On 25 September 2020, the Cabinet Secretary for The National Treasury gazetted the Value Added Tax (VAT) (Electronic Tax Invoice) Regulations, 2020 to usher in a new electronic tax invoice regime. The regulations took effect on gazettement and they required VAT registered persons to comply within 12 months therefrom. However, recently, the KRA issued a public notice citing its intention to roll out the new electronic tax invoice requirements commencing 1 August 2021. The public notice provides a further twelve-month transition window from the roll out date for taxpayers to comply. Within this period – expected to close on 31 July 2022 – VAT registered businesses are expected to acquire the new electronic tax invoice devices, implement, and start complying.
The key objective of this new Tax Invoice Management System (TIMS) is to foster tax compliance and minimize tax revenue leakage. To achieve this, it is expected that TIMS will be integrated with the KRA system to allow efficient transmission of tax invoice data to KRA. In fact, the regulations envisage real time transmission of invoice data to the revenue authority as well as a daily summary.
According to the regulations, the tax register is an electronic tax invoicing or receipting system that is maintained and used in accordance with the said regulations. To ensure integration of the tax register with the KRA system, every registered taxpayer is required to procure a control unit, being either a point-of-sale terminal, an Enterprise Resource Planning (ERP) system or simply an ETR, either as an independent or integrated component, for seamless invoice data transmission. The selected control unit must have an inbuilt transmission, validation, and signing capabilities. This creates a need for authorized suppliers of the said control units since businesses may lack capacity to develop the same internally.
Whereas the benefits of this new system are apparent, questions still abound in many a taxpayer’s mind. Firstly, accredited suppliers for the said control units are, at this stage, not known. The process of procuring the units is also not clear. As such, there is need for the KRA to urgently publish a register of accredited and authorized service providers in this regard.
Another lingering question centres around data protection and data security. The new TIMS regime envisages a situation where taxpayers’ information may be shared between the various Government Agencies. The regulations do not outline how the integrity of such data will be secured and any remedies available should data integrity be compromised. In a world where data security is continuously threatened and cyber security is a real risk, this question, if not comprehensively answered, may be an Achilles’ heel to the success of this project.
Are the regulations optimal? No. In an ever-developing digital world, other countries have embraced TIMS that are not only more advanced but also cost efficient to taxpayers. The KRA could borrow a leaf from Rwanda and Uganda where the in-country TIMS come at reduced to no cost to taxpayers.
Lessons from other regions that KRA may seek to adopt include considering the diverse nature of taxpayers’ industries/operations and customising the e-invoicing system to take this into account, rather than rolling out a “one solution fits all” invoice management systems. Secondly, as is the case with Rwanda and Uganda, the KRA should ensure that taxpayers are able to access monthly reports of their transactions for ease and efficiency of filing their VAT returns. Desirably, these reports should come in a template that is akin to a prepopulated VAT return. The KRA should also review the challenges faced in implementation of TIMS in Rwanda and Uganda and ensure such bottlenecks are addressed in this transition period. For instance, TIMS should be enhanced to recognise tax invoices and credit notes relating to periods prior to full adoption of the new system.
In conclusion, businesses need to plan for migration into the new system and put in place structures to ensure compliance with the provisions of the regulations. Also, this being a new system, it is expected that there will be certain teething issues in the early days of operationalization before the system becomes fully functional. Therefore, businesses need to plan how soon after 1 August 2021, but before 31 July 2022, they can transition into the new system.