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VAT – the PIPELINE TAX

As a business do you have a VAT obligation? Do you even know who is eligible for VAT obligation?

Let’s get to understand this today as the whole craze on TIMs compliance takes effect with a little more “seriousness” than has been running for the better part of 2023, yeah, TIMs compliance took effect in May 2023 for businesses with VAT obligation, the roll-out has been in phases, and it just now that it looks like a new thing, but it is not, anyway let’s focus on today’s topic, shall we? VAT it is,

VAT is an indirect tax that is paid by the person who consumes vatable goods and services hence the street name ‘pipeline tax’ it is passed from the supplier through the seller to the final consumer, who is eligible to have VAT obligation on their PIN? is the big question that has been on many business owners’ mind, and the commonly known option is; if your sales is above 5M Kenyan Shillings, however, the guideline has another clause that indicates, ‘if dealing with Vatable good and services’ which means your sales may be below the 5M threshold, but the nature of your operations require you to have the obligation.

VAT is said not to affect the business seeing as it is a pipeline tax, and that is the case to a certain extent and not the case to another extent, this is why I say so, while doing pricing of any product it is paramount to be aware of not only the other cost but also the Taxes (VAT) that your product is subject to because this is bound to affect the final selling price of the product (be it a good or a service).

To understand the pipeline aspect, it is best explained using the process of VAT consideration as follows;

Purchase price net of VAT add any other relevant direct cost, then tabulate the acceptable margin and when you have this total multiple by the applicable VAT rate (i.e. the standard rate of 16%) to get the selling price, the VAT payable will be a net of the purchases VAT & the sales VAT (let’s not get caught up on the formulation of it, as this is easy to calculate both on the VAT3 form and while doing the product pricing)

What I needed you to understand today is that most businesses are supposed to have the VAT obligation on their PIN the sales amount notwithstanding this because very few products in our country (KE) are exempt (let’s not even start the conversation that the Govt is looking into making this list even smaller as they look into increasing the Tax collection bracket)

Up until 1st July 2023, there were 3 VAT rates:

  • 16% – known as the general product VAT rate
  • 8% – was the petroleum VAT rate, however, this is now scrapped by the 2023 Finance ACT
  • 0% – this is mostly for what’s considered basic need products (e.g milk, rice, flour, sanitary towel, LPG gas was in this category until the TAX appetite changed earlier this year which saw it move to the general rate bracket, the other thing that I don’t understand why it has a general rate is panty liners, doesn’t it serve the same purpose as the sanitary towel? Which is zero-rated? Anyway, focus stop getting distracted with me that’s not the point here)

As it is right now we only have 2 rates on the VAT bracket i.e. 16% and 0%

NB: VAT should be filed and paid for before the 20th day of the following month, failure to comply with this attracts a penalty of 5% of the tax due or Kshs. 10,000 whichever is higher and a 1% interest per month going on

RIPPLE EFFECT

Let’s take this conversation back to its core, enough distractions, VAT is indeed a pipeline TAX however, just like any other TAX it is bound to affect the bottom-line operational decisions of your business because it influences the price of your product, which means it can affect the competitiveness of your product in the market, so be aware of the taxes involved before launching the price, because if there is something I have found true in business, it is easy to introduce a high price, than it is to change a low price upwards.

 

CHECKS & BALANCES

Don’t wait for the TAX man to call & tell you that you have been evading tax which is a crime because remember in Kenya ignorance is no defense, the penalties & interests that will come your way might end up crippling you and your venture, get a business review, advice & forge forward with confidence, again remember to consider VAT while doing pricing, remember to plan accordingly, because failing to plan is planning to fail, DON’T FAIL

That’s it from us today, see you next week as we look at what troubles your business might it be because of poor record keeping.

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