Tax laws amendment bill – effect on cost of living.
The government tabled the Tax Laws (Amendment) Bill, 2018 in parliament on 10th April 2018. The bill has gone through the first reading and committee stage and is expected to be presented in parliament soon. The bill contains a raft of measures including introduction of withholding tax on winnings from betting and gaming, increasing the reliefs for home ownership and exempting some products that were initially zero rated by the VAT Act 2013.
The proposed changes have a great magnitude on the cost of living and the regulation of the betting industry that has ballooned in Kenya in recent years. The aim of the government is to benefit from this growth through additional tax collections.
Firstly the bill seeks to amend the Income Tax Act by introducing a Withholding Tax (WHT) of 20% on the winnings received by resident and non-resident persons from betting and gaming. Kenya has become a betting paradise and the figures from the Betting Control and Licensing Board (BCLB) are mind boggling. Data from BLCB shows that in 2015, betting and gaming operators netted income of KShs 19,432,872,708 out of which they paid out winnings of KShs 14,969,627,825. This caught the attention of the tax man and WHT was introduced in 2015. However, this did not take off as implementation of the tax became an uphill task. This was shelved.
In 2016, the returns skyrocketed to KShs 97,832,148,096 out of which KShs 81,662,678,803 was paid out to the winners. The government in response introduced a tax of 35% on the gaming and betting operators’ revenue. There was an uproar from the sector which saw the operators withdraw from sports sponsorships and charities in a bid to force the government to back down. The government has given in hence the proposals to reduce the tax on the operators to 15% and introduction of the WHT on the winnings.
While it is clear that the industry has to be taxed, some of the questions that arise are on the fairness of the tax and the practicability of implementing the tax. It should be noted that before the punters win from the bets and games, they would have suffered losses in the past. Therefore in the interest of fairness, KRA should impose the tax on the income received by the punters as opposed to the winnings. One of the proposals put forward is that on a monthly basis an analysis is done on the winnings and losses for the month and WHT charged where the difference is positive.
Further, the WHT should be imposed on income above a certain threshold. Winnings come in all amounts from KShs 20 to millions. Accounting for the WHT on such small amounts is not tax efficient and hence a threshold should be introduced. In addition, a greater percentage of the recipients of the winnings are individuals some of who do not have Personal Identification Numbers (PINs). Withholding on such individuals on i-Tax will be impossible. In this regard exemptions should be made for the requirement of PIN numbers in accounting for this tax.
The departmental committee on Finance and National Planning has proposed the change in definition of winnings to take into account the losses made by the punters. Further they have proposed to reduce the WHT rate from 20% to 10% in addition to removing the requirement for punters to have PIN numbers. We hope that this time round, KRA has addressed the bottlenecks experienced previously in implementing this tax.
Secondly, the bill proposes to move a number of items that are currently listed as zero rated to the exemption schedule. The major reason for this is that the government wants to restrict zero rating to exports. KRA’s argument is that VAT is a consumption tax and hence it’s borne by the final consumer of the goods. In this regard, since exports are consumed outside the country, the VAT cannot be charged on them and hence they are zero rated and any VAT on them is refunded. This move seeks to reduce the VAT refund burden that has dogged the taxman for a very long time.
To understand the impact of this move, it is important to understand how the zero rating and exemption regimes works. When a good or service is exempted, the supplier of such a good or service does not charge VAT on the good or service but cannot claim the VAT that he is charged on his supplies.
Consequently the supplier will pass that VAT to the final consumer. On the other hand, when a good is zero rated, the supplier charges VAT at 0%. Further the supplier is able to claim the VAT that he is charged on his purchases hence the net effect is almost zero hence this reduces the price of the good or service.