KRA seeks simpler trade rules to stop tax evasion

Regional governments have been asked to harmonise and simplify trade policies to curb tax evasion that is fuelled by loopholes in the Northern Corridor. 

The commissioner general of the Kenya Revenue Authority (KRA), Mr Michael Waweru, asked the policy makers to consider collecting taxes from the first point of entry to boost revenue collection.

Securing the movement of the cargo along the corridor is a major challenge East African countries are facing, he said.

KRA earlier this year started an electronic cargo tracking system to monitor movement of transit goods from the dispatch at Mombasa port until they have crossed the Busia or Malaba border points to the landlocked region, but diversion still goes on.

The solution known as Hi-G-Data seal is installed by a radio frequency identification (RFID) solution developer: Hi-G-Tek Inc.

The new system, which is to be fitted on goods in transit, will replace the conventional mechanical seal.

It is also meant to do away with the current cumbersome escort of cargo to Kenya’s borders.

Through the physical escorts, the taxman has not been able to seal the loopholes that importers use to bring in goods purportedly destined for neighbouring countries, only to dump them in the local market.

Escort officers are sometimes used by unscrupulous importers to fraudulently certify exportation of the diverted goods, Mr Waweru said.

Despite increasing the security bonds for transit cargo to Sh10 million, KRA is yet to win the war on diversions.

The authority demands that transporters place a security bond of Sh10 million for goods in transit and such trucks are barred from carrying cargo other than those on transit.

But the security bond may not be a sufficient as a deterrent measure.

“Due to the insufficient security bond, it is profitable to offload the good into the local market as the amount of bond is considerably less than the actual taxes payable on the goods,” Waweru told delegates attending a recent trade facilitation workshop along the Northern Corridor held in Mombasa.

At the moment, it is hard to confirm the correct value, quantities and description of goods in transit.

Automating and integrating regional revenue bodies processes would be able to deal with such problems, he said.

Disparity of tax regimes and standards is another factor that leads importers to exploit loopholes along the Northern Corridor to evade tax.

“Importers have continued to exploit disparities in standards and tax regime within the region to conduct illicit activities,” Waweru said, adding that goods exported and the tax paid to the transit countries are smuggled back due to different excise tax rates among regional countries.

Recently, sources at KRA confirmed that the government was losing billions of shillings to tax cheats through dummy wines and spirits exports to neighbouring countries that end up in the local market.

Two months ago, the taxman launched an investigation against a leading manufacturer of industrial and methylated spirits for failure to remit over Sh200 million ($2.6 million) in excise duty.

KRA investigation department launched a probe into the scam, focusing on the porous border crossing points of Busia, Malaba, Chepkube and Suam.

“Our borders have stretches of unmanned land, sea and lakes which are continually exploited to bring in contraband goods,” Mr Waweru said, adding that the problem of the insecurity in most of these areas have exacerbated the problem.

Crucial information

The cartels that run the business employ hundreds of couriers to ferry back wines and spirits previously “exported” from Kenya to Uganda through the Busia and Malaba border points,, according to officials at KRA.

The smugglers exploit the tax differentials between the two countries.

In Uganda for instance, wines and spirits are subject to a 45 per cent duty while in Kenya, ad valorem rates of 65 per cent and 50 per cent are imposed on spirits and wines, respectively.

Used and non compliant vehicles for Kenya market are imported as Ugandan cargo and subsequently registered or smuggled back to Kenya, Mr Waweru said.

“Failure by revenue authority to exchange crucial information about the movement of the goods across the region has been exploited by unscrupulous importers force tax refunds and rebates under the pretext of exportation of the goods across borders in the region,” Mr Waweru said.

He said some importers mask their true identity.

They use paper companies and other nominees to mask their identity especially to conceal volumes of the trade, including illegal diversion of goods and smuggling.

Delays in cargo clearance by importers, Waweru said, was another challenge leading to compromise of some clearing procedures.

Failure by the importers to facilitate clearance of their goods leads to backlog of clearing procedures and congestion at the port of Mombasa.

“Undue pressure to clear the backlog has led to bypassing of critical custom procedures,” Mr Waweru said.

KRA is betting on a strategy to collect Sh545 billion out of the Sh866 billion needed in this year’s budget, 13.4 per cent higher than what was collected last year. Customs department collected Sh45 billion last year.

The authority has already missed the first quarter target, collecting Sh124 billion against an expected figure of Sh127 billion.