Value Added Tax (VAT) is a tax levied on the value added to goods and services at each stage of production and distribution. In Kenya, the VAT Act 2013 requires all businesses to charge VAT on their sales and pay the tax collected to the Kenya Revenue Authority (KRA).

However, exports are exempt from VAT as they are considered zero-rated supplies. This means that while businesses are still required to charge VAT on their exports, they can claim a refund of the VAT paid on inputs used in the production of the exported goods or services.

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In November 2021, the KRA issued a ruling that would change the way VAT on exports is calculated, and this ruling has since raised concerns among Kenyan firms and multinationals. The ruling requires businesses to pay VAT on exports based on the difference between the selling price and the cost of inputs, instead of the full selling price.

This change in the VAT calculation will have a significant impact on Kenyan firms and multinationals that rely on exports for a significant portion of their revenue. These businesses will now have to pay VAT on their exports, which will increase the cost of doing business and reduce their competitiveness in the global market.

Furthermore, the ruling will also increase the administrative burden for businesses as they will have to keep track of the VAT paid on inputs and the VAT charged on exports to ensure they are claiming the correct refund. This could lead to increased compliance costs and a decrease in profitability for businesses.

The VAT export ruling will also impact the competitiveness of Kenyan firms and multinationals as compared to their peers in other countries who do not have to pay VAT on exports. This could result in a loss of market share and a decline in exports, which will have a negative impact on the country’s economy.

In addition, the VAT export ruling may discourage foreign investment in Kenya, as multinationals may consider investing in other countries that do not have such restrictive VAT rules. This could result in a decrease in foreign direct investment and a slowdown in economic growth.

It is important to note that the VAT export ruling will not only impact businesses that export goods and services but also those that import goods and services. Importers will now have to pay VAT on the full value of the goods and services they import, instead of just the difference between the cost of the goods and services and the VAT charged on inputs. This will increase the cost of doing business for importers and reduce their competitiveness in the local market.

The VAT export ruling is likely to have a ripple effect on the Kenyan economy, as businesses pass on the increased cost to consumers in the form of higher prices. This could result in a decrease in consumer spending, which will have a negative impact on economic growth.

In conclusion, the VAT export ruling will have a significant impact on Kenyan firms and multinationals, as well as the wider economy. It will increase the cost of doing business, reduce competitiveness, and discourage foreign investment. The KRA should reconsider the ruling and find a way to support businesses in the export sector to maintain their competitiveness and contribute to economic growth.

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