and this raises the question as to whether it is really necessary to introduce a WH VAT system at this time.

It is expected that the Minister will issue a gazette notice that appoints WH VAT agents. It will also be necessary for the URA to issue detailed guidelines on the practical application of WH VAT and how the system will be implemented (addressing fundamental issues such as how agents pay the WH VAT to the URA and how suppliers claim a credit for the WH VAT in their VAT returns). As part of this process, it is important that the Government learns from the challenges posed by WH VAT in neighboring countries in the region to avoid making similar mistakes that will be detrimental to the ease of doing business in Uganda.

By Juliet Najjinda Indirect Tax Manager