The government on Tuesday suspended all tax reliefs in a move that will see several firms that previously enjoyed tax breaks start paying taxes and those awaiting refunds facing an uncertain future.
Kenya Revenue Authority (KRA) Chairman Anthony Mwaura said the radical move is aimed at enhancing the current processes related to the payment of tax refunds, exemptions, waivers and abandonments.
The shock announcement last evening left firms awaiting processing of refunds running into billions of shillings from the KRA in limbo.
But KRA said the move to suspend tax reliefs, which is backed by the National Treasury allows the taxman to "audit and enhance the tax relief processes and procedures."
"In a bid to enhance the current processes related to the payment of tax refunds, exemptions, waivers and abandonments, the Kenya Revenue Authority (KRA) in concurrence with the National Treasury and Economic Planning has suspended all tax relief payments with effect from February 28, 2023 until further notice," he said in a statement.
"In the past five years, KRA has granted tax reliefs and incentives totalling Sh610 billion, with an average of Sh122 billion per annum," added Mr Mwaura.
A tax relief is an incentive that reduces the amount of tax that a person has to pay.
It is designed to help individuals and businesses reduce their tax burdens or resolve their tax-related debts.
Tax reliefs may be in the form of universal tax cuts, targeted programmes that benefit specific groups of taxpayers, or initiatives that bolster particular goals of the government.
Tax relief programmes and initiatives help taxpayers reduce their tax bills through tax deductions, credits, and exclusions. Other programmes help taxpayers who are behind on their taxes settle their tax-related debts, potentially avoiding penalties in the process.
Analysts said the shock move by KRA would leave businesses that were expecting refunds will serious cash flow issues.
"There are billions of shillings due for refunds and a sudden stop to this process would jeopardise business operations," said Kunal Ajmera, the chief operating officer of consultancy firm Grant Thornton.
The suspension comes at a time KRA has been under pressure from the new administration to seal revenue leaks and boost State coffers to enable Treasury to wean itself off reliance on public debt.
Mr Mwaura also said the current suspension and ongoing review of tax reliefs are aimed at increasing the impact of tax expenditure on economic growth.
"This will be achieved through minimising tax expenditure and aligning it with international best practices for better internal revenue," said the KRA chairman.
"KRA is optimistic that the enhancement of the tax relief process and procedures will offer a permissible issuance of tax exemptions; it will also ensure equitable processing of tax reliefs."
The Kenya Kwanza administration has in the past accused powerful officials and wealthy individuals and businesses of reneging on their tax obligations due to their rich status, putting pressure on KRA to act.
“Beginning with William Ruto, everybody must pay tax. This is not the ‘animal farm’ where some are more equal than others,” said President William Ruto recently, signalling there would be no sacred cows in payment of tax.
The cash-strapped new administration plans to increase tax revenues as a percentage of the gross domestic product (GDP) from 17.3 per cent over the current financial year to 17.8 per cent in the 2023/24 financial year.
The latest official data shows that tax collection in the six months of the current financial year fell short of the new government’s target by Sh43.2 billion.
This deals a major blow to President Ruto’s revenue collection plan to fund his costly campaign promises.
The KRA collected a total of Sh985 billion between last July and December in taxes, falling short of the target of Sh1.028 trillion that the National Treasury had set for the period.
Experts said the radical move to stop refunds will hit businesses hard.
"This is quite serious. As far as stopping exemptions, I can understand that it is the tax authority's prerogative and there might be pressure from IMF (International Monetary Fund) as these exemptions are not serving the purpose, but suspension of refunds is quite concerning," said Mr Ajmera.
"The current process requires due audits to be done before they can be approved. I don't know why there is a blanket suspension on all refunds as this will have serious implications for businesses. What is also not clear is what happens to those refunds that were approved but now will be suspended due to this announcement."
But Mr Mwaura said the suspension is part of the government’s strategy to seal revenue leakage and enable KRA to mobilise more taxes towards the country’s economic growth.
He said it is also part of the aggressive revenue mobilisation plan aimed at enhancing revenue collection and redirecting resources to finance priority growth-supporting programmes.
"It is also part of the aggressive revenue mobilisation plan aimed at enhancing revenue collection and redirecting resources to finance priority growth supporting programmes," he said.
On Sunday, Mr Mwaura said KRA had as late as last week paid tax refunds amounting to Sh5 billion to some unnamed firms dealing with milk and bread in the country.
Treasury had recently argued that going forward there is a need for a delicate balancing act on the usefulness of the incentives through “management and monitoring of the tax incentives to safeguard the tax base and ensure value for money.”
Massive tax breaks granted to various parties under the law, including foreign and local investors, the military, and the Kenya Police, force the taxman to forfeit billions of shillings in import duties and other taxes every year, official data shows.
The Treasury in the past estimated that the KRA loses about Sh369.6 billion every year to cumulative tax exemptions and incentives.
The country’s tax laws provide for various tax breaks. These include; tax exemptions, tax deductions, allowances, tax deferral and concessional tax rates or timing rules, such as accelerated depreciation of capital assets.