It is the hope of all affected micro, small and large businesses, owed some Sh18 billion in tax refunds by the Kenya Revenue Authority (KRA), that their problems will be sorted out when the VAT Bill, which has already received Cabinet approval, comes up for debate before Parliament.

In the 2012/13 Budget, Treasury has announced finalization in its review of the VAT law and that the VAT Bill 2012 will soon be tabled for debate and approval by the house.

A number of companies are exposed to tax risks, errors and inconsistencies in the application of the VAT law. While the issue of VAT refunds has been a thorn in the flesh of affected businesses, it is also worth noting that this is not unique to Kenya, but affects most of Africa’s 54 countries.

Slow and tedious
While KRA is taking audits to weed out fraudulent claims before paying out the refunds, the process has been slow, tedious and expensive.

KRA uses an invoice-based method, where each seller charges VAT rate on his output and passes the buyer a special invoice that indicates the amount of tax charged.

The buyer, if he is subject to VAT on his own sales, uses these invoices to obtain a credit (reduction) towards his own VAT liability.

The difference in tax shown on invoices passed and invoices received is then paid to the Government (or a refund is claimed, in the case of negative liability).

Typically, it takes at least 60 days for KRA to make a refund, but this can stretch to 120 days as all requests for refunds must be audited, which may delay and certainly adds to the cost of receiving compensation for overpayment of net taxes.

A further impediment to the speedy refund of excess payments is that such transfers are treated under the Budget as expenditures, not as negative revenues.

This means that Parliament must pass an appropriation bill with funds earmarked for refunding. This leads to backlogs which are intermittently cleared, only to immediately start growing again.

In addition there appears to be disagreement between the KRA and the Treasury over the size of refunds required, which again leads to delays.
The refund policy, even with the new VAT Bill, should clearly be much more automatic, unless there are serious concerns over fraud that would be determined on a basis of risk.

It is understandable that KRA should watch out for fake claims but this should not be a reason to delay payment of refunds to those firms doing clean business and are therefore genuine claimants.
We urge KRA to come up with less advanced tax systems that are not time consuming or labour-intensive when they want to verify claims before approving refunds.

This is to avoid the current backlogs of refund requests and considerable disquiet among business taxpayers who have been deprived of their working capital.

Under pressure
While tax authorities are to blame, the heaviest responsibility rests with the state. This is because delays occur when state Budgets are under pressure and when tax collection targets are not being met, like is the situation now.

As matters stand, the state appears not to have set aside sufficient funds to meet legitimate refund claims when they occur.

We urge Treasury to put in place more sophisticated forecasting and Budgeting capabilities so that it can predict refund levels with some degree of precision. At present, it is difficult to estimate how much KRA is holding in VAT tax refunds, creating suspicion and mistrust between the tax man and businesses.
It is also more difficult for KRA to trace and net the culprits than it is to verify claims.

KRA acknowledges that VAT refund delays are occurring because KRA cannot surpass the Budget it has allocated for refunds. This is in addition to the various operational and administration challenges which we hope the new VAT Bill will address.

We hope an overhaul of the VAT system will eliminate outstanding issues, including the fact the present one is cumbersome, patched up and outdated. It is also riddled with many exemptions with three different rates charged on various goods and services.

The present VAT Act was not properly drafted, is incoherent and not synchronized in some respects.
Further, it gives room especially to firms dealing in exported services, to avoid paying taxes.

We hold that reforms of the VAT law should not be entirely World Bank-IMF driven but also with a huge participation from local tax experts and bureaucrats.