TOPIC: Cashflow Saving Ideas – Indirect Taxes
WRITER: Priya Shah – Senior Indirect Tax Manager
COMPANY: PwC Kenya
In these uncertain times, businesses need to do all they can, not just to ensure that they can keep afloat but to thrive and expand. This can be done by improving cashflow and efficiency. There are loads of ways a business can structure its operations to maximize cashflow, which include, but are not limited to, assessing taxes, supply chain management, stock management, critically reviewing operations to minimize inefficiencies, and so on. In this article, I explore how indirect taxes (VAT, Customs, and Excise) can be optimized to improve efficiency and cash flow. After all, cash is king!
VALUE-ADDED TAX (VAT)
VAT is applicable on all supplies listed as taxable in the VAT law in Kenya. Businesses can either voluntarily register for VAT or are obliged to register for VAT once they have reached the VAT registration threshold of KES 5,000,000 taxable supplies per annum. Once VAT registered, businesses are required to charge VAT on all their taxable supplies at either the standard rate of 16%, zero rate, or special reduced rate of 8%.
- Deductibility of Input Tax
Once registered for VAT, the taxpayer can recover the VAT incurred (input tax) when making taxable supplies. This is a critical cash-saving opportunity for all taxpayers considering that most businesses incur VAT to make the eventual supply. But, it is important to note that recovery of this VAT is not automatic in Kenya. As such, the taxpayer needs to make a claim to recover this VAT within the prescribed period, i.e., within six months of the date of the invoice. In addition to making the claim, the business should also ensure that it holds the evidence to be able to reclaim this VAT which is either an invoice or any other document approved within the law. Failure to retain and provide this evidence will result in the tax authorities rejecting the VAT recovery claim, and the taxpayer can unnecessarily miss out on money that is rightfully theirs. Thus, it is advisable to keep a close eye on purchase invoices to ensure that they are both correctly represented as tax invoices and have been reflected on VAT returns as soon as they are received to recover the VAT at the earliest opportunity.
- VAT Refunds
VAT refunds is another way a taxpayer can boost their cashflow to enhance their operations. One thing to note is that when a taxpayer is in a repayment position, such that the monthly VAT returns show that the business has paid more VAT on purchases compared to VAT on sales, the taxpayer must still submit a separate claim to be eligible for this refund. Once the tax authority receives the claim, it will carry out an audit to verify the claim, and once approved, the taxpayer should be eligible to receive the refund in cash. However, with effect from 1 January 2022, the law has been amended to the effect that this refund will be held on the system, and taxpayers will be able to use this approved refund against future tax liabilities. As such, the earlier a taxpayer lodges a refund claim, the earlier it will be able to either get the cash back and or utilize that amount against future tax liabilities, which will assist with overall cashflow.
- Bad Debt Relief
Given the current economic conditions and the general downturn of businesses, customers defaulting on payments have been on the rise. The VAT law allows businesses to recover any VAT they have paid, resulting in bad debts. This is known as bad debt relief. Where the company has concluded that it will be unable to recover a debt from its customers and this debt is more than three years old, it can make a claim to recover the VAT paid on the debt. If the customer has been declared legally insolvent, a claim for bad debt relief can be made sooner. As with all tax laws, it is crucial to keep an eye on time limits to ensure that the claim for VAT paid on bad debts is submitted in good time.
From a customs perspective, businesses may import raw materials for their production processes or simply finished goods to sell them to the final consumer and when they do, they must engage customs officials through their customs agents. Importers are required to pay import duty and all other relevant taxes upon importation of their goods. Therefore, it is paramount for businesses to pay close attention to this aspect of their business as failure to do so may have some negative impact on their operations that may cripple their supply chain and possibly lead to hefty fines, closure of facilities, and even the risk of reputational damage. To save cash on customs duties, businesses should consider various exemptions and remissions that are available.
- Bonded Warehouses
Depending on the nature of the goods imported into Kenya, a business may consider using a bonded warehouse to defer the payment of the customs duty to a later date, i.e., to a date that they are sold and released from the bonded warehouse rather than the date the goods are imported into the country. This can significantly improve cashflow for the business.
- Tariff Optimization
Another important consideration for customs duties is ensuring that the business is paying the correct amount of duty for the goods imported. There are several things to consider here, such as, is the customs valuation and tariff for the product correct? Is the amount of duty payable correct? Are the imported products subject to preferential duty rates such that the business is eligible to pay less duty? Are the products coming from an area with a Free Trade Agreement with Kenya and so on. All these considerations will help businesses ensure that they are not overpaying customs duty, thereby assisting with cashflow.
One important area that consistently gets overlooked is duty refunds. Where a business has overpaid customs duty, it can submit a claim to get the money refunded. In addition, where the goods have either been damaged or destroyed while on their way into the country or even under customs control and the business has already paid the duty on these items being imported, the business can apply for the customs duty to be refunded to boost cashflow and avoid paying too much duty in error. It is important to note that when making the refund application with the Customs Authority, the business should provide as much documentary evidence proving that the goods were damaged or the duty was overpaid.
With customs duties, there are some reliefs a business can take advantage of to aid with cashflow optimization. For instance, ‘inward processing relief’ is where a business imports goods into the country for “processing” and then, once completed, exports the goods back out for final sale. In this case, processing can be anything from assembly, repair, repacking, etc. Outward processing relief is another relief available to businesses where the opposite takes place such that the businesses export a good for processing and then imports it back in for use or sale. These reliefs can result in a business saving cash by either getting a full or a partial duty relief.
Businesses that deal in excisable products must ensure that they are licensed by the tax authorities to deal in excisable products. Recently, one of the contentious issues has been the influx of fake excise duty stamps in the market. This has been a real menace over the last few years, and it is important that businesses ensure that they only secure excise duty stamps directly from the tax authorities for use in their operations.
- Excise Duty Relief
There are a few ways businesses can seek excise duty relief. For example, if a business has imported excisable raw materials to process into a final product for sale, that business could be entitled to offset the excise duty on imports against excise duty payable on the final product. Another area where a business could be entitled to excise duty relief is importing excisable goods and then exporting them out. In such a case, the business may be able to claim excise duty relief provided it makes a claim within 12 months.
- Bad Debt Relief
Similar to VAT, where a business has paid excise duty on a good or service but has yet to receive payment from the customer, the business is eligible to apply for bad debt relief. The same rules as per VAT apply, such as the debt needs to be more than three years old. However, a claim can be made earlier if the customer has been declared legally insolvent.
Like other indirect taxes, where the excisable goods have been returned to the original seller, damaged, stolen or even destroyed before they were consumed, a business is eligible to apply for an excise duty refund.
In conclusion, there are numerous ways a business can save cash and or ensure it doesn’t overpay taxes. While this article has only considered a few key considerations from an indirect tax perspective, it certainly hasn’t considered all the possible ways a business can structure its operations to optimize cashflow and mitigate any ensuing risks.