On September 14, 2023, law nº 049/2023 of 05/09/2023 establishing value added tax (the new VAT law) was gazetted.

The new VAT law introduces a number of changes that must be welcome, including the exemption or zero-rating of electric and hybrid vehicles, their batteries and charging station equipment, which will certainly contribute to reduction of carbon dioxide emissions, the exemption of processed rice and maize flour to cushion final consumers against soaring food prices, and the exemption of aircraft, their spare parts and maintenance tools, which is also a relief for operators in air transportation who have, in the past, had to treat the VAT on the said goods as business cost given that their main supply (i.e. transportation of persons by air) is exempted from VAT.

The new VAT law also introduces the taxation of online supplies whose mechanics will be provided for by a ministerial order, and this is crucially important for not only generating the revenues necessary to finance sustainable development and to strengthen domestic resource mobilisation, but also to minimise competitive distortion between foreign online sellers and local physical stores. Another change that is expected to increase the tax morale is rewarding final consumers who request electronic invoices.

While the above changes and many others under the new VAT law should be commended, one believes there are other aspects of the new VAT law which should have been looked at differently for the Rwanda’s tax system to remain competitive. I discuss some of those aspects below.

One of the things that were expected to be clarified by the new VAT law is the definition of ‘exported service’ for the purpose of its zero-rating as the same concept was not defined under the repealed VAT law and that has led to a number of court cases. Exported service is now defined under new VAT law as "a service provided for use or consumption outside Rwanda whether the service is supplied in Rwanda or both inside and outside Rwanda but which does not have any impact on the recipient’s interest in Rwanda.”This definition, however, has its own issues as it appears to depart from the principle of destination that is considered cardinal and widely accepted as far as the application of VAT on cross-border supply of services is concerned, as it has already been confirmed by the Supreme Court of Rwanda in the case RS/INCONSIST/SPEC 00004/2019/SC, which was decided on 24/07/2020.

VAT being a consumption tax, the principle of destination dictates that VAT must be charged in the country where the consumption of a service takes place as doing it differently would distort international trade in services by for instance creating situations where businesses may pay VAT without them being able to recover such VAT as input tax credit. One appreciates the fact the right to tax is intrinsically associated with State sovereignty and any State has the right to levy taxes the way it deems fit, but in a world that is globalised, countries’ tax policies should also be internationally compatible for them to remain competitive. Equally important, introducing a legal provision clearly departing from valid positions priorly taken by courts (including the Supreme Court) may send out all the wrong signals. In this vein, the wording ‘but which does not have any impact on the recipient’s interest in Rwanda’ should have been removed from the definition of ‘exported service’ to align the application of VAT on cross-border supply of services with the principle of destination.

Another aspect that should have been considered differently is exemption from VAT on internal restructuring where the new VAT law exempts, from VAT, the transfer of assets between related persons residing in Rwanda at the time of the restructuring of their business, if the business activity of a person that acquires assets persists for a period of not less than three years and the person transferring the assets has the actual business of supplying or providing exempted goods or services.

The condition that the person transferring the assets have the actual business of supplying or providing exempted goods or services makes the whole provision irrelevant in that such person would not be required to register for VAT as per article 11 (3) of law n° 020/2023 of 31/03/2023 on tax procedures (Tax Procedures Law), and the assets transferred would not have been subject to VAT even without this provision. What should instead have been considered is to resuscitate the exemption of transfer of business as going concern (TOGC) which was provided for under law n° 06/2001 of 20/01/2001 on the code of value added tax, something which was proposed at the time the new VAT law was a bill. There is a strong case for exempting TOGC from VAT as under basic principles, VAT is supposed to be charged on the transfer of each asset taking into consideration the rules applicable to each group of assets, namely standard rate, zero-rate and exemption, and it may not be humanly possible to individualise and allocate value to each asset in case of a TOGC.

The new VAT law also introduced changes (which actually baffled the tax fraternity) relating to the entitlement to input VAT credit and VAT refund where the taxpayer’s input VAT exceeds their output VAT. The new VAT law provides that a taxpayer shall only be entitled to input VAT credit/refund if such VAT was paid by their supplier as output VAT to the tax administration. This is indeed the burden being shifted from the tax administration and unreasonably imposed on the taxpayers as, unlike the tax administration which has the power under the Tax Procedures Law to forcibly recover unpaid VAT as well as corresponding penalties and interest, taxpayers do not have control on their suppliers and should not be penalised for the latter’s non-compliance.

The implication of the said change may even go beyond what can be conceived as the taxpayer cannot know whether their supplier has remitted the output VAT they collected, and the denial of input VAT at the time of audit may increase the taxpayer’s VAT payable, in which case they would be liable to pay additional tax, penalties and interest.

It is worth highlighting that the denial of input VAT for the reason introduced by the new law has a long history as the tax administration has consistently been denying taxpayers input VAT credit for the same ground, but the courts had also consistently said ‘NO’ to that. The provision subjecting entitlement to input VAT credit/refund to the said condition has also elicited heated debate when the new VAT law (then a bill) was being discussed before the parliamentary Committee on National Budget and Patrimony (see Private sector wants VAT refund delays solved in new bill - The New Times) and it was hoped that requirement would be scrapped, only to see it in the new VAT law when gazetted.

It may sound strange to recommend the amendment of a law that has been in force for less than a month, but something needs to be done for addressing the above aspects particularly the issue of denying taxpayers input VAT/refund, simply because the same VAT was not remitted by their supplier as output VAT, something the taxpayer may not even be able to ascertain at the time of filing their VAT return.

The views contained herein are those of the author.

The writer is a Partner in the ENS Rwanda tax and corporate commercial practices.

Email: dnzafashwanayo@ensafrica.com

Telephone: +250 788 309 880