KRA starts installing new VAT system to catch tax cheats

Kenya Revenue Authority employee assists a client to file tax returns at the Nyeri regional office. [File, Standard]

Kenya Revenue Authority (KRA) expects traders to migrate to a new electronic register that captures and sends to the taxman all transactions, especially invoices, in real-time.

This has thrown traders into a fit of anxiety with many of them yet to comply with the strict requirements from the taxman.

“There is a lot of anxiety within the business community regarding the introduction of Electronic Tax Invoice by KRA effective July 1, 2022.” “It looks like many businesses will grind to a halt,” said a trader who did not want to be named.

Taxpayers will be required to keep and safeguard the data in the previously used Electronic Tax Registers (ETR) as the law requires them to keep the record for five years. With the new Tax Invoice Management System (TIMS), an upgrade of ETR, there will be the real-time transmission of data directly to KRA’s digital system, the iTax, at the touch of a button.

Suppliers of ETR had been given until January 15, 2022, to adopt the new ETR machines that are configured for real-time transmission of data to the taxman’s register.

TIMS, an upgrade of the current ETR, became effective in August 2021.

“The roll-out phase commenced on August 1, 2021and is expected to run for 12 months until July 31, 2022. Each VAT registered trader is expected to upgrade their electronic tax registers in line with the requirements outlined in the regulations within the set timelines,” said KRA.

Implementation of TIMS, which is expected to boost tax compliance, was to run up to July this year when full on-boarding of traders is expected to have been achieved.

“Consequently, suppliers of ETRs are notified to cease supply of Electronic Tax Registers that are not compliant with Value Added Tax (Electronic Tax Invoice) Regulations, 2020 effective January 15, 2020,” said KRA in a statement last year.

The intention is to ensure people only claim what is due when it becomes mandatory, according to Samuel Mwaura, a partner in charge of taxation services at Grant Thornton audit firm, in an earlier interview with The Standard.

Since 2005, traders have been on non-TIMS compliant ETR, where an initial increase in the 16 per cent value-added tax (VAT) collection was shortly eroded due to inherent technological shortfalls in the current ETR machines, said Deloitte, in an advisory in 2019.

Some of the shortfalls were due to tampering with the ETRs and mis-declaration or under declaration of sales transactions, pushing the KRA to streamline the system.

“This resulted in significant loss of revenue over the years, which directly impacted on VAT revenue administration,” added Deloitte.

VAT is one the most critical tax heads that the government relies upon to fund its budget with the taxman given a target of Sh583.2 billion, nearly a third of the total ordinary revenue, by end of June next year.

Legal basis

Those who do not comply with the regulations will be liable to a fine not exceeding Sh1 million, imprisonment for a term not exceeding three years, or both. The legal basis of TIMS is the VAT Act of 2013 and the VAT (Electronic Tax Invoice) Regulations, 2020.

With TIMS, if you invoice someone, the information of your sale will go to iTax directly and the purchase of expense will go to the other party directly on their iTax account.

Mr Mwaura said KRA is trying to ensure people pay VAT on the month that they make a sale and claim VAT on the month they have incurred a service or purchase of goods.

“The current ETR does not enable any data to be sent to iTax. You have to do a CSV file (file format that is not fully standardised) and do a self-assessment. But here there will be the real-time transmission of data directly to iTax at the touch of a button,” said Mwaura.