Firms drown as KRA refunds backlog hits Sh25b

By James Anyanzwa

Nairobi, Kenya: Businesses are being forced to procure expensive loans as they wait for the taxman to settle unpaid claims

The dreaded ghosts of unpaid Value Added Tax (VAT) refunds have struck again, terrorising businesses and jeopardising the Government’s revenue collection efforts. This is despite a presidential directive to the Treasury that it pays the money promptly to enhance companies’ cash flow.

The Government is holding in excess of Sh25 billion of unpaid VAT refunds as businesses raise concerns over mounting cash flow problems.

The unpaid claims stood at Sh6 billion when President Kibaki made the directive that the Treasury allocates enough money to clear the tax refunds backlog in 2010. But the process of clearing this backlog has further been complicated by the Government’s decision to abolish the Withholding VAT system in July 2011, where government ministries, departments, and parastatals were used as tax agents.

These delayed payments have tied up huge amounts of capital straining liquidity and business growth in the face of high charges for bank overdraft facilities. This is coming at a time when the Kenya Revenue Authority (KRA) is also facing challenges in meeting its revenue collection targets.

“VAT refunds is a big issue which needs to be dealt with,” said Nikhil Hira, the Head of Tax Practice at the Deloitte and Touche East Africa.

“We have significant VAT refunds which have not been met and it is having a lot of impact on businesses. These refunds are in excess of Sh25 billion and the Government don’t have funds to pay.”

Very difficult

With company revenues under pressure, Hira said, the taxman would also find it very difficult meeting its revenue collection targets.

“Revenue collections is going to be a big issue because these unpaid VAT refunds are impacting on profitability of businesses,” Hira told The Standard.

Tax experts have also urged the State to legislate the timeframe within which KRA should hold on to tax refunds, and to allow the refunds attract interest if they are not paid within the stipulated period.

Hira said the cash flows of many businesses and particularly small and medium enterprises (SMEs) are being affected by the Authority’s sluggishness in settling tax refunds.

The expert also cites practices in parts of East Africa that could deal with the Kenya refunds debacle.

For example, in Tanzania and Uganda, levies reverse VAT where firms make VAT entries in their books and simply recover it directly from expected VAT payment.