Experts hit out at KRA over VAT rules

The Kenya Revenue Authority’s new demands for documentation confirming the export of goods has caused a system paralysis that has increased outstanding value added tax (VAT) refunds to a new high of Sh20 billion, tax experts said. Tax consultancy KPMG said the taxman’s recent communication to companies on the required documentation for export contains onerous conditions including proof that the exported goods actually left the country.

Peter Kinuthia, a tax director with KPMG Kenya, said the demands have increased complexity of tax compliance that could only result in energy consuming legal battles going forward.

“It has been complicated by some regulations that KRA is now enforcing, which are really making the position worse for taxpayers. The backlog now stands at Sh20 billion and is not likely to get any better, especially given the kind of letters we have received this week,” said Mr Kinuthia.

“They are asking for onerous documentation from taxpayers. They want you prove things that should actually be in their control.”

Robert Waruiru, associate director of tax and regulatory services at KMPG, gave the example of the taxman’s demand that exporters of flowers to UK prove that the flowers actually left Kenya to the destination market as one such onerous condition.

“It is like they are asking taxpayers to go to UK and get customs entry to show that the importer there has paid custom duty or excise duty,” he said even as he wondered why KRA is asking Kenyan taxpayers to get documents meant for another revenue authority.

Mr Waruiru reckoned that since most of the exports are going to the European Union where data privacy laws are strong, it may be impractical for Kenyan firms to get such documents without being seen to be violating data privacy.

Tax refunds arise when firms such as manufacturers pay VAT on transport, rent, electricity and other components during the manufacturing phase. KRA is required to refund VAT amounts paid during production, usually called input VAT.

Under paragraph 13 of VAT Regulations 2017, exporters are supposed to submit to KRA a copy of invoice showing that the recipient of the supply is a person outside Kenya and also produce proof of payment.

For transit goods, a copy of the bill of lading, road manifest, or airway bill and the export or transfer entry certified by an officer of customs at the port of exit is also required.

“Further, the commissioner is empowered under the regulation to require a registered person --to produce a certificate stamped by a competent authority in the destination country that the goods were duly landed and entered for home use,” states the regulations.

KPMG, however, argues that these regulations ought to have first been approved by Parliament through the Gladys Shollei-led committee on delegated legislation to become effective.

“We have gone through the National Assembly Hansard and we cannot find any evidence to prove this. It can only be an instrument the government wants to use to hold on your cash. For them, that’s better than going to the market to roll over a bond at interest,” said Mr Waruiru.

KRA had not responded to our questions on this matter by the time of going to the press.

Mr Kinuthia called for changes in legislation to start levying interest on outstanding VAT refunds. Back in 2013, the VAT backlog was at about Sh31 billion and at end of 2017, that had dropped to about Sh14 billion.

The audit firm says that with slow growth in credit to private sector and government not paying its suppliers on time, a delay in VAT refunds will only strangle SMEs to death.

“If banks are not lending and government is delaying on payment on contracts while KRA is holding VAT refunds, what else is left for SMEs but to shut down?” posed Mr Waruiru.