New VAT system nets 35 000 cheats despite outcry by audit firms

Caxton Masudi Ngeywo, Ag.Chief manager (Investigation Department) Kenya Revenue Authority demonstrating how they carry out their work. [Mbugua Kibera]

The Kenya Revenue Authority has defended its use of an automated system to police remittances from value added tax by large taxpayers.

It said the system had made it easy to flag tax cheats and bring them to book. The taxman said the new automated VAT system - VAT Automated Assessment (VAA) - had netted over 35,000 tax claims that could have defrauded it of Sh22 billion in January 2018.

According to KRA, over 35,000 firms had been claiming Sh22 billion in VAT refunds but they were not supported by evidence validating the claims.

Assessments for subsequent months might see KRA uncover more firms that have failed to remit VAT or made fictitious refunds.

The new system has been a source of concern among firms that collect VAT. They said it exaggerated the number of defaulters simply because some of them had not reconciled their accounts.

Audit firms too, have expressed their concerns, noting that KRA could have failed to capture all taxpayer information when migrating them from the manual to the automated system.

“In the auto assessments that we ran for January this year, we identified 35,876 persons who have been affected in one way or another, both the buyers and sellers,” said Caxton Masudi, KRA Deputy Commissioner, Policy and Tax Advisory.

“Invoices that were affected were 642,000 and the total value for all these invoices was Sh141 billion, which is quite a big value. Of this, the total unmatched input claims are Sh22 billion.”

He added: “We have raised 1,590 assessments worth Sh3.5 billion, out of which we have recovered Sh1.9 billion and are in the process of recovering the rest. This demonstrates the VAA works… this process of matching the invoices in the system works.”

Once the inconsistencies have been flagged, they are communicated to the affected taxpayers who are then expected to correct the information in the system.

This could be through making correct entries or introducing invoices that may have been left out. Tax experts said although this might see KRA increase collections on VAT, it would come at a great cost to taxpayers.

Firms will now have to invest in correcting the inconsistencies raised by the KRA system.

“VAT has not performed as well as it might… Given that the tax is a consumption levy that applies every time a consumer spends, there can only be two reasons for its poor performance - evasion is rampant and traders are simply not charging or accounting for the tax, and consumer spending is depressed. This may well be the case when the economy is not as buoyant as it could be,” said law firm Bowmans.

“The system the KRA is now using focuses on evasion, which while laudable, will make the administrative burden on an already beleaguered taxpayer much greater. The costs of reconciling the discrepancies are likely to be exorbitant with the need to hire people to carry out the task.” The firm said in the case of larger businesses, discrepancies could be in thousands.

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