When you thought the tax landscape couldn’t get any more interesting, the Finance Act 2023 arrives with an unexpected twist. The new clause in Kenya’s Finance Bill 2023 is a significant change that will majorly impact businesses and individuals. It is crucial to be aware of this change’s implications and take steps to comply with the new requirements.
The introduction of a clause in the Tax Procedure Act that requires KRA to set up an electronic system (e-tims) through which a taxpayer is required to :
-Issue tax invoices.
-Maintain data relating to stocks.
The TPA exempts the following from the requirement:
-Salaries & other emoluments
The Income Tax is also amended to disallow expenditure or loss where the invoices have not been generated through e-times except as provided above.
The VAT Act will equally disallow input on invoices not generated through e-tims.
For Companies: The new system will require companies to adapt their accounting and tax compliance systems to fit the new digital requirements. This may involve investing in new technology, training staff, and altering business processes. Additionally, the Income Tax amendment, disallowing expenditure or loss where invoices are not generated through e-times, means that companies will need to strictly adhere to the system or risk not being able to claim certain deductions. This might also lead companies to change their supply chain and opt for vendors who use e-time for invoicing.
For Kenya Revenue Authority (KRA): Implementing the electronic system should theoretically streamline tax collection and improve tax compliance. It should allow for better tracking of taxable transactions and potentially reduce the occurrence of tax evasion. However, the KRA will also need to invest in the system’s development, implementation, and maintenance and ensure its security.
For Individuals: The implications for self-employed individuals and sole proprietors are similar to those of companies. They will need to adapt to the new system and possibly incur costs in doing so. On the positive side, the system could simplify their tax filing process by having an automated record of invoices and expenses.
The Finance Act 2023 doesn’t address a few crucial aspects:
VAT-exempt transactions: The Act does not clarify how transactions exempt from VAT will be handled within the e-times system. Companies and individuals may encounter difficulties when dealing with such transactions.
Transactions by taxpayers below the VAT threshold: The Act doesn’t address how the new system will apply to taxpayers not required to register for VAT. There needs to be clarity on whether such businesses are required to use e-time or not.
Accrued Expenses or Losses: The Act does not clarify how the system will handle accrued expenses or losses, particularly invoices not generated through e-tims.
Inventory: The requirement to maintain data relating to stocks through e-times could make it more difficult for businesses to track their inventory.
Additionally, The requirement to issue tax invoices through e-tims could lead to increased costs for businesses, as they will need to invest in new software and hardware.
These ambiguities might lead to confusion and potential errors in compliance, which could negate some of the intended benefits of the system. KRA and lawmakers might need to issue further guidelines or amendments to address these issues.