Honest taxpayers to get priority in tax refunds

By James Anyanzwa

Nairobi, Kenya: Taxpayers with integrity could be the biggest beneficiaries of the government’s new system of dealing with the backlog of Value Added Tax (VAT) refunds. In an attempt to reduce accumulation of unpaid VAT refunds estimated at Sh30 billion, the Kenya Revenue Authority has embarked on a new system of rewarding honest taxpayers.

This is by giving them the first priority in terms of payment. The Kenya Association of Manufacturers says the new system dubbed ‘Authorised Economic Operator would also help ward off unethical tax behaviours.

“This system is just a means through which tax payers with integrity are being recognised and rewarded by the taxman,” Polycarp Igathe, the association’s chairman told The Standard yesterday. “The major beneficiaries are those taxpayers who have earned a lot of trust from the taxman.” Unpaid tax refunds has remained a major challenge to businesses. This even as firms attempt to stay afloat in a country strongly criticised for its high cost of doing business. The National Treasury however says that the huge backlog of the unpaid VAT refunds is as a result of the slowed process of auditing claims. “The challenge is with the auditing process. It will take a while because there are so many people asking for the VAT refunds. It is just a question of speeding up the auditing process,” Cabinet Secretary Henry Rotich (pictured) says. 

Tedious process of obtaining refunds from KRA means that affected businesses have to finance the VAT out of cash generated from operations. They can also arrange additional working capital by borrowing from commercial banks thus increasing their cost of business in addition to interest costs.  The requirement that all VAT claims be audited, validated and vetted has slowed down the process.  It is argued that audits tend to take longer than anticipated and in some instances audits have proceeded years without conclusion.

The growing volume of VAT refunds has thrown the private sector fraternity onto a collision course with KRA accusing the taxman of applying double standards in the treatment of taxpayers.   The delays in payment of the refunds have become a major cash flow challenge in business operations.

The process of clearing this backlog has further been complicated by the Government’s decision to abolish the Withholding VAT system in July 2011 where government ministries, departments, and parastatals were used as tax agents.

These delayed payments have tied up huge capital straining liquidity and business growth in the face of high charges for bank overdraft facilities.

Tax refunds have remained a thorny issue to resolve. KRA has been faing criticism from companies which say they have been forced to seek costly loans for their operational expenses.

 They have also argued that KRA should be penalised and pay the refunds with an interest. According to KRA the new value added tax (VAT) law would help reduce the number of claims.