Accounting for VAT requires a sound understanding of how the VAT concept works. Failure to apply the right rules when calculating the tax liability can lead to fines which are detrimental to profitability. The Kenya Revenue Authority (KRA) provides a clear guidance on accounting for zero-rated and exempt goods. Zero rating refers to the supply of goods taxable at the rate of 0%. Suppliers of these goods and services are entitled to claim input VAT in case it was charged during their acquisition. On the other hand, exempt goods are not chargeable implying that suppliers of these goods cannot claim the input VAT.
Importance of Zero Rating
The idea of zero rating was aimed at motivating manufacturers, suppliers of zero-rated goods, and exporters as it reduces input costs. High input cost is one of the major impediments to the growth of the manufacturing sector in Kenya and this tax helps to address this problem. The Zero rating concepts also make Kenyan exports competitive in international markets as it enables exporters to charge lower prices. The globalisation of markets and production has intensified competition for investors and customers. Governments strive to create a supportive environment for multinational manufacturers since manufacturing is an important ingredient in GDP growth. Zero-rating exports make Kenya an attractive destination for American and European based multinationals considering these regions are characterized by a high production cost.
Zero Rated Goods and Services
Zero-rated goods consumed locally include educational materials, pharmaceuticals, and agricultural inputs among others. Zero-rating these products increase their affordability in line with the government’s responsibility of improving the quality of life. Failure to make taxation interventions would lead to businesses charging high prices that are out of reach for many Kenyans. Allows the market forces to determine prices and at the same time empowering businesses to charge competitive prices by reducing their tax burden. Tax consultants help businesses to exploit opportunities presented by the VAT to reduce input costs.