Punitive VAT Rules Hinder Free Trade In East Africa

Punitive VAT Rules Hinder Free Trade In East Africa

The private sector in the East African Community wants value-added tax (VAT) regimes  harmonized among the five partner states.

Different VAT structures and administrative systems in five countries — Burundi, Kenya, Rwanda, Tanzania and Uganda — distort cross-border transactions by increasing compliance and administrative costs.

They also draw out the refund process. The additional cost, extra time and resources spent on complying with different tax regimes hurt business and competitiveness, the private sector says. The costs are ultimately passed on to consumers.

The East African Business Council, the apex organization of the private sector in East Africa, recommends a common explicit definition of who should pay VAT. It also said in a position paper that the harmonization of the VAT registration threshold should be converged to minimize non-competitiveness of partner states.

Private firms are pushing for introduction of a standard bounded rate, within which the individual countries would vary their respective rates.

They also recommend the establishment of an EAC unit to coordinate VAT harmonization across the region. In addition, they want common rules for what is VATable and when the VAT is to be paid, a common exceptions list, a common appeals procedure and forms, and common rules and practices for VAT refund.

When the East African Common Market took effect in 2010, partner states harmonized their tax policies and laws to facilitate the free movement of goods, services, capital and to promote investment within the community.

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In pursuit of this, the EAC has embarked on the process of harmonizing the tax regimes in the community. VAT is one of the taxes undergoing harmonization. The process is intended to put in place a harmonized VAT regime for the EAC partner states to address critical concerns of the private sector.

The EAC has been calling upon governments to harmonize VAT regimes across the region. According to East African Business Council Chairman Vimal Shah, VAT is a domestic tax and was not initially slated for harmonization. Any changes would have to go through lengthy negotiations and involve changing the EAC Customs Management Act, he said.

The most important issues are rules and procedures, not the harmonization of VAT rates, said Shah. “This affects the ease of doing business,” Shah said in an AFKInsider interview. “All the rules need to be harmonized. In the long run, if you want to expand your business, this issue determines where you locate.”

Harmonization will lead to better competitiveness, said Shah, who in 2013 was was ranked by Forbes as East Africa’s richest man.

Theoretically, VAT is levied on all consumer goods and services, so that all prices are increased by the same tax rate. However, when a firm is trading across the borders of the community, it faces different VAT regimes that influence cross-border transactions.

Different VAT refund systems in the five partner states have different rates of effectiveness. The national revenue authorities are responsible for refunding companies for the VAT paid.

However, even though systems are in place for ensuring a speedy refund process, the private sector says inefficient refund systems are the overarching reason for VAT challenges facing business.

VAT Refunds

All five states have a rule that VAT must be refunded within one month of the payment. That rarely happens. It takes three to six months to get VAT refunded through the national revenue authority.

The return and payment for VAT is a mandatory obligation to taxpayers, made at a given point in the year. The frequency is either monthly or quarterly.

Within the EAC, the frequency and date for making a return and payment varies across the partner states. In Rwanda and Tanzania the return and payment are made on the 30th day of every month while in Uganda and Burundi this is done on the 15th of every month. Kenyan taxpayers must file returns by the 20th of the following month.

VAT law, practice and procedures across the EAC provide for appeals against tax positions reached through audits, penalties and interest. The individual appeal processes are not harmonized across the EAC.

In Burundi, a taxpayer appeal is made through a special commission which consists of representatives of the taxpayers and of the tax administration. If the decision is not acceptable to all parties and hence binding at this stage, the objection notice or second appeal is made to the Minister of Finance within three months. If no binding decision is reached, then it can be contested by filing a lawsuit with the administrative courts.

In Kenya, the appeal is made to the Tax Appeals Tribunal. However, before making the appeal, the taxpayer deposits the full amount of the tax in dispute with the Kenya Revenue Authority.

In Rwanda, a taxpayer appeal is made within 90 days to the commissioner general. If the decision is not binding, the taxpayer can make further appeal to the appeals commission within 30 days. Again, the taxpayer can make a further appeal to the tribunal within 30 days of a decision.