Have Your VAT Tax Refunds Been Rejected?

Tax refunds claims are sometimes rejected. In this post, we will address the following:

VAT credits that qualify for refunds.
Why will the VAT refund claim be rejected?
What to do when a tax refund claim is rejected.

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Introduction to Tax Refunds

Taxpayers lodge VAT refund claims expecting to be refunded the VAT credits. Currently, all refund claims are lodged in i-Tax. This includes VAT refund, Income tax refund, and any other tax refund. To be refunded the VAT refund claims, the VAT refund claims go through three stages:

Preparation by the taxpayer.
Processing in KRA Refunds section.
Payment in KRA Finance department.

The purpose of this post is to explain the process of claiming VAT back. I often get questions on how to track my refund, get my tax refund, get my refund, etc. These questions are on VAT refunds, income tax refunds, unemployment tax refunds. This post is about rejection of VAT refunds in Kenya. This post does not include other refunds.

Errors in any of these three stages will result in delayed refunds. The Value Added Tax Act (2013) allows for claim and refund of VAT credits. VAT refund rejection only takes place in the second stage in the KRA Refunds section.

The VAT refund is only done when taxpayers lodges a VAT refund claim. That is, a taxpayer must ask to be paid the VAT credits. VAT refund claims are based on the VAT return balances. The monthly net VAT balance must be a tax credit for a taxpayer to qualify for a VAT refund claim.

In addition, the taxpayer must be operating the business. This is because the VAT system is an input-output system. However, other reasons will make VAT credits non-refundable. Hence, not all VAT credit balances are currently refunded under the VAT law.

VAT credits that qualify for tax refunds

A VAT return has VAT credits because the credit side of the VAT return s more than the debit side of the VAT return. The amounts on the credit side of a VAT return are refunded. According to the VAT Act (2013), only the specified VAT credit balances are refunded.

The VAT credits currently refunded are balances from the following (Please note that this list can change from time to time)

Zero-rated sales in the Second Schedule of the VAT Act (2013).
All exports irrespective of whether they are zero-rated locally or not. However, it is essential to check the occasional changes. For example, from the Finance Act 2021, all exported services are VAT exempt.
VAT paid in error.
VAT in bad debts after the specified period, currently after three years.
Withholding VAT (from 2019).

Since 2015, all VAT returns have been submitted on i-Tax. Since VAT refund claims are based on the balances in the VAT returns, it means that for a VAT refund claim to be paid, the VAT returns you submitted should have the same information as the current detail on i-Tax.

However, the VAT return you used when lodging the VAT refund claim can be different from the current VAT return in i-Tax because of an amendment after submitting the VAT refund claim for payment.

This is often because of an amendment after submitting the VAT refund claim for payment.

This is the main issue that causes problems in VAT refund claims and, hence, rejection.

Who amends VAT returns?

A VAT return summarizes the VAT activities in a tax period. The two main activities are purchases and sales. There are also other activities like credit notes, credit carried forward, amendments, etc.

For VAT purposes, the tax period is one calendar month. It is a legal requirement for every VAT taxpayer to file a VAT return for every tax period. The VAT return acts as the self-assessment.

A VAT return can be filed either as:

An original VAT return by the taxpayer.
An advance VAT return by the taxpayer as required by the Commissioner.
A default VAT return by the Commissioner when a taxpayer fails to file a VAT return.
An amended VAT return.
An amended return of an earlier amended VAT return.

Only an original VAT return and an amended VAT return can be amended. The VAT returns will be amended because of two main reasons:

When a taxpayer realizes they made errors in the composition and amounts in the VAT return.
After a tax audit, a taxpayer is asked to amend the VAT returns by KRA, or the return is amended by KRA if the taxpayer has already amended the VAT returns. The tax audit can be a compliance tax audit, an in-depth tax audit, or a tax investigation.

Amended VAT returns are also amended. All amended VAT returns can be amended again at the instigation of the following:

Tax Commissioner.
The Tax Appeals Tribunal.
The High Court.
Court of Appeal.
The Supreme Court.

Note that the returns are not amended in case of an advance VAT return or a default VAT return, but the taxpayer is asked to file an original VAT return to replace those returns.

Why will the VAT refund claim be rejected?

Since all VAT returns are currently made in i-Tax, every time a change is made in the i-Tax system, the latest information/data is available in i-Tax. Hence, if VAT return details are amended, there will be inconsistencies between the VAT return information used to lodge the VAT refund claim and the current VAT return.

The latest information in the VAT return will make the i-Tax flag any attempts to process any VAT refund claim. The refund claim will be automatically rejected because of the inconsistencies.

The inconsistencies between the VAT return you submitted when lodging the VAT refund claim and the VAT return in the system could be caused by either of the following:

VAT amendments by the taxpayer.
Amendments resulting from a tax compliance audit.
Inconsistencies due to VAT Auto Assessments (VAA).

What to do when a Refund claim is rejected

Since a VAT refund claim with inconsistencies in the data cannot be processed, it will be rejected. Once this is done, you will get the details of the rejected claim through your email.

You will be expected to do the following:

Amend the details in the VAT refund claim to be consistent with the current information in i-Tax. For example, if you amended the original VAT return, you should include that VAT return.
Reapply the VAT refund claim by lodging the same documents but with the changes. i-Tax should accept the VAT refund claim because it is a re-application even though it is past the mandatory period. Contact KRA for assistance if you cannot reapply for the VAT refund.

It is essential to note the following:

If you had amended the VAT return once, you could not amend the VAT return a second time. Taxpayers are only allowed to amend a VAT return once.

In this case, you will go to your Tax Services Office (TSO), the tax station where your Personal Identification Number (PIN) is located, and seek assistance from your relationship manager. The TSO is your tax base.

Your relationship manager is a person who is in charge of your tax file. The relationship manager will assist you. It is essential to know your relationship manager at all times because of any other tax queries that you may have.

Once you re-lodge the VAT refund claim, the claim will follow the normal process. The VAT refund claim application will be:

Processed again, where the refund claim will be examined for compliance.

2. If the refund claim is found payable, it will be taken to the Finance office. The total refund claim amounts can be paid, or part is paid. You will be informed on the way forward about the unpaid refund claims amounts.

3. If the full refund claim or part of it has other outstanding issues, it will be rejected again, and you will be guided on the way forward.

Conclusion

Taxpayers lodge VAT refund claims to be refunded the VAT credits. However, the refund claims may not be processed due to various issues that may result in the VAT refund claim being rejected.

Since refund claims are currently being lodged online in i-Tax, they are also rejected through i-Tax. If a VAT refund claim is rejected in i-Tax, the taxpayers should address the reasons for the rejection and re-lodge the VAT refund claim.

Questions