Why not pay interest on outstanding VAT refunds?

By Andrew OduorTo a large extent, a number of companies supply either to withholding VAT agents or some form of zero-rated supplies. This means they will perpetually be in a VAT refund position and thus suffer an additional burden in terms of cost and time in submitting and pursuing VAT refunds from the Kenya Revenue Authority (KRA). With the extra cost and administrative requirements needed to ensure adherence to the law, businesses are finding it hard to obtain VAT refunds from KRA. This in turn makes it difficult for them to manage their cash flows. The long drawn process of obtaining refunds from KRA means affected businesses have to finance VAT out of cash generated from operations or arrange additional working capital finance, thereby increasing their business costs. The system is thus particularly disadvantageous to businesses that supply withholding VAT agents or make zero-rated supplies, as it has a direct impact on their revenue margins. Taxpayers are increasingly feeling like they are being punished even where they are compliant. Mutual benefitThe VAT regime should not create a win/lose kind of feeling among businesses. Rather, it should ensure that compliance is of mutual benefit to both the KRA and the taxpayer in terms of equity, adherence to the law and restitution.The VAT refund process is more negative than positive, as it would appear that the majority of the taxpayers who are otherwise compliant are being punished for the ‘sins’ of those that are keen to evade paying tax. Meanwhile, KRA is currently holding an extremely large amount of VAT refunds due to various taxpayers.An obvious remedy that would serve all parties is if a time limit was set within which a refund must be paid by KRA to the claimant. In the mind of a businessman, this assures him that even though he will have to meet the VAT cost initially, he will be refunded within a certain period embedded in the law. It will also assist in cash flow planning of the business, and will introduce a culture of mutual trust between KRA and the taxpayer. This will encourage people to be more compliant because they will feel inclined to cooperate as a result of the fair environment created.In addition, where a refund is paid after the time limit referred to above, equity demands that interest be applied on the refundable amount. This will serve to compensate the claimant for the cost of money incurred in funding the VAT from their pocket. In some jurisdictions, revenue authorities pay interest on refunds of VAT to a claimant where there is a delay of more than 30 to 95 days in processing a fully completed claim. In Ireland, for example, the tax body is obliged to pay interest if a VAT-repayment has not been made after the expiry of 93 days from the date of receipt of a valid claim. The claimant in this case must provide the tax body with whatever details or records they request to validate the claim. Interest will be paid from the date of expiry of the 93 days up to the date repayment is made, excluding the time correspondence is ongoing with the taxable person concerning the claim. Outstanding errorsIt should be noted, however, that the provision does not cover simple arithmetical errors or cases where revenue withhold a refund pending the filing of an outstanding tax return by the taxpayer. This is also the trend in many other European countries, including the UK.Closer home, in South Africa, where if the commissioner does not refund any amount refundable within the period of 21 business days after the date on which the vendor’s return in respect of a tax period is received by an office of the South African Revenue Service, interest is paid on such refundable amount at the prescribed rate subject to certain conditions.The importance of these kinds of provisions cannot be over-emphasised. It helps create equity. The taxpayer will not feel aggrieved by the inconvenience caused by the delays in the refund system, as he will in a way be compensated for his having to bear this cost. It will also increase the attractiveness of Kenya as an investment destination, where the Government is not only concerned with increasing its revenue, but also with the general welfare and business environment in which taxpayers operate.In addition to payment of interest, a provision should be included allowing the taxpayer to offset any VAT refundable against its other taxes such as withholding tax, PAYE and corporation taxes without recourse to the KRA. The current provisions require that KRA approves any such set-offs. Since Kenya operates a self-assessment tax regime, it should be interpreted to also mean where one has self-assessed a VAT refund then it should not require the KRA approval. KRA is perfectly entitled to audit such taxpayers and on concluding that the refund was incorrectly self-assessed has sufficient mechanisms within the existing legislation to remedy the situation and exact punishment for the error through application of the penalties provided in the legislation.A tax system needs to be dynamic for it to be of benefit to both the Government and the taxpayers. With a new VAT Act expected next month, this seems like an opportune moment for Government to ease the burden on the honest taxpayer.—The writer of this article Tax Consultant — Deloitte Kenya

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