KRA to punish buyers for tax sins of non-compliant sellers

Commodities such as fuel attract value- added tax whose payment, KRA says, is fraught with inconsistencies. [File, Standard]

Kenya Revenue Authority plans to punish individuals who buy goods or services from persons or entities that fail to declare their income.

The system, which entails in-depth data analytics, is the latest push by the taxman to grow revenues.

KRA expects the new system to cure the problem of fictitious value added tax (VAT) inputs mismatched against outputs and subsequently increase revenue collection.

According to tax experts, seven out of 10 VAT receipts are inaccurate and could be costing KRA billions of shillings in revenue every year.

Under the new system, referred to as VAT Auto Assessment (VAA), a buyer and a seller could be punished for VAT inconsistencies on the side of the seller.

KRA has said it will seek to match the records of both parties to detect inconsistencies, with a buyer bearing the cost of the seller failing to file tax returns.  

Both the buyer and the seller will be given 30 days to correct the inconsistencies.

The authority says if after that period the assessed amount remains unpaid, it will dispatch a debt officer.

KRA has commenced issuing notices to taxpayers through iTax highlighting the VAT inconsistencies.

But audit firm PricewaterhouseCoopers (PwC) has said the proposed VAA is likely to face legal headwinds on the basis that VAT legislation is prescriptive on the requirements for claiming of input tax.

According to PwC, the law requires that any VAT claimed as input tax should be incurred for purposes of making taxable supplies and that the claimant should be in possession of certain prescribed documentation to show entitlement to the claim.

“The law as currently written does not impose any obligation on the buyer of goods or services to ensure that the VAT charged to him or her by the seller is declared and paid to the KRA. The VAA, in our view, imposes this as an additional obligation on the buyers of goods and services,” said the firm.

“Further, the Tax Procedures Act, 2015 (TPA) allows taxpayers up to ?ve years from the date of ?ling a tax return to amend the tax return, if required. Accordingly, the con?nement of the VAT return adjustment period to 15 days appears to contravene the TPA.”

The firm said inconsistencies in the output tax charged by the sellers and the input tax claimed by the buyers do not necessarily indicate tax leakage.

“There are other factors that could lead to the exceptions, including exchange rate variances in case of foreign currency-designated transactions or partial recovery of VAT by the buyer owing to partial exemption (input tax apportionment).”

KRA said the system was meant to reduce the claiming of fictitious and or unsupported inputs by taxpayers, ensure data cleaning for proper filing of returns, actualise data-driven compliance in line with the transformation agenda, broaden the tax base and increase revenue.

Between July 2016 and December 2017, the taxman said about 27 per cent returns matched while about 73 per cent had inconsistencies.  

“It is clear that the VAT system in Kenya has not achieved its potential. The incidence of tax evasion and fraud has been significant and the VAA is being seen as a means to address this issue using data analytics and the technology available in the iTax system,” said law firm Bowmans Kenya.