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Kenya Revenue Authority (KRA) will start paying interest on delayed tax refunds in an effort to ease the pain on traders whose working capital has remained tied at the taxman’s coffers.
The agency will now pay a two per cent interest on refunds that remain unpaid three months after traders have put in their application in what look set to worsen the financial position of KRA’s –which the Auditor General says is in the red.
KRA will also be obliged to inform claimants whose refund claims have not been approved two months after they are received, a step towards reducing the mountain of claims now standing at Sh23 billion – an amount that has hurt the cash flow of big manufacturers, banks and oil companies and Treasury says the interest charge will start before April on new claims.
“The interest penalty will speed up the refund process so that it releases the working capital for taxpayers,” said Martin Gumo, the deputy director for Economic Affairs at Ministry of Finance.
Mr Gumo sits in the task force – comprising KRA and Treasury officials – which is spearheading the overhaul of Kenya’s tax regime, notably the VAT Bill, expected to be ready by April.
Tax refunds are paid when traders absorb VAT charges on their inputs and do not pass them on to consumers when their final products are zero-rated. This allows them to seek a refund from KRA on the input taxes.
It also applies when traders, especially those in the oil business, pay their taxes upfront that tend to be higher than the actual dues.
The tax agency has been struggling to clear the refunds due to reduced allocation for refunds from Treasury and increased paperwork filed for verification of the claims.
“The slow processing of our refunds has not only locked up our money but in essence means that we are lending it freely to the government for years on end,” said Jimmy Mugerwa, the country manager of Kenya Shell.
KRA has been racing to reform the refund process with a view of reducing the pain on traders.
In July, for instance, the tax agency ordered that suppliers offering goods and services to institutions such as insurance firms, Saccos, ministries, local authorities, parastatal to start claiming their refunds directly to them.
This is a departure from the past where the claimants would get VAT certificates from the agents and later present their claims to KRA. The mounting refund problem sucked in the President who urged KRA to clear tax refunds within 60 days – a target that has remained elusive, prompting technocrats to introduce the interest penalty to the upcoming tax law.
“KRA will be forced to be more efficient and vigilant when making payments making this a big win for business owners,” said Mr Ashif Kassam, the managing partner at RSM Ashvir—an audit and tax consultancy firm.
This will put pressure on KRA’s expenses that the Auditor General Edward Ouko warned will cripple KRA’s ability to carry out its mandate if it continues to run beyond its means.
It has wiped out more than Sh1.5 billion of accumulated reserves in the past two years, setting off a row with Treasury over the commissions it receives for collecting tax.
KRA is mandated to receive a maximum of two per cent of the annual tax collections to run its operations.
But Treasury has been paying between 1.3 per cent and 1.65 per cent over the past four years and KRA is now demanding a bigger portion of the collections. The Ministry of Finance reckons that the commissions are adequate.
It is estimated that KRA’s accumulated fund will fall into the negative territory in the next 14 months should it fail to get additional resources from Treasury – which owes it Sh2.9 billion in bonuses since 2004.
KRA’s reserves stood at Sh669 million in the year to June from Sh1 billion the previous year and Sh2 billion in 2009.
The revisions in the VAT law will see basic commodities like flour, books, electricity and petroleum products attract the full 16 per cent duty.
Relief to Kenyans is that the tax rate will be maintained at 16 per cent but the Cabinet Secretary has the ability to raise this to a maximum of 25 per cent through a gazette notice.
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