Is KRA harassing taxpayers more than tax evaders?

NAIROBI: On Wednesday June 29, Rose Mwangangi, 26, left her house at 5am armed with her husband’s P195 form.

She braved the dark and the cold weather to get to an iTax support centre at Lunar Park, Nairobi. She was convinced she would beat early risers to the queue. After all, by the time she made her way to the venue to file her husband’s 2015 income tax returns, not a single streak of sunlight had pierced the skies. But she was wrong. To her dismay, hundreds of Kenyans had already lined up. Crestfallen, she decided to go back home to Embakasi and wake up even earlier the following day.

On her way home, however, she decided to drop by the iTax centre at Sameer Business Park on Mombasa Road. Again, it was barely 6am, yet there was a winding queue.

By the time Business Beat met with her at around 2pm, she was hungry, tired and on the verge of giving up. She tried to be amiable, but she could barely mask her frustration. You could see it in her weary smile, hear it in her dry laugh as she tried to make light of her fears.

She was afraid she would earn her busy husband a punitive penalty from Caesar; a penalty that would leave her family Sh10,000 poorer.

Before Ms Mwangangi got the forms, she said her husband had tried filing his returns from his office, but the taxman’s electronic system had presented a host of problems. To try and avoid a cash punishment they could ill afford, they had decided that Mwangangi visit a support centre and have Kenya Revenue Authority (KRA) officers help out.

She was not alone in the last-minute dash. And by the time the deadline of June 30 rolled around, 2.3 million of the four million taxpayers registered on iTax had been unable to file their income tax returns.

This means just about four in 10 taxpayers were able to file their returns through the digital system.

And when you consider that the taxman has about 8.5 million registered taxpayers, it becomes clear why KRA is struggling to meet revenue targets. This 2016-17 financial year, it is expected to collect Sh1.37 trillion.

But on claims that iTax might have failed closer to the deadline as Kenyans, as they are wont to do, rushed to file their returns, KRA insisted each complaint was distinct, dismissing the argument that the system was at fault.

Yet, after the deadline passed, those who tried to file their returns received the message: “Sorry, iTax system is temporarily unavailable due to a scheduled maintenance. Please try again later.”

The authority proved unyielding in the face of repeated calls for an extension after system hitches.

“The authority would like to reiterate that the deadline for filing returns has not been extended and will not be extended,” it said in a statement last week.

“Consequently, KRA informs taxpayers that according to the Tax Procedure Act (TPA) 2015, Section 83, late filing of returns attracts penalties.”

Some of the penalties are: for employment returns, the higher of 25 per cent of tax due or Sh10,000; for turnover tax returns, Sh5,000; in any other case, 25 per cent of the tax payable under the return or Sh25,000, whichever is higher; for failure to submit a document other than a tax return, Sh1,000 for each day or part day of default, but the total shall not exceed Sh50,000.

John, who asked that his last name not be used to preserve his privacy, is among those who got caught up in the last-minute dash. The sales manager’s taxes due are Sh600,000, but when he tried to file his returns, system glitches deterred him.

“I am now to be penalised Sh150,000. I can’t afford that. If it were Sh1,000, I would have paid without much complaint,” he said.

“Besides, KRA has my taxes already — my employer has been paying diligently and that cash has certainly not hit my account. So why am I being penalised for money they already have? It isn’t fair.”

TECHNICAL HITCHES

Lilian Kubebea, a tax partner at Deloitte East Africa, said KRA needs to make its system “more user friendly and limit technical hitches”.

She added that the iTax system has “too many controls”, which might be hampering its operations, especially when there is a surge in traffic closer to June 30.

“For instance, one of the controls is that a taxpayer cannot change their own tax obligation, meaning they would have to physically go to KRA to make such changes. This ends up lengthening the process and is counterproductive to automating systems. They need to reduce human interface by allowing online interaction,” Ms Kubebea said.

In June last year, the taxman announced it would train close to 100,000 Kenyans on how to use the iTax system, but there are still millions of users facing problems.

“I tried filing my returns at a cyber café, but only ended up wasting Sh350. The whole thing was not successful. So I came here to avoid being penalised. I only got permission from work for today, so I have to get it done today,” said Benson Mudelwa, one of the hundreds of taxpayers at the Sameer Park iTax centre queue.

Still, iTax has won accolades for its efforts to transform the national revenue collection system. Most recently, last month it won the ‘Highly Commended Winner, Best in Class Treasury Solution in Africa’ gong at Treasury Today’s Adam Smith Awards 2016.

But the question remains, why does the taxman need taxpayers to input information it already has? Some have described the process as a waste of man-hours.

In the 2011-12 financial year, then Finance Minister Uhuru Kenyatta even proposed to abolish this custom of having employees file returns, which he felt resulted in duplication.

“The Government has noted that there are many taxpayers who file income tax returns, yet all their pay as you earn (PAYE) taxes have been paid promptly by their employers on a monthly basis,” Mr Kenyatta said in his Budget speech on June 8, 2011.

“In order to reduce unnecessary filing of tax returns, I propose to abolish the filing of returns by employees who have no other income and their PAYE has been paid to the Exchequer by their employers.”

WEAK SPOT

But KRA insisted individual employees had to file their returns as some employers were not remitting taxes.

Kubebea agrees with this argument, saying an individual may have other tax obligations, such as other incomes that an employer may not be privy to.

“This makes such information private and in sole custody of the income earner, making it hard for an employer to file returns on behalf of the employee,” she said.

But perhaps KRA’s spirited efforts in getting individuals to file their income returns betrays the difficulties it is facing expanding consumption taxes, such as value-added, excise and customs taxes.

Experts think this over-reliance on income tax is an Achilles heel.

In the 2014-15 financial year, KRA collected Sh623 billion in income tax — with the portion of this contributed by individuals (PAYE taxes) amounting to Sh330 billion, and Sh293 billion coming from corporates. It got Sh324.9 billion from value-added taxes (VAT) and Sh144.5 billion from excise taxes.

According to audit firm PricewaterhouseCoopers (PwC), the world is moving towards consumption taxes to boost government coffers.

With Kenya relying on income taxes, revenue collections can be badly hit by business upheavals. Last year, for instance, was tough for companies, with numerous firms issuing profit warnings, laying off workers and freezing salaries.

“The Government is the single-largest employer and consumer, and it has frozen employment. The private sector is also not employing,” KRA Commissioner General John Njiraini noted in an interview with The Standard. This has, of course, taken a toll on revenue collections.

Further, the complicated process of filing tax returns may be counter-productive to the Government’s efforts to lure the informal sector into the tax net, added PwC.

In his Budget speech last month, Treasury Cabinet Secretary Henry Rotich announced the Government’s boldest intention to go after the ubiquitous informal sector, which employs more than 70 per cent of Kenyans.

“We must widen the tax net so that everyone eligible to pay tax, including the informal sector, pays tax. In this respect, I have asked the Kenya Revenue Authority to explore ways of taxing the informal sector and to redouble their efforts in netting tax evaders,” said Mr Rotich.

He added that the Government was thinking of introducing presumptive tax “for the hard-to-tax” segment, which includes the informal sector.

But it may be an uphill task for an authority that is still viewed with a lot of apprehension.

SELLING INSURANCE

Take, for instance, the case of Elisha Reru, 27, a tenacious insurance agent. Mr Reru has struggled to make ends meet by selling insurance policies to an apathetic public.

Every shilling he earns from the trade is deeply cherished. From his commission, 10 per cent is withheld by the insurance company to be remitted to the taxman.

Known as withholding VAT (WHVAT), it is extended to other incomes, including pensions, dividends and management and training fees. But it is supposed to be refunded once a taxpayer demonstrates payment of VAT.

Reru was among the millions of Kenyans who rushed to file their tax returns last month.

Because his income is erratic, he is not deducted PAYE like those formally employed. Still, KRA needs to be assured he pays VAT to release the 10 per cent of his income that it withholds.

After Reru files his VAT3 return, KRA is supposed to refund him all the money it has withheld. But for this to happen, Reru is supposed to be issued with a withholding VAT certificate by the insurance company, which entitles him to claim back withheld VAT to avoid double taxation.

However, Reru only recently learned about this refund; neither the company that has contracted him nor KRA had ever told him about it. Reru wants the authority to be as keen about educating the public on refunds as it is about getting people to pay taxes.

REFUNDS BACKLOG

Nikhil Hira, a tax partner at Deloitte East Africa, talked of a “backlog of VAT refunds” at KRA. Manufacturers alone are owed Sh30 billion.

His colleague, Fred Omondi, also told Busines Beat that while KRA has been quick to penalise taxpayers who default, it has not been as expeditious when it comes to refunding them.

KRA has also continued to appoint withholding VAT agents despite clear evidence that Section 110 of the Tax Procedure Act (TPA) and the schedule to the same deleted WHVAT.

Unlike in its latest statement where it invoked the Tax Procedure Act to remind those who had failed to file their returns of penalties, the authority was silent on the legal basis it continues to hold on to withholding tax.

However, KRA did not forget to remind those that had been appointed withholding VAT agents of the “interest and penalty charges that may arise under the Tax Procedure Act 2015”.

Kenya’s tax regime has been listed as one of the reasons the business environment continues to be hostile to investors.

Despite the country’s overall improvement in the World Bank’s Ease of Doing Business ranking, for instance, the taxation regime was a blot on the performance.

Kenya moved up 28 places in the rankings to position 108, but went down two positions to 101 on tax regime, with investors bogged down by a complicated system that requires them to make several tax payments.

According to a report by PwC and the World Bank, Paying Taxes 2016, despite the implementation of an electronic filing system to ease the burden of tax compliance, businesses were still having a hard time.

It takes a company 202 hours to pay taxes, making about 30 payments, according to the report. Mr Hira, however, puts the total payments at 67.

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