In a significant step towards simplifying its taxation landscape, the government of Rwanda has enacted the new VAT law (Law Nº 049/2023 of 05/09/2023: Establishing Value Added Tax) published in the Official Gazette n° Special of 14/09/2023.
Following the implementation of the Law n° 37/2012 of 09/11/2012 establishing the Value Added Tax, the following challenges had been identified:
- The previous law on VAT did not provide for the exemption of some goods and services that should have been exempted given their importance to the economy and the population in general;
- Taxpayers used to be able to deduct VAT paid on imported services that were not available in Rwanda. However, it had been very challenging to determine services that were available in Rwanda and those that were not. Several forms of abuse had also been identified in the method in place to determine locally available services.
- There was no clear policy for encouraging the final consumer to request an electronic invoice in a bid to increase compliance with the obligation to issue an electronic invoice.
- There used to be ambiguity in the VAT Law regarding whether some goods or services were taxable or not, which on several occasions led to the Government going to court for dispute resolution.
- There were opportunities for abuse in claiming input VAT credit without payment of the corresponding output VAT.
- The VAT law did not facilitate start-up businesses when there was no output tax declaration; they were not allowed to claim input tax paid when preparing the production or distribution places.
The new Law has been prepared to address the above issues.
Key changes in the VAT law include:
Changes related to tax exemption:
- For affordability, health and sanitation purposes, sanitary pads and the service of transportation of household solid waste were added to the list of goods exempted from VAT;
- Goods sold in customs for which no taxes have been paid are exempted from VAT. This is in line with taxation principles, in particular the territory principle;
- In an attempt to strengthen and promote investment in the aviation sector, aircrafts, their spare parts and maintenance tools appearing on the list established by the Minister in charge of transport and approved by the Minister were added on the list of exempted goods;
- Transferred assets between related resident companies during the period of restructuring are exempted from VAT in order to facilitate such companies in the process of pure change of legal constitution or corporate reorganization that require easy transfer of assets that has no impact on the private property of the companies in general;
- Equipment for conservation of human remains of victims of the Genocide against the Tutsi and its related evidence were added on the list of goods exempted from VAT. The list of such equipment is established by the Ministry in charge of genocide memory and approved by the Ministry;
- Goods or services, including imported ones, which are transferred to, or by, a Special Purpose Vehicle as a consequence of entering into an asset backed securitization transaction will be VAT exempted, except when the Special Purpose Vehicle is acquiring as owner of such goods or services. This is with the main objective of achieving revenue neutrality while mobilizing new sources of business financing and quick capital for small and start-up businesses;
- As the list of exempted financial and insurance services may be constantly increasing due to economic dynamism, this list will be established by an order of the Minister in charge of finance;
- In order to enhance access to essential foodstuff, processed maize and rice were added to the list of exempted goods.
Other changes:
- Following the conclusion that it is almost practically difficult to determine whether a service is available in Rwanda or not, the taxpayer who wants to acquire a service not available in Rwanda must request for authorisation from the Minister. An Order of the Minister determines modalities to apply for such an authorisation;
- A new Article was introduced (see article 27) to enable a reward to be given to the final consumer who requests for, and is given, an electronic invoice. A Ministerial Order will determine the value of the reward and the conditions for granting such a reward;
- In a bid to reduce disputes that come from uncertainty of whether some goods or services are taxable or not, the new law has introduced a clear definition for processed agriculture and livestock products;
- The period to claim input VAT refund from the date of invoice issuance has been reduced from two (2) years to twelve (12) months. In previous years, due to a manual approach to invoicing and record keeping, it was possible for a taxpayer to lose invoices and delay the period for input claim. However, with new electronic invoicing in place, the probability of losing the invoice is almost zero. Therefore, to embrace the Government effort, the above stated period has been reduced to twelve (12) months;
- In a bid to facilitate start-up companies (newly registered companies with stock on the day of registration), they have been allowed to claim the input tax paid while organizing themselves to start the production and distribution before they even declare the output tax;
- Goods sold in the shops that are exempted from tax were added on the list of VAT zero-rated goods to facilitate suppliers to be able to claim input tax and consequently reduce the cost of these goods;
- In order to facilitate public transport by avoiding the increasing cost of fuel, electric automotive vehicles, hybrid automotive vehicles, relevant batteries and their electric charging station equipment locally assembled were added to the list of VAT zero-rated items and those imported exempt from VAT;
- To avoid any legal conflict between the Law on VAT and the Law on investment promotion and facilitation with regards to refund of input VAT, a cross-reference to the investment Law was made in the VAT Law to allow special treatment of registered investors to whom the refund of VAT is made within a period not exceeding fifteen (15) days upon receipt of the relevant documents by the Tax Administration;
Written by Fidele Ukwishaka
Tel: +250788876772
E: fidele.ukwishaka@ceaconsulting.rw