KENYA: THE DRAFT TAX PROCEDURES (ELECTRONIC TAX INVOICE) REGULATIONS, 2023
The Finance Act, 2023 amended the TPA to empower the Kenya Revenue Authority (the KRA), effective 1 September 2023, to establish an electronic system for issuing of electronic tax invoices and keeping of records of stock.
The Finance Act, 2023 also amended the Income Tax Act, Chapter 470 of the Laws of Kenya (the Income Tax Act) to provide that effective 1 January 2024, expenses or losses on transactions that are not supported by electronic tax invoice generated from an electronic tax invoice management system would be disallowed save where an exemption has been granted under the Tax Procedures Act, 2015 (the TPA).
Accordingly, all businesses that are resident in Kenya or Kenyan permanent establishments of non-resident businesses are required to comply with the electronic system and keep records as prescribed by the KRA.
It is in the above context that the draft Electronic Invoice Regulations have been issued and we discuss the key requirements below.
Exemption from the requirement to issue an electronic invoice
The TPA provides expressly for an exemption for emoluments, imports, investment allowances, interest, and airline passenger ticketing (the TPA Exclusions). The Draft Electronic Invoice Regulations also provide that a non-resident person without a permanent establishment in Kenya is not required to issue an electronic invoice. In addition to the above, the KRA may by Gazette Notice exempt or revoke an exemption for a person from the requirement to issue an electronic invoice.
Requirement to issue an electronic tax invoice
Save for the exempt businesses and transactions set out above, every business owner will be required to record every sale in the electronic tax invoice management system and issue an electronic invoice generated from such system for each sale.
The electronic invoice must be sent to the buyer. It must also be sent to the KRA through such means as may be prescribed by the KRA. To enhance this, a person is required to keep a system that could be integrated with KRA’s systems and transmit data to the systems.
The electronic tax invoice will be required to contain information on the tax PIN of the business, the time and date, serial number, buyer’s tax PIN or other identifying information, gross total, the total tax, item code of the supply, brief description of the goods or service, quantity of supply, unit of measure, the tax rate charged, unique system identified, unique invoice identifier, and a quick response (QR) code. Any credit or debit note issued by a business must reference the original electronic invoice number for the supply.
Electronic system to record business transactions
A taxpayer is required to record all purchases and imports in an electronic system. The electronic system will be registered with the KRA during linking and the electronic system should be exclusively used by the registered user. The system should be capable of integration with KRA’s systems for receipt of the relevant stock level data by the KRA.
Where the system cannot be used temporarily, the KRA must be notified within twenty-four (24) hours and record sales as may be specified by the KRA. The stock records will be updated once the system can be used.
Where the system is to be discontinued due to among others, business closure, the KRA must be notified within thirty (30) days before the discontinuation or within seven (7) days (if the discontinuation is unplanned).
The enhanced transparency will make it easier for taxpayers to maintain records that prove their tax liability.
Closure of business
A taxpayer must notify the KRA within thirty (30) days before the closure of business and indicate records of current stock and where the stock is transferred on closure, the KRA must be notified of the stock, quantity, and levels transferred. Further, the taxpayer must ensure payment of all relevant taxes on the closure of the business.
The draft Electronic Invoice Regulations propose to also revoke the Value Added Tax (Electronic Tax Invoice) Regulations.
Non-compliance with the draft Electronic Invoice Regulations is punishable by a penalty of two times the tax due.
The use of the electronic system means that many businesses that intend to claim expenses would stop dealing with businesses without the system. This will bring more businesses into the tax net as they will have to use the electronic system. However, the cost of compliance for small-scale traders would be onerous.
Due to the nature of certain retailers such as supermarkets or petrol stations, some of the information to be included in the electronic invoice such as buyer’s details may be impractical due to the large volume of transactions. Further, a large number of customers are on a walk-in/walk-out basis.
It is unclear what KRA will consider sufficient buyer’s identifying information which may lead to disputes over documentation. The above-mentioned businesses will have to discuss with KRA to have their system specifically configured in relation to the buyer’s information collected.
From the Regulations, it is unclear what criteria would be used by the KRA when issuing or granting exemptions from the requirement for an electronic tax invoice. It is our view that the exemption application criteria should be clearly laid out to limit uncertainty regarding eligibility for the exemption.
The proposed changes would allow KRA to continue updating its technology and may in the future result in real-time business data analysis by the revenue authority. Businesses closing down will now also be required to notify the KRA, which will be used by the KRA to assess whether all taxes have been paid before the closure of a business.
The Draft Electronic Invoice Regulations have been published for public participation, which ends on 8 December 2023. Bowmans will continue to monitor developments on the draft regulations.