IMPLEMENTATION OF VAT ON PETROLEUM PRODUCTS ALERT ALGERIA BOTSWANA ETHIOPIA GUINEA KENYA MADAGASCAR MALAWI MAURITIUS MOROCCO MOZAMBIQUE NIGERIA RWANDA SUDAN TANZANIA UGANDA ZAMBIA REGIONAL OFFICE: UAE
Introduction On 1 September 2018, the Kenya Revenue Authority (the KRA) issued a press statement confirming that VAT at a rate of 16 percent would be applied on petroleum products with effect from 1 September 2018, following the lapse of the 2 year VAT exempt transition period which had been extended effective from 1 September 2016. The press statement was issued for the attention of the general public, oil marketers, resellers, retailers, importers, depots, distributors and pump stations. Following the end of the transition period, VAT at 16 percent is now applicable on petroleum products such as petroleum oils, motor spirit, aviation spirit, kerosene, medium petroleum oils and preparations, gas oil and natural gas in a gaseous state (except Liquefied Petroleum Gas (LPG) which is zero rated). The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter IMPLEMENTATION OF VAT ON PETROLEUM PRODUCTS PAGE ii
BACKGROUND Petroleum products had been exempt from VAT since 1 September 2013 (when the Value Added Tax Act, 2013 (the VATA) became effective) for a transition period of 3 years, which was due to expire on 1 September 2016. On 9 June 2016, the National Assembly through the Finance Act, 2016, approved a 2 year extension to the exempt status of petroleum products to 1 September 2018. This has meant that the sale of petroleum products has not been a taxable supply for purposes of the VATA (either at a rate of 0 percent (zero rated) or 16 percent (standard rated)) and hence players in the value chain have not been required to charge VAT. The petroleum products that had been exempt from VAT during the transition period are set out below: a. Petroleum oils; b. Motor spirit regular and premium; c. Aviation spirit and spirit type jet fuel; d. Special boiling point spirit and white spirit; e. Light spirits and preparations; f. Partly refined crude; g. Kerosene jet fuel and illuminating kerosene; h. Medium petroleum oils and preparations; i. Gas oil automotive, light, amber for high speed engines; and j. All natural gas in a gaseous state. The supply of LPG remained zero rated and as such unaffected by the lapse of the exemption. IMPLEMENTATION OF VAT ON PETROLEUM PRODUCTS PAGE 1
PRACTICAL IMPLICATIONS The importation and sale of these petroleum products is now subject to VAT at 16percent of their taxable value, which would mean that all importers, resellers, distributors, depots and downstream oil marketers are required to register, charge, account for and submit VAT returns on a monthly basis. This registration is individual to all players in the value chain, for example, where a pump station is owned and managed by a third party reseller and not the downstream oil marketer (multinational, national and independent operators), the third party reseller would also be required to register for VAT and charge VAT on the petroleum products. VAT on importation is the obligation of the importer and as such would apply on the petroleum products imported through the Open Tender System (OTS) regulated by the Ministry of Energy and the Energy Regulatory Commission (the ERC). The obligation to pay the import VAT would be on the respective oil marketing company which wins the OTS tender to import petroleum products in a specific period. Registration for VAT Only persons who are registered for VAT can charge VAT. A person is required to register for VAT through the KRA s online itax portal if they have or expect to make a turnover in taxable supplies of KES 5 million (approximately USD 50,000) annually. Owing to the huge volumes of petroleum products consumed in Kenya, both for personal and commercial use, players in the value chain would be required to register for VAT (to the extent that they are currently not registered) within a period of 30 days from 1 September 2018. The KRA is however empowered to register for VAT any person who is eligible for registration who fails to do so within this 30 day period. It is however likely to be the case that the KRA will seek to treat the players as being liable for VAT registration as from 1 September 2018. All registered persons are required to account for and submit VAT returns on a monthly basis by the 20th of the subsequent month to which transactions relate. The VAT payable on the sale of taxable supplies (output VAT) is set off against VAT on taxable supplies purchased by such a supplier (input VAT), and where such input VAT exceeds output VAT, such balance is carried forward to the next month. The ERC, pursuant to the Energy (Petroleum Pricing) Regulations, 2010 (LN 196 of 2010), is empowered to calculate and issue maximum retail pump prices of petroleum products, which will be in force from 15th of every month. The formula applied in determining the maximum wholesale/retail price of super/ regular petrol, kerosene or automotive diesel ought to factor in, among other factors, the weighted average cost per litre, the transportation cost from Mombasa to the nearest depot and the allowed oil marketing company s gross wholesale/retail margin. Since the review of the petroleum product price should now take into account the requirements of the VATA, then the revised maximum retail pump IMPLEMENTATION OF VAT ON PETROLEUM PRODUCTS PAGE 2
price set by the ERC in September is likely to be increased by the applicable VAT. Currently, petroleum products are subject to excise duty, road maintenance levy, petroleum development levy, petroleum regulation levy, import declaration fees and Kipevu Oil Storage Facility charges. This means that the application of VAT would be a significant portion of the total taxes due on petroleum products due from the final consumer. For consumers of petroleum products who are not registered for VAT, the tax on petroleum products will be an extra cost as they are the final persons on the value chain and they cannot therefore claim any input VAT incurred on the purchase of their petroleum products. However, consumers who are registered for VAT and who provide taxable supplies are entitled to claim the input VAT incurred on the purchase of petroleum products. In this regard therefore, service providers who provide exempt supplies (for example transportation of passengers by public service vehicles) who cannot recover the input VAT suffered on petroleum products are likely to increase their charges to recover the input VAT. There has also been some uncertainty regarding the taxable value on which the 16% VAT ought to be levied. The VATA provides that such taxable value ought to be the aggregate of the consideration paid for the petroleum product and all taxes, levies and charges paid or payable on the supply. This means that at importation, the 16 percent VAT would be applicable on excise duty, import duty and all levies paid on importation by the oil marketer who wins the OTS tender. This tax on tax may therefore carry an additional inflationary burden across the value chain above the absolute value of 16 percent. It is likely that guidance will be issued by the KRA and the National Treasury on what the taxable value for petroleum products should be, in light of the uncertainty highlighted above. IMPLEMENTATION OF VAT ON PETROLEUM PRODUCTS PAGE 3
TIMING OF THE FINANCE BILL, 2018 The National Assembly on 29 August 2018 approved an amendment to the VATA intended to extend the transition period for exemption of VAT on petroleum products for a further period of 2 years (expiring 1 September 2020). It is our understanding that the Finance Bill has now been presented to the President for assent and he has a 14 day period from the date he receives it from the National Assembly to assent to it. The President has the power to either assent to a Bill as presented or to refer it back to the National Assembly for reconsideration noting any reservations that the President may have concerning the Bill. It is worth noting that the Public Finance Management Act, No 18 of 2012 provides that the National Assembly shall consider and approve the Finance Bill with or without amendments no later than 90 days after passing the Appropriation Bill. The relevance of the Appropriation Bill is that once it is signed into law, it gives the government the power to withdraw money from the Consolidated Fund to fund government expenditure. The Appropriation Bill was signed into law on 29 June 2018 by the President. This therefore means that the Bill, as is or with relevant changes, ought to have been passed by the National Assembly by 30 September 2018. Having been passed by 30 August 2018, the President would have until approximately mid-september to assent to the Bill or make his reservations. However, even where the President refuses to assent to a Bill and makes recommendation for its amendment, the National Assembly still has the power to pass a Bill a second time without implementing the President s recommendations. The Constitution provides that where the President refers a Bill to the National Assembly for reconsideration, the National Assembly may either: a. amend the Bill in light of the President s reservations; b. pass the Bill a second time without amendment; or c. pass the Bill a second time with amendments that do not fully accommodate the President s reservations. However, for the National Assembly to pass a Bill that has been referred to them for reconsideration without amendment or with amendments that do not fully accommodate the President s reservations, they must have a vote supported by two-thirds of the National Assembly. Article 116(3) of the Constitution of Kenya, 2010 provides that an Act of Parliament comes into force on the fourteenth day after its publication in the Gazette, unless the Act stipulates a different date or time at which it will come into force. IMPLEMENTATION OF VAT ON PETROLEUM PRODUCTS PAGE 4
As such, the provisions of the VATA imposing 16 percent VAT on petroleum products are in force with effect from 1 September 2018, until the Finance Bill, 2018 is assented to by the President and the provisions extending the VAT exemption period for petroleum products are effective. IMPLEMENTATION OF VAT ON PETROLEUM PRODUCTS PAGE 5
THE TEAM Should you require more information, please do not hesitate to contact Daniel Ngumy at dng@africalegalnetwork.com, Kenneth Njuguna at kkn@africalegalnetwork.com or the Tax team at taxteam@africalegalnetwork.com Daniel Ngumy Partner Kenneth Njuguna Senior Associate E: dng@africalegalnetwork.com E: kkn@africalegalnetwork.com IMPLEMENTATION OF VAT ON PETROLEUM PRODUCTS PAGE 6
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