It is all over the media that taxpayers in Kenya are owed kshs 20 billion in the form of VAT refunds. This figure could be more or less. It is all over the media that taxpayers in Kenya are owed kshs 20 billion in the form of VAT refunds. This figure could be more or less.
However, KRA promised to pay kshs 2 billion in the next few days. Kshs 2 billion is a mere ten (10) per cent of kshs 20 billion. This is a drop in the taxpayer’s current financial drought.
What VAT tax refunds?
Many people do not know the reasons why some taxpayers are refunded VAT. Because of this lack of knowledge, there is the perception that taxpayers are kind of given free money by the government and they do not deserve the refunds.
In the VAT Act 2013, there are three situations when a taxpayer is refunded VAT. The first situation is in the case of bad debts, where after three years and before the end of five years, a taxpayer can claim the VAT amount in the bad debt. In this case, the taxpayer sold goods or services and charged VAT.
The buyer did not pay the taxpayer, who is required by law, to account and pay any due VAT for all the VAT charged within twenty (20) days after the closure of the tax period (calendar month) when the sales took place. The taxpayer is refunded what he/she had paid to the government but was not paid by the buyer of his/her goods or services. Effectively, the taxpayer paid VAT on behalf of the buyer.
This means that the taxpayer sold goods at a price less than the VAT amount.
The second situation is where tax is paid in error either by the taxpayer or on behalf of the taxpayer. A taxpayer can use the wrong VAT rates, wrong classification etc., which will result in the taxpayer paying VAT in error. The taxpayer can seek a refund because that is not the VAT that was supposed to be paid.
Also, a customer can pay VAT in error on behalf of the taxpayer. For example, with the Withholding VAT system, some customers, particularly County governments, have on occasions withheld six (6%) VAT and remitted the same to KRA, yet the supplier is not VAT registered. The VAT erroneously paid on behalf of the taxpayer is refundable.
The third situation is when a taxpayer supplies zero-rated goods and services listed in the Second (2nd) Schedule of the VAT Act (2013) and sometimes in the Kenya Gazette. Supplies in the 2nd Schedule are categorized as zero-rated supplies, either supplied locally or exported. The Cabinet Secretary (CS) to the National Treasury can also Gazette certain supplies which will be included in the VAT Act later when it is amended, often after reading the National budget.
Zero-rated supplies mean the taxpayer charges VAT at zero (0%) per cent. The taxpayer will collect zero (0) VAT from the buyer. However, the taxpayer will have been charged VAT at the rate of either zero (0%) per cent, eight (8%) per cent or sixteen (16%) per cent when procuring vatable goods and services. The taxpayer has no output VAT to claim back the input VAT from purchases.
Under the VAT tax system, the VAT paid on purchase should be offset against the VAT charged on sales within twenty (20) days after the end of the tax period and any balances remitted to KRA. Any excess input VAT is either carried forward or claimed as VAT refunds. Taxpayers who sell zero-rated goods and services do not have any output VAT they have collected that they can offset the input VAT which they have paid on purchases.
This is why taxpayers claim the VAT refunds from KRA, assuming that the sellers accounted for the VAT.
Essentially, VAT refunds are the input VAT that the taxpayer is supposed to claim every calendar month before the 20th of the following month. Unfortunately, the refunds are sometimes paid after even five (5) years. Currently, some taxpayers are owed tax refunds which they claimed in 2015.
The input VAT is the taxpayer’s operating capital. When taxpayers continue to lodge VAT refund claims and are not refunded, the continued delays mean that the government continuously removes operating capital from refund claimants, notably the exporters. The delays in VAT refunds amount to punishing the suppliers for selling zero-rate supplies, yet the government has reasons for zero-rating the supplies, such as making supplies available for pro-poor policies, zero-rating the presidency office, making Kenyan exports internationally competitive etc.
The difference between the VAT refunds from zero-rated supplies and the other VAT refunds is that the taxpayer paid VAT to his/her suppliers in the zero-rate based VAT. This means that before KRA pays any VAT refunds claimed, the amounts must be established to be payable. Establishing whether the claimed tax refunds are payable is first by examination of the provided documentary evidence. KRA has provided a list of documents required for this exercise. For example, a certificate of export (COE) is one of the documents required to be provided.
COE is at the centre of today’s VAT refunds problem.
In this post, we will look at the COE to demonstrate the link between the VAT refunds, tax revenues and the status of the Kenyan economy.
The Certificate of Export problem
A certificate of Export (COE) is issued by the Customs Department of KRA. However, KRA requires that exporters provide the COE when claiming VAT refunds based on exports in the Domestic Taxes Department, another department of KRA. This means that COE is issued by one department and presented to another department of KRA. It is a document from the same organisation: from the left hand to the right hand.
If the Customs Department has not issued the COE, the taxpayer cannot produce the COE in the Domestic Taxes Department for VAT refunds. Therefore, requiring the taxpayer to provide the COEs leaves the exporters at the mercy of KRA, enabling the organization to manipulate the whole VAT refund process. Yet, manipulation of the operations of tax systems is not a core mandate of KRA. The core mandate of KRA is to facilitate the operations of the tax systems.
COE is essentially supposed to be a confirmation that exports took place. Clearing and Forwarding Agents take various documents, including C17B, exporters invoices etc., to KRA Custom’s offices for the COE to be issued. Clearing and Forwarding Agents complain that the Customs office that is supposed to issue the COEs is understaffed. Hence, the COEs are never issued on time.
This means that over time, the Clearing and Forwarding Agents have continued taking export documents to the Customs office without receiving COEs. Hence, the export process is never completed. Currently, some companies have COEs for 2015 that are still pending, and they cannot be paid the VAT refunds.
Exporters lodge VAT refund claims in Domestic Taxes Departments (DTD). However, when the exporters lodge the VAT refund claims, the processing of the refund claims cannot be completed because the exporters do not have the COEs despite the goods having left the country and the taxpayer has received payments for the same exports.
Effectively, when a taxpayer does not have a COE, KRA is telling the taxpayer that the export transactions they have been engaging in with their foreign customers are not exports. The message is loud and clear… the taxpayer did not export anything …. and … the refund claims are fraudulent.
Therefore, … unless the exporters provide the COEs, whatever they claim to be experts will be treated as local sales subject to VAT at the rate of sixteen (16%) per cent. The taxpayers will be assessed the principal VAT amounts, late payment penalty, and interest. Also, the exporters will be penalised for fraudulent refund claims, which is twice the amount claimed.
All this is for lack of a document that is supposed to be issued by the same organisation asking for it.
This problem of COEs has persisted for some time, with KRA insisting on the COEs. In normal practice, no problem has only one solution. The COE problem begs several questions:
1. What is the export?
2. What evidence does a taxpayer produce to KRA for an export to be treated as an export?
3. Are other documents providing evidence that an export took place apart from COE?
4. Since COEs are based on C17Bs, in the presence of KRA’s failure to issue COEs, isn’t C17B sufficient evidence for an export?
5. Why is KRA not using C17Bs to clear the VAT refunds while it takes its sweet time to issue the COEs?
6. Should we as a country do away with the VAT refunds
The COEs problem is essentially administrative, not a technical problem. Hence, it does not warrant delays in the VAT refunds. This problem of COEs could have been avoided if the exporters had insisted that the Clearing and Forwarding Agents complete the export process by availing the COEs from KRA. The Clearing and Forwarding Agents could have resolved the issue with KRA and promptly resolved the problem.
Clearing and Forwarding Agents are authorised by KRA. Unfortunately, they adopted the very normal habit of Kenyans; we only act when pushed to the corner, and we are not proactive at all. Of course, KRA had no reason to sort out the problem; no one complained about the lack of COEs.
In the meantime, exporters were paying for the provision of incomplete services by the Clearing and Forwarding Agents. The exporters should understand that according to KRA, an export is not an export unless a COE is issued.
This problem of lack of COEs is not only affecting exporters who are claiming VAT refunds. Even those exporters who are not claiming VAT refunds will be affected. The best they can do is to require their Clearing and Forwarding Agents to complete the export process and provide them with COEs. If any Clearing and Forwarding Agents have closed the shop, the exporters may be in trouble. Exporters should henceforth not pay Clearing and Forwarding Agents for providing export services until they provide COEs.
Media reports show taxpayers have not been refunded kshs 20 billion VAT refund claims. This problem of COEs is at the heart of this VAT refund claim. A critical examination of the problem points at three parties who should bear the blame:
- Clearing and Forwarding Agents for failure to insist on getting the COEs from KRA on time.
- KRA for failure to issue the COEs on time and
- The exporters for not demanding the Clearing and Forwarding Agents complete the export process and provide the COEs from KRA.
Unfortunately, KRA and the Clearing and Forwarding Agents are not suffering. The taxpayers and the Kenyan economy are suffering.
Who are the taxpayers?
These taxpayers who should be refunded all this money and suffering, who are they? These taxpayers are mostly exporters. However, these taxpayers are also unique in various aspects. The following are three major aspects of many exporters.
a. Large businesses
Most exporters have high annual turnovers. Most are served in KRA’s Large Taxpayers Office (LTO) and Medium Taxpayers Office (MTO). This means they are businesses whose operations are conducted every day twenty-four seven (24/7), three sixty-five days a year. Most of the business is not new and has matured or is at maturity. Therefore, these businesses have developed operating systems and will not close shop tomorrow. They are stable businesses tested over time and have a massive economic influence.
b. Human capital intensive
Most exporter businesses are labour-intensive, meaning that they employ hundreds of people. These people, too, have many dependents who rely on them. For example, the flower sector in Kenya is one of the largest employers compared to other economic sectors. When one exporter has problems, the labour industry and spill-over effects are affected (remember Karuturi’s case).
c. Cash intensive
Many exporters have large scales of operation and are large, thus requiring a lot of money for their daily operations. The availability of cash flows is at the heart of their very survival. Anything that affects the cash flows affects their survival. The cash flows are the operating capital. The companies borrow from local and international banks because of cash flow problems. The financing cost eats into the taxable revenues resulting in lower taxes. All exporters operate on bank overdrafts.
Delayed refunds make taxpayers suffer. However, in the whole business of delayed refunds, there are beneficiaries.
Beneficiaries of delayed tax refunds
In life, when a person suffers, another person benefits. The question is, who is benefiting as the taxpayers suffer in this VAT refund issue? There are two main beneficiaries of the delayed refunds, but one is the ultimate beneficiary.
a. The government
The delayed refunds are interest-free funds to the government from taxpayers with zero-rate supplies. This fact informed the decision to impose the 2% interest per month on any amount of refunds not paid within two years. However, two years is long and unfair for the following three reasons.
First, VAT is an output-input tax system. Those taxpayers who have output VAT can deduct the input VAT at the end of every tax period, which is one calendar month within twenty days after the closure of the tax period. However, those with zero-rate supplies have to wait sometimes up to five (5) years to get the input VAT.
Second, the input VAT that is claimed by the exporters as VAT refunds is their operating capital. The operating capital is used to generate income for the businesses. Delaying the VAT refunds means the government has withdrawn operating capital from the businesses, leaving them with no operating capital. When the government withdrawals operating capital from the business without refunding it on time, it behaves like a tick on the skin of a dying cow.
This withdrawal of operating capital leaves the businesses with no alternative but to look for other sources of operating capital. Even this borrowed operating capital at a cost (interest) is still withdrawn by the government. This is a double tragedy for the exporters. Their operating capital is withheld, and their borrowing capital is also withheld.
It does not make sense for the government to continuously withdraw operating capital from businesses because that will eventually collapse them. Essentially, the government-aided, by KRA, has been stealing (for lack of a better word) from the exporters but with the promise of refunding the money in the form of refunds. This was, however, not the government’s intention, but unfortunately, KRA’s actions have resulted in this very act.
Probably it is high time to relook at the whole issue of VAT refunds and KRA’s mandate.
Third, to be paid the VAT refund claims is a process that takes time and has various steps. The requirement for the payment of the 2% interest on late payments did not detail the point at which the count of two years starts. Two years is a very long time because other taxpayers who have 16% or 8% output VAT can claim the output within the month. The 2% interest is of little consequence to the taxpayers because they are not in the business of lending money to the government.
Though the government is a current beneficiary of the delayed tax refunds, this is only in the short term because of the negative effects of the delayed refunds on the economy far out ways the tax-free funds from the exporters. At the end of the day, when the economy is not performing, the government loses massively. Therefore, the government will be a net loser.
b. Money lenders
The ultimate beneficiaries of the delayed tax refund claims are the banks, financial institutions and anyone else, including individual lenders such as shylocks in the money market. For businesses to survive, they require operating capital. When the businesses exhaust their operating capital, they borrow. The borrowed money is not for free, but there is a cost in interest.
For example, assuming that the owners of all the kshs 20 billion that is held as un-remitted VAT refunds borrow an equivalent amount from money lenders, how much money in the form of interest have the lenders made in the last one year since this problem of COE started? The capped interest rate of approximately 14% per year translates to kshs 2.8 billion the lenders are getting from the affected taxpayers. This is an unnecessary cost to the exporters.
This begs the question: Is someone in the money market colluding with someone in the tax authority to ensure that the VAT refunds are not paid so that the money market sector can continue making money? Remember, anything is possible in this country. Allow the thought … today is Easter Monday, and all sins are forgiven, including this very “evil” thought.
Consequences of delayed Refunds
Though the government and money lenders benefit when the payment of tax refunds is delayed, the consequences are bad for the economy and survival of this country. There are several consequences of delaying tax refunds. The consequences are short-term and long-term. The following are some of the consequences:
a. Unequal treatment of taxpayers
VAT refunds are because a taxpayer does not have output VAT. After all, their supplies are zero-rated; hence, the taxpayer has to claim the input VAT from KRA, which takes much time to be refunded. Taxpayers with 8% and 16% output VAT can claim the VAT input monthly. In an ideal situation, the refund claims should be paid every month. This unequal treatment of some taxpayers is against the Taxpayer’s Charter and a human rights issue.
b. Increased cost of doing business
Delaying tax refunds increases business costs since taxpayers must borrow from money lenders to survive. This borrowing is at a cost. This increases the cost of doing business in the form of interest, the time taken to negotiate the financing facilities and the added stress that goes with seeking and paying the financing facilities.
Some of the costs can be monetized and recovered from the generated profits, thus reducing the taxable profits and the corporate tax payable. For example, the 14% interest on borrowings is monetizable. Other costs, such as related stress, cannot be monetized and will eventually affect the company’s operations.
c. Employment
Currently, Kenya has many unemployed persons in all age brackets. Therefore, the creation of employment is critical for the country. Employment creation is one of the four pillars of development by the Jubilee government. The majority of export businesses are labour-intensive. When their VAT refunds are delayed, the exporters do not have operating capital, including money for salaries and wages.
Businesses can struggle to pay salaries and wages for only a short time. They are forced to scale down operations and sack employees if they do not get the VAT refunds on time. Therefore, delaying tax refunds is undoing the efforts being put in place to create employment in this country. This is sabotage of government efforts to create employment. This is against the 4 Pillars of Development and Vision 2030.
d. Business Survival
Operating capital is important for business survival. A person sets up businesses with their equity and loans, hoping to turn round the money and make profits. When the operating capital is taken away from the businesses by the government, which informs of input VAT and is not refunded on time, the businesses cannot survive. They will collapse. The government should be encouraging business survival, not killing businesses.
e. Business expansion
Businesses operate hoping to make profits and expand their operations. Most of the money in tax refunds is the company’s operating capital. Delays in refunding these monies will stifle any expansion plans for the businesses. This country has been courting international investors to come and invest in the country. Yet, the government’s actions towards taxpayers already in the market are discouraging. No one will come to set the business in this country when the talk is more than action.
f. Enslavement of exporter’s businesses
The majority of businesses with delayed VAT refunds operate with bank overdrafts. Although interest rates are currently capped, many businesses operate with profit margins of less than the interest rate at 14% banks charge. When businesses take loans from money lenders, any profits will go towards paying the bank interest.
Therefore, exporters are essentially working for money lenders. Hence, instead of the businesses working towards their growth, they are working for the growth of the players in the money market. Every day that flower farm worker wakes up, they do so to go and work not for their employers to expand the business and pay them better salaries in the future but to work so that his/her employer can get money to pay off the money lenders’ loans that the employers have taken to continue operating since the employers operating capital has been taken by the government in the form of input VAT which is not refunded on time.
The workers should stop complaining that their employers are not increasing their salaries currently. It will also not happen shortly. This will increase poverty levels in the country. Various sectors of the economy are supposed to be complementary.
g. Tax-related stress
Tax-related stress is a hidden cost. Though this cost cannot be monetized, it is present and will eventually affect the company’s operations. Dealing with tax refunds is very stressful for taxpayers. Many taxpayers view it as a headache. The stress is because of the uncertainty of when the refunds will be remitted, the lack of financing and the financing costs. The resultant stress affects the business and the individual taxpayers, notably the company directors. Stress affects the business and the person’s health. Ultimately, this results in low output and diseases such as high blood pressure and diabetes etc. and the associated costs.
h. Tax revenues
Businesses must have their own or borrowed cash to operate. Without cash, it becomes difficult to operate. Taxes are generated from business operations. Without business operations, there will be no tax. Therefore, delaying VAT refunds means businesses will not have the cash to operate, will have low incomes, and will have no taxes to pay. This will affect the tax revenues of the government. Also, businesses are discouraged from operating in the country. Every negative thing about tax refunds affects business operations and the tax revenues budgeted in the financial year.
i. Economic growth
Our economy is largely funded by tax revenues. Therefore, when taxpayers are not refunded VAT on time, their business operations will be affected, and they will not generate adequate income to pay taxes. This will result in the country generating less than the budgeted tax revenues, and this will affect government development plans hence the economic growth in the country. A certain percentage of Kenya’s current economic status has been attributed to the failure to refund the claimed VAT amounts.
There are many other consequences for delaying tax refunds.
The concern
Delaying tax refunds is affecting all facets of Kenya’s republic. Though the blame for the delayed tax refunds is on the taxpayers (exporters) who paid the Clearing and Forwarding Agents without completing the export process, the Clearing and Forwarding Agents who did not complete the export process and KRA for not allocating adequate resources to issue the COE’s on time, KRA carries the bigger burden.
KRA is a government body charged with matters of tax in Kenya. KRA’s actions should support the government’s efforts to develop the country, not the contrary. Perhaps, it is time to re-read the KRA Act Cap 469 and all the amendments. The Customs Department and Domestic Taxes Departments are KRA departments. Taxpayers cannot issue themselves the COEs; they have to be issued by KRA. When KRA does not issue the COEs to the exporters, where does KRA expect the exporters to get the COEs from?
Refusal by KRA to refund the VAT claimed brings into question the validity of the export data provided by KRA to the government and various organizations. By insisting on the COEs, KRA is questioning the validity of the exports. Yet, KRA has already reported the same data as exports to the government, government institutions such as the Central Bank of Kenya and government bodies such as the Kenya National Bureau of Statistics. Kenya’s export data is also available from such organizations as the World Bank, IMF etc. Organizations like the Kenya Flower Council and Kenya Association of Manufacturers (KMA) have also provided export data.
Essentially, KRA is saying that all this export talk is a lie because it is not sure of the validity of the exports. By continuing to insist on the COEs, KRA acknowledges that it has provided “fake” data. Why? It is not sure of the validity of the exports. Therefore, KRA has lied to the government, Kenyans, and the world about our exports. Hence, all policies crafted and implemented by anyone, including the Kenya government, are based on wrong data, and they should be reexamined and adjusted after KRA issues the COEs.
Therefore, Kenya should stop operating until KRA issues the COEs and the correct data.
However, this is not the time for a blame game but for action and solutions. Taxpayers are entitled to get the VAT refunds as detailed above. There is a lot at stake for the country. Taxpayers are expected to get the COEs from the Clearing and Forwarding Agents who will get the COEs from KRA. Yet the same KRA will not refund the VAT claims due to a lack of COEs which they have not issued. The problem and the solution rest with KRA.
The unwillingness by KRA to sort out this problem is unexplainable unless somebody somewhere is working for the ultimate beneficiaries, which are the money lenders in the economy at the expense of the whole country … and the person is benefiting massively. There is nothing for free!
This smells of ugly capitalism and the epitome of state capture!
Taxpayers are principals in tax matters, and KRA is an agent of the other tax principal, the government. Taxpayers have a right to tax refunds as long as the tax refunds are established to be payable. Since KRA has provided export data to its principal, the government, thus acknowledging the exports as genuine, can the other tax principal, the taxpayer, reclaim his/her position?
Export validity does not change depending on the tax principle. The tax refund should not be withheld based on the COEs because KRA has already reported the exports as valid exports to the government unless KRA will also withdraw the export data reported to the government.
COEs problem is an administrative problem, not a technical problem. It is not in dispute that the goods and services left the country. It is also not in dispute that taxpayers have already received payments for the goods exported. The only problem is the lack of COE.
Conclusion
Since Kenya is greater than any single person or persons and Kenya’s interest supersedes any single person’s interest, the VAT refunds should be paid without the continued demand for the COEs. The following are our reasons:
- There is no cut-off period from when the COEs are required.
- There is no timeline within which KRA should issue the COEs.
- There is no requirement that KRA not release any data as export data to the government unless COEs have been issued.
- Other measures of export evidence are ignored.
- KRA’s systems are not integrated for data collation.
- The whole issue of tax refunds should be re-looked at for the benefit of the taxpayers and the country.
- KRA has already provided export data to the government.
- This is an administrative KRA problem, and only KRA can solve it.
Note:
Since this is a tax education website, we will not hesitate to point out when things are wrong.
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Disclaimer
This post is for a general overview and guidance and does not in any way amount to professional advice. Hence, www.taxkenya.com, its owner or its associates do not take any responsibility for the results of any action based on the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. The tax industry in Kenya is very dynamic.
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