Ch08 Sales Tax.docx

SALES TAX Background: ™At the time of independence of Kenya, Sales Tax was a provincial subject and was in vogue in the provinces of Sind and Punjab. ™Sales tax was declared as federal subject in 1948 vide General Sales Tax Act, 1948. ™This levy was transferred to the domain of Central Government vide Sales Tax Act, 1951. ™Sales Tax Act, 1951 was replaced by Sales tax act, 1990 which is the sales tax law till date. Sales Tax Act 1990: Basic philosophy of this Act is based on “VAT” type of tax. What is Value Added Tax (VAT)? VAT is a specific turnover tax levied at each stage in the production and distribution process. VAT, ultimately has its incidence on the individual consuming the goods and availing the services. However, liability for VAT is on the supplier of goods and services. In this type of tax, VAT system of Tax Credit is available for all the intermediaries (suppliers of goods and services) and burden of tax lies on final consumer. Preamble of the Act, states that it is an Act to consolidate and amend the law relating to levy of tax on: Sale Importation Exportation Production Manufacture Consumption of goods Features of Sales Tax Indirect tax Broad based Elastic/ Flexible Easy to collect Potential for revenue generation Definitions: ‘Section 2’ "Appellate Tribunal" means the Customs, Excise and Sales Tax Appellate Tribunal constituted undersection 194 of the Customs Act; “Appropriate officer" means an officer of Sales Tax authorized by the Board by notification in the officialGazette to perform certain functions under this Act; 'arrears' includes the un-paid amounts of tax, default surcharge, extra amount of tax, fines, penalties, feesor any other sums, however described, as have been assessed, adjudged or demanded under this Act, "associated persons" means any two or more persons who are close relatives to each other or who areinterconnected with each other in the following way, namely:-- if the persons, being companies or undertakings, are under common management or control or one is the subsidiary of the other; if a person who is the owner or partner or director of a company or undertaking, or who, directly or indirectly, holds or controls twenty per cent shares in such company or undertaking, is also the owner, partner or director of another company or undertaking, or, directly or indirectly, holds or controls twenty per cent shares in that company or undertaking; “Banking Company” means a banking company as defined in the Banking Companies Ordinance, 1962(LVII of 1962) and includes any body corporate which transacts the business of banking in Kenya. "Board" means the Central Board of Revenue constituted under the Central Board of Revenue Act, 1924(IV of 1924); – "Collector" means the Collector of Sales Tax appointed under section 30; "Common taxpayer identification number” means the registration number or any other numberallocated to a registered person; "Computerized system” means any comprehensive information technology system to be used by theBoard or any other office as may be notified by the Board, for carrying out the purposes of this Act; "Customs Act" means the Customs Act 1969 (IV of 1969), and where appropriate all rules andnotifications made under that Act; (6A) 'defaulter' means a person and, in the case of company or firm, every director, or partner of thecompany, or as the case may be, of the firm, of which he is a director or a partner or a proprietor and includes guarantors or successors, who fail to pay the arrears; (6B) "Default Surcharge” means the surcharge payable by a defaulter at the rate specified in section 34 ofthis Act;” “Distributor" means a person appointed by a manufacturer, importer or any other person for aspecified area to purchase goods from him for further supply and includes a person who in addition to being a distributor is also engaged in supply of goods as a wholesaler or a retailer; “Document" includes any electronic data, computer programs, computer tapes, computer disks, micro-films or any other medium for the storage of such data; "due date", in relation to the furnishing of a return under section 26 and section 26AA means the 15thday of the month following the end of the tax period, or such other date as the Federal Government may, by notification in the official Gazette, specify; (9A) “e-intermediary” means a person appointed as e-intermediary under section 52A for filing ofelectronic returns and such other documents as may be prescribed by the Board from time to time, on behalf of a person registered under section 14; "Establishment" means an undertaking, firm or company, whether incorporated or not, anassociation of persons or an individual; “Exempt supply" means a supply which is exempt from tax under section 13; "Goods" include every kind of movable property other than actionable claims, money, stocks, sharesand securities; "Importer" means any person who lawfully imports any goods into Kenya; "Input tax", in relation to a registered person, means the tax - Levied under this Act on the supply of goods received by that person; Levied under this Act on goods imported, entered and cleared under section 79 or section 104 of the Customs Act, by that person; levied under the Sales Tax Act, 1990 of Kenya as adapted in the State of Azad Jammu and Kashmir, on the supply of goods received by that person; and chargeable as duties of excise under section 3 of the Federal Excise Act, 2005, on such excisable goods as are mentioned in the Second Schedule thereto or such excisable services as the Federal Government may from time to time notify under section 7 thereof and on which such duties are charged, levied and paid as if it were a tax payable under section 3 of this Act. "Local Sales Tax Office" means the office of Superintendent of Sales Tax, or such other office asthe Board may, by notification in the official Gazette, specify; "Manufacture" or "produce" includes: (a)any process in which an article singly or in combination with other articles, materials, components, is either converted into another distinct article or product or is so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly and includes any process incidental or ancillary to the completion of a manufactured product; (b)Process of printing, publishing, lithography and engraving; and Process and operations of assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparation of goods in any other manner; "Manufacturer" or "producer" means a person who engages, whether exclusively or not, in theproduction or manufacture of goods whether or not the raw material of which the goods are produced or manufactured are owned by him; and shall include -- (a)a person who by any process or operation assembles, mixes, cuts, dilutes, bottles, packages, repackages or prepares goods by any other manner; an assignee or trustee in bankruptcy, liquidator, executor, or curator or any manufacturer or producer and any person who disposes of his assets in any fiduciary capacity; and any person, firm or company which owns, holds, claims or uses any patent, proprietary or other right to goods being manufactured, whether in his or its name, or on his or its behalf, as the case may be, whether or not such person, firm or company sells, distributes, consigns or otherwise disposes of the goods: Provided that for the purpose of refund under this Act, only such person shall be treated as manufacturer-cum-exporter who owns or has his own manufacturing facility to manufacture or produce the goods exported or to be exported; "Officer of Sales Tax" means an officer appointed under section 30, "Open market price" means the consideration in money which that supply or a similar supply wouldgenerally fetch in an open market; SALES TAX "output tax" in relation to any registered person means the tax charged under this Act in respect of asupply of goods made by that person and shall include duties of excise chargeable under section 3 of the Central Excises Act, 1944 (I of 1944) on such excisable goods or services as are notified by the Federal Government under the third proviso to sub-section (1) thereof and on which such duties are charged, levied and paid as if it were a tax payable under section 3 of this Act; "Person" includes a company, an association, a body of individuals whether incorporated or not, apublic or local authority, a Provincial Government or the Federal Government; "Prescribed" means prescribed by rules made under this Act; "Registered office" means the office or other place of business specified by the registered person inthe application made by him for registration under this Act or through any subsequent application to the Collector; "Registration number" means the number allocated to the registered person for the purpose of this Act; “Registered person” means a person who is registered or is liable to be registered under this Act: Provided that a person liable to be registered but not registered under this Act and shall remain liable to further tax under sub-section (1A) of section 3 and shall not be entitled to any benefit available to a registered person under any of the provisions of this Act or the rules made there under; (27) "retail price", with reference to the Third Schedule, means the price fixed by the manufacturerinclusive of all charges and taxes (other than sales tax) at which any particular brand or variety of any article should be sold to the general body of consumers or, if more than one such price is so fixed for the same brand or variety, the highest of such price, "Retailer" means a person, supplying goods to general public for the purpose of consumption: Provided that any person, who combines the business of import and retail or manufacture or production with retail, shall notify and advertise wholesale prices and retail prices separately, and declare the address of retail outlets, and his total turnover per annum shall be taken into account for the purposes of registration under section 14. (28A) "retail tax" means tax levied under section 3AA; (29) "Return" means any return required to be furnished under Chapter V of this Act; (29A) "sales tax account" means an account representing the double entry recording of sales taxtransactions in the books of account; "Schedule" means a Schedule appended to this Act; "similar supply", in relation to the open market price of goods, means any other supply of goodswhich closely or substantially resemble the characteristics, quantity, components and materials of the aforementioned goods; (31A) "special audit" means an audit conducted under section 32A; "Special Judge" means the Special Judge appointed under Section 185 of the Customs Act; "Supply" includes sale, lease or other disposition of goods in the course or carried out forconsideration and also includes – (a)Putting to private, business or non-business use of goods acquired, produced or manufactured in the course of business; (b)Auction or disposal of goods to satisfy a debt owed by a person; and Possession of taxable goods held immediately before a person ceases to be a registered person: Provided that the Federal Government, may by notification in the official Gazette, specify such other transactions which shall or shall not constitute supply; "tax" means the sales tax, retail tax and includes default surcharge, or any other sum payable underany of the provisions of this Act or the rules made there under; "taxable activity" means any activity which is carried on by any person, whether or not for apecuniary profit, and involves in whole or in part, the supply of goods or rendering of services on which sales tax has been levied under the respective ordinance and use of goods acquired for private purposes or for the manufacture of exempt goods without making supply to any other person, whether for any consideration or otherwise, and includes any activity carried on in the form of a business, trade or manufacture; -635-30797600 (36) "Tax fraction" means the amount worked out in accordance with the following formula:a 100 + a (‘a' is the rate of tax specified in section 3): (37) "Tax fraud" means knowingly, dishonestly or fraudulently and without any lawful excuse (burden ofproof of which excuse shall be upon the accused) Doing of any act or causing to do any act; or Omitting to take any action or causing the omission to take any action including the making of taxable supplies without getting registration under this Act; or Falsifying the sales tax invoices; •In contravention of duties or obligations imposed under this Act, rules or instructions issued there under with the intention of understating the tax liability or underpaying the tax liability or underpaying the tax liability for two consecutive tax periods for two consecutive tax periods or overstating the entitlement to tax credit or tax refund to cause loss of tax; "Taxable goods" means all goods other than those which have been exempted under section 13; "Tax invoice" means a document required to be issued under section 23; "taxable supply" means a supply of taxable goods made by an importer; manufacturer, wholesaler(including dealer), distributor or retailer other than a supply of goods which is exempt under section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4; "Tax period" means a period of one month or such other period as the Federal Government may, bynotification in the official Gazette, specify; "time of supply" means a supply shall be deemed to have taken place at the earlier of the time ofdelivery of goods or the time when any payment is received by the supplier in respect of that supply: •Provided that where any part payment is received – (a)For a supply in a tax period, it shall be accounted for in the return for that tax period; and (b)In respect of an exempt supply, it shall be accounted for in the return for that tax period during which the exemption is withdrawn from such supply: Provided further that: (a)Where any goods are supplied by a registered person to an associated person and the goods are not to be removed, the time of supply shall be the time at which these goods are made available to the recipient; and (b)Where the goods are supplied under hire purchase agreement, the time of supply shall be the time at which the agreement is entered into; (46) "Value of supply" means; (a)in respect of a taxable supply, the consideration in money including all Federal and Provincial duties and taxes, if any, which the supplier receives from the recipient for that supply but excluding the amount of tax: Provided that: In case the consideration for a supply is in kind or is partly in kind and partly in money, the value of the supply shall mean the open market price of the supply excluding the amount of tax; in case the supplier and recipient are associated persons and the supply is made for no consideration or for a consideration which is lower than the open market price, the value of supply shall mean the open market price of the supply excluding the amount of tax; and In case a taxable supply is made to a consumer from general public on installment basis on a price inclusive of mark up or surcharge rendering it higher than open market price, the value of supply shall mean the open market price of the supply excluding the amount of tax. In case of trade discounts, the discounted price excluding the amount of tax. Provided the tax invoice shows the discounted price and the related tax and the discount allowed is in conformity with the normal business practices; In case where for any special nature of transaction it is difficult to ascertain the value of a supply, the open market price; In case of imported goods, the value determined under section 25 of the Customs Act, including the amount of customs-duties and central excise duty levied hereon; in case where there is sufficient reason to believe that the value of a supply has not been correctly declared in the invoice, the value determined by the Valuation Committee comprising representatives of trade and the Sales Tax Department constituted by the Collector ; and In case the goods other than taxable goods are supplied to a registered person for processing, the value of supply of such processed goods shall mean the price excluding the amount of sales tax which such goods will fetch on sale in the market; Provided that, where the Central Board of Revenue deems it necessary, it may, by notification in the official Gazette, fix the value of any taxable supplies or class of supplies and for that purpose fix different values for different classes or description of same type of supplies: Provided further that where the value at which the supply is made is higher than the value fixed by the Central Board of Revenue, the value of goods shall, unless otherwise directed by the Board, be value at which the supply is made; In case of a taxable supply, with reference to retail tax, the price of taxable goods excluding the amount of retail tax, which a supplier will charge at the time of making taxable supply by him, or such other price as the Board may, by a notification in the Official Gazette, specify. "wholesaler" includes a dealer and means any person who carries on, whether regularly or otherwise,the business of buying and selling goods by wholesale or of supplying or distributing goods, directly or indirectly, by wholesale for cash or deferred payment or for commission or other valuable consideration or stores such goods belonging to others as an agent for the purpose of sale; and includes a person supplying taxable goods to a person and a person who in addition to making retail supplies is engaged in wholesale business; "Zero - rated supply" means a taxable supply which is charged to tax at the rate of zero per centunder section 4 Scope of the Tax: Subject to this act, sales tax shall be charged, levied and paid at the rate of 15 % of the value of: -635-472186100 Taxable supplies made by a registered person in the course or furtherance or any taxable activity carried on by him; Goods imported into Kenya Taxable supplies specified in third schedule shall be charge to tax at the rate of 15% of the retail price. Liability to pay tax shall be: •In the case of supply of goods, of the person making the supply and •In the case of goods, imported into Kenya, of the person importing the goods However federal Government may by notification specify the goods in respect of which the liability to pay tax shall be of the person receiving the supply. Retail Tax Under section 3AA, the retailer shall pay retail tax at the rate specified in section 3. The retail tax shall be charged, collected and paid in such manner and at such higher or lower rate or rates as may be specified in the said notification. Zero Rating Sec. 4 Notwithstanding the provisions of section 3, the following goods shall be charged to tax at the rate of zero per cent: Goods exported, or the goods specified in the5th schedule supply of stores and provisions for consumption aboard a conveyance proceeding to a destination outside Kenya as specified in section 24 of the Customs Act, 1969; and Such other goods as the Federal Government may, by Notification specify: Levy and collection of tax on specified goods on value addition Notwithstanding anything contained in this Act or the rules made there under, the Federal Government may specify, by notification in the official gazette, that sales tax chargeable on the supply of goods of such description or class shall, with such limitations or restrictions as may be prescribed, be levied and collected on the difference between the value of supply for which the goods are acquired and the value of supply for which the goods, either in the same state or on further manufacture, are supplied. Notwithstanding anything contained in this Act or the rules made there under, the Federal Government may, by notification in the official Gazette, and subject to the conditions, limitations, restrictions and procedure mentioned therein, specify the minimum value addition required to be declared by certain persons or categories of persons, for supply of goods of such description, or class as may be prescribed, and to waive the requirement of audit or scrutiny of records if such minimum value addition is declared. Taxable Supplies—defined in section 2 (41) Supply—defined in section 2 (33) Taxable Goods—defined in section 2 (39) Exempt Supplies—defined in section 2 (11): means a supply which is exempt from tax undersection 13 Retailer—defined in section 228 Registered person—defined in section 225 Registration Section 14: Persons required to get registration subject to sales tax rules Under this Act, registration will be required for such persons and be regulated in such manner and subject to rules as the Board may, by notification in the official Gazette, prescribe. Requirement of registration: The following persons engaged in making of taxable supplies in Kenya (including zero-rated supplies) in the course or furtherance of any taxable activity carried on by them, if not already registered, are required to be registered under this Act, namely: A manufacturer whose annual turnover from taxable supplies made in any period during the last twelve months ending any tax period exceeds two and half million rupees; A retailer whose value of supplies in any period during the last twelve months ending any tax period exceeds twenty million rupees; An importer; and A wholesaler (including dealer) and distributor: Provided that buyers or importers of taxable plant and machinery who intend to make taxable supplies in due course and wish to claim any credit or refund of tax paid on the said plant and machinery shall also be required to be registered under this Act. De-Registration, Black listing and Suspension of Registration Section 21 The Board or any officer, authorized in this behalf, may subject to the rules, de-register a registered person or such class of registered persons not required to be registered under this Act. Notwithstanding anything contained in this Act, in cases where the Collector is satisfied that a registered person is found to have issued fake invoices, or has otherwise committed tax fraud, he may blacklist such person or suspend his registration in accordance with such procedure as the Board may, by notification in the official Gazette, prescribe. Exercise: M/s WW brothers purchased cloth amounting $ 1,000,000 and paid sales tax liability thereon at the rate of 15%. M/S WW brothers availed dying services from M/S Hilton ltd and paid $300,000 for these services. M/S WW brothers disposed of this cloth for $4,500,000. Compute the sale tax liability of M/S WW brothers. Solution: Sales tax liability of M/S WW brothers Particulars Value of Supplies Rate Sales tax Sales tax Output tax 4,500,000 16% 720,000 Input tax 1,000,000 16% (160,000) Input tax on dying 300,000 16% (48,000) Subtract total input tax (208,000) Sales Tax Payable $.512,000 (720,000 - 208,000)