Kenya is losing billions each year in revenue as traders use fake invoices to avoid paying taxes.

A report by an international think tank details how traders are under-declaring or overestimating the value of import and export goods and cheating the taxman out of billions of shillings in taxes.

Importers and exporters are said to declare lower values of goods to pay less VAT and custom duties or inflate the values, thereby reporting lower profits. This translates to less income tax.

“We find that Kenyan imports of cereal from Pakistan, mineral fuels from India and, more generally, imports from China to be particularly prone to potential revenue loss to the Government of Kenya due to under-invoicing,” said Global Financial Integrity (GFI).

The report analysed trade figures between Kenya and her bilateral partners and estimated the country lost Sh90 billion in 2013 alone, which GFI said was conservative and the loss could be much higher if other trade data is factored in.

“For 2013, we can reasonably identify potential revenue losses in excess of $907 million (Sh90 billion), or about eight per cent of total Kenyan Government revenues,” said the think tank.

Under pressure

The report comes at a time the Kenya Revenue Authority is under pressure to broaden the tax base and meet the cash collection targets needed to bridge the country’s budget deficit.

In the Finance Bill 2018, Treasury introduced new levies, including excise and value added tax (VAT) on various sectors aimed at reducing a Sh600 billion deficit occasioned by a public debt burden that has ballooned to Sh5 trillion in the past five years.  

“The portion of revenue lost due to import mis-invoicing is Sh77 billion,” said GFI. “This amount can be further divided into its component parts: uncollected VAT tax Sh32 billion, customs duties Sh23 billion and corporate income tax Sh21 billion.”

Lost revenue due to mis-invoiced exports in 2013 was estimated at Sh14 billion, attributed to lower-than-expected corporate income and royalties.

The analysis further revealed the bulk of lost revenue was as a result of under-reporting in just five product types.

“Those products and the related estimated revenue losses include mineral fuels (Sh1.5 billion), electrical machinery (Sh1.7 billion), vehicles (Sh1.8 billion), cereals (Sh2.1 billion), and worn clothing (Sh2.1 billion),” said GFI.

Some Sh14 billion was lost in the export of major commodities such as coffee and tea.

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