Before you click ‘submit’ and sigh with relief that you have beaten the taxman’s deadline for filing your tax returns, check again.
Any slight mistake that you may have made could come back to haunt you with huge financial implications.
Every year, between January and June, all Kenyan citizens in possession of a Kenya Revenue Authority (KRA) personal identification number, simply called KRA Pin, are expected to file tax returns.
So far, over one million taxpayers have filed their returns, according to KRA, with more expected to do so as the June 30 decline beckons.
But one of the biggest nighmare for taxpayers is making an error in the returns, which for KRA officers amounts to unpaid tax which requires to be cleared with interest. This is one of the common errors that could also prove costly to rectify.
In an interview with Financial Standard, KRA Chief Manager for Domestic Taxes Department Judith Njagi said filing a tax return deserves seriousness and should not be taken lightly as is the case with many taxpayers. Simply put, if you are an employee, this is an exercise to inform the taxman that you earned a salary and that your employer taxed it correctly and remitted the due tax to KRA.
But for many taxpayers, this is where it all begins to get complicated: Why file returns yet the employer has already remitted the tax?
“Your employer may not know what you do before or after work. There could be clear established businesses that employees do,” she explains.
“The employer wouldn’t know and even if they did, they can’t go outside their mandate of deducting tax on salary. The individual should declare that.”
This is supposed to capture taxes paid by salaried individuals who run any income generating activities outside their formal jobs. In addition, Ms Njagi says, making tax returns helps KRA catch employers who deduct taxes but fail to remit them since the system is able to flag unreconciled accounts.
In this case, they are hit with penalties of 25 per cent on taxes due or Sh10,000, whichever is higher for any outstanding income tax every 9th of a new month. When employers pay taxes but do not file returns, their employees are issued with defaulter notices when they file their returns.
While local institutions have the obligation to tax their employees and remit it to KRA, foreign organisations such as embassies have no obligation to withhold. They, therefore, pay their employees the full amount, posing major potential revenue losses for KRA, according to Ms Njagi.
“Such employees are supposed to declare their taxes. Since their taxes are not deducted by employers, they have to compute and remit their taxes on a monthly basis. But many don’t do this,” she says.
Those employees doing other businesses are also expected to file returns for the taxes paid against the business income. For instance, an employee who also earns rental income is expected to pay KRA 10 per cent of the gross income per month and make returns on the same.
But Njagi says this remains a challenge. Many people are not willing to disclose additional sources of income and therefore find themselves at loggerheads with KRA. Taxpayers are supposed to remit the money to KRA via appointed banks.
“Tax is one thing that people don’t like. If you were paid all the salary then asked to present your pay as you earn (Paye) to KRA, would you?” she poses.
Ms Njagi says collecting taxes is “not easy” and incidents of corruption demoralise the taxpayers. However, she urges for compliance in the spirit of patriotism.
“Some taxpayers say that if this is how money is getting lost, then why should they pay?” she poses. Despite the need to file returns on time, some taxpayers delay due to challenges such as delay in getting P-9 forms from employers or being outside the country during the time of filing. In such cases, the penalty is still incurred.
However, Njagi says this can be lifted if the taxpayer provides proof to KRA. But if within that period there are outstanding taxes, a penalty on the arrears will not be lifted. Leaving it unpaid attracts one per cent interest every month.
“If actually there was a tax obligation within that period, but the taxpayer didn’t honour, he or she will be hit with a fine of five per cent of the payable tax or Sh20,000 whichever is higher,” explained Njagi.
For some taxpayers, it happens that they change employers in the course of an income year. In this case, they have to combine the returns from each employer, sometimes a process that could be prone to errors when filing.
According to Njagi, it is also mandatory for those who have not earned any taxable income in a given year to file nil returns to simply inform the Commissioner-General that they did not generate any taxable income. Those who fail are also slapped with the Sh20,000 fine.
“If you don’t make a return, the Commissioner wouldn’t know whether you earned or not. The penalty will still stand,” she says. Because many taxpayers are in a rush to file returns, Njagi cautions that errors during filing could also prove costly to rectify. The online system of filing, called iTax, allows one to amend the erroneous return within five years of filing. But that requires KRA approval and also comes with costs.
Erroneous filing that leads to the iTax system reflecting unpaid taxes attracts a penalty of one per cent per month, calculated on a simple interest basis.
“Errors during filing are costly and taxpayers have to be careful to reconcile records before filing. Leaving the error till late to amend is costly because the penalty on erroneous filing can be waived, but not the interest incurred on the penalty,” explains Njagi.
KRA has various points of service, called stations, where taxpayers can resolve such issues.
Sometimes, taxpayer stations could be far away, especially if employees shift to new residential areas. But Njagi says KRA is implementing borderless services to serve taxpayers from any station.
Errors showing that KRA owes the taxpayer are given a keen analysis. The KRA official says the taxman cannot be quick to pay out a tax credit without proper scrutiny. This, she says, is because KRA has observed fictitious taxreturn amendments intended to reduce tax liability.
“We check all amended returns. We have seen a lot of introduction of fake expenses all geared at lowering taxliability,” she says.
For businesses, taxes are supposed to be paid on or before the end of the fourth month after the end of an income year, this normally covers 12 months period. This is paid in four instalments. For individuals running businesses they also pay in four instalments if they expect to incur an annual tax liability of Sh40,000 and above.
This means those businesses whose financial year ended in December should have paid taxes by April. Late payment attracts a penalty of one per cent on outstanding taxes.
Despite the responsibility that comes with having a KRA PIN, failing to acquire one also comes with huge implications. Any citizen aged 18 years and above, whether involved in any taxable income generating activity or not, is eligible to apply for and get the PIN. Without the PIN, some of the crucial services that one will not be able to access under their name include installation of electricity or water, Higher Education Loans Board (HELB) loans and buying or selling land. Some job applications and tender bidding, especially in the public sector, also demand a taxcompliance certificate. This is simply a document to show that one has been paying taxes and there are no arrears.
While this should take about two days after online application, it could prove hard for those who have arrears - whether out of erroneous filing or outright tax evasion.
“We check for compliance history for all income years. If there is a tax liability, we reject applications and tell you the outstanding tax,” says Njagi.
This has seen many people miss out on employment or government tenders, especially that KRA issues just one PIN for an individual’s entire lifetime, making it hard to run away from pending obligations.
In February, KRA suspended about 95,000 PINs of companies, mostly those doing business with the Government but had not been paying taxes.
Netting tax cheats or those with pending tax liabilities was easy because iTax is linked to the Government’s Integrated Financial Management Information System. “We are enhancing systems so that we will be able to know directors of companies whose PINs we suspended and have not come forward. Before we give them any other PIN, we need to first of all close the pending taxes,” says Njagi.
This means that many suppliers who have pending taxliabilities may not be able to do any other business with the Government, even under a new name, unless they pay these arrears.
Taxes have been described as a compulsory and necessary evil where it is difficult to get people who are willing to pay without coercion. However, KRA gives Sh150,000 income tax exemptions per month to persons with physical disabilities upon getting exemption certificates, usually valid for five years subject to renewal. However, before getting the exemption, any previous taxliability arising out of failure to pay tax, file or make correct returns is checked.