Tax refund deadlines must be imposed on KRA too

By Maurice Wangutusi

The Kenya Income Tax Act will have to be amended, if taxpayers are to benefit from some of the changes announced in the Budget.

The law should impose deadlines for the Finance Minister and the Kenya Revenue Authority (KRA) respond to applications for extensions and waivers.

As it stands today, the law is too one-sided, imposing stringent compliance rules on taxpayers, without requiring the same from Government. One of the cardinal principles of taxation the world over is that taxation should be equitable in its application to those affected by it. The other very important requirement is that the tax law should be clear and certain.

Experience has shown that where the tax law is clear and unambiguous the rate of compliance is much greater than where this is not the case.

However, the Kenyan Income Tax Act is too soft on the Kenya Revenue Authority and the Minister for Finance.

Take the case of the carry forward of business losses incurred in a given year of income being available for carry forward to future years. The position, up to June 12, was that where a business made a tax loss for a year of income, it was permissible for such tax loss to be carried forward indefinitely for use against future taxable income until it gets exhausted.

The Minister for Finance changed this last Thursday. With effect from Friday last week, where a business makes a tax loss, it will only become an allowable deduction against its total income for that year, and the next four succeeding years of income.

What this means is that if a business is unable to utilize its tax losses over a five-year period, the unused balance is lost, unless the business owner applies to the Kenya Revenue Authority for an extension.

five-year limit

This is a welcome gesture, but may not assist taxpayers faced with this problem, because it does not impose any time limit within which the Minister must respond to the application request. Similarly, the new tax provisions do not state what will happen to the taxpayer‘s position, whilst he or she awaits the Minister’s decision.

Take for example a taxpayer who has a tax loss brought forward over the past five years of say Sh1 million.

In the sixth year his business generates taxable income of Sh500,000. The taxpayer applies for an extension to utilize the tax losses brought forward beyond the five-year limit.

Should the taxpayer assume that the Minister’s decision would be positive and therefore pay nil tax for the sixth year?

Or should such person take the worst-case scenario and pay tax on the income of Sh500,000 as he waits for the Minster’s decision?

Similarly, assume that the taxpayer does not pay the tax and it later transpires that the Minister does not approve the application to extend the allowability of the losses brought forward from previous years.

Should he be liable to penalties and interest for paying his tax liability for the sixth year late? These are some of the issues that should be addressed, before the Finance Bill 2009 is enacted into the Finance Act, to minimize stress on taxpayers.

Another hurdle is remission of penalties and interest. Where, for whatever reason, they have not paid tax by the due date, taxpayers are liable to late payment penalties and interest.

penalties

The Act permits taxpayers in such situations to apply for a waiver of the penalties and interest, provided they have good reasons for the delay in paying the taxes due.

The KRA can waive penalties and interest of up to Sh1.5 million. When they exceed this, the power to waive lies with the Minister for Finance.

Here, again, the legislation does not give the KRA and the Minister a timeline in which to respond to taxpayers’ applications for such a waiver.

The unfortunate thing is that while KRA and the Minister may take months or even years to rule on the applications for the waiver, the penalty and interest amounts involved are deemed to be tax, and continue to attract additional interest.

The additional interest is at the rate of 2 per cent per month, compounded. Needless to mention, such penalties and interest are high and punitive, and can be a real hurdle in the path of tax compliance.

tax return

Finally, there is also the issue of errors in the self assessment forms or returns submitted to the KRA by business entities.

The Income Tax Act allows taxpayers who pay excessive tax, due an error in their tax returns, to apply to the KRA for a correction and a refund.

For such application to be valid, it must be lodged not later than seven years after the expiry of the year of income to which the application relates.

Typically, while imposing a time limit on the taxpayer, the law does not set a timeline for KRA to resolve the matter.

In practice the KRA takes years to respond to these cases.