Relief as Treasury agrees to release tax refund billions

Treasury is promising a speedy clearance of the huge tax refunds backlog that businesspeople say has taken billions of shillings from their hands, forcing them to rely on expensive bank loans to remain in business.

In a radical policy shift that could release billions of shillings into circulation, Treasury said it will soon allow the Kenya Revenue Authority to pay all outstanding refunds to taxpayers who have consistently paid their dues in time – adding a tax compliance incentive to the plan.

Economists said release of the refunds, estimated at Sh6 billion, could add impetus to the stimulus packages that the government recently rolled out and speed up the pace of economic activity in the country.

Details of the plan are to be released before the end of the year when the task force appointed by Treasury to audit unpaid Value Added Tax (VAT) refunds is expected to have completed the work.

The changes are part of the measures Treasury is taking to fix the country’s tax regime that businesspeople reckon is impeding efficient allocation of capital and slowing down economic activity.

“The current environment is not taxpayer-friendly because KRA Charter is not being followed, particularly in the timeliness and courtesy with which tax audits and refunds should be done,” said Mr John Thindi, a tax director with PKF Consultants.

Finance minister Uhuru Kenya added impetus to the reforms plan with a promise that the 2010/2011 budget would capture the proposed changes and give the country its simplest tax regime in history.

“The high growth rate witnessed in 2007 was the culmination of reforms that the government undertook after the 2002 election and we can replicate that with a focus on tax reforms,” he told the fourth gathering of the Prime Minister’s roundtable forum (PMRT) in Nairobi.

But he warned those who have been filing wrong returns, tax evaders and those who have been delaying payments that they will stand at the end of the queue when the refunds payments begin.

Taxpayers say it takes an average of six months to recover the VAT funds from the taxman, a process that has seen KRA accumulate Sh6 billion in unpaid refunds.

But with the persistence of the difficult investment climate arising from the global financial crisis, the business community has lost its cool with the taxman and has taken their complaints to the highest level of government.

“When a businessman delays taxes, he faces fines and interests. But when the government delays our cash, it easily gets away with it. Our relationship with KRA must be reciprocal,” said Mr Vimal Shah, the Kenya Association of Manufacturers’ (KAM) chairman.

Analysts, however, warned that even with the new advance refund payment proposal, Treasury mandarins will still have to weigh among the different competing needs to find the extra cash to settle the tax claims.

“We all know that in an ideal situation, the government shouldn’t really hold any money belonging to the private sector,” Mr Kenyatta said. “But under the present circumstances with numerous emergency expenditures, we can’t pay everything promptly but good taxpayers will get their money long before KRA finishes processing their orders.”

Treasury’s change of heart is expected to excite the horticulture industry players who alone are owed Sh1.9 billion in unpaid tax refunds.

In their pre budget presentations early this year, the business community had asked Treasury for a policy change that would exempt them from paying VAT instead of paying the taxes to KRA and then applying for refunds later.

“Treasury promised to allocate enough money in the 2009 /10 budget to settle the outstanding claims but delays still persist in the payments of VAT refunds,” Mr Hashit Shah, the chairman of Fresh Produce and Exporters Association (FPEAK), told the Business Daily last month.

According to Mr Shah, the industry requires the idle money to meet expenses like freight and exchange losses, expansion, rising energy costs and other operational expenses that require ready cash flows

But Treasury is dangling the advance tax refund both as carrot for good taxpayers and as a stick to those who fail to comply with tax laws who will still have to wait longer for their refunds.

The National Business Agenda (NBA) crafted by the private sector last year in the hope of returning the country to the level of growth realized in 2007 proposed that the government should reduce the tax refund period to 60 days.

“Delay in tax refunds is still a major problem in the country despite the fact that it has been a common agenda for all the three previous meetings,” Mr Patrick Obath, the Kenya Private Sector Alliance said.

Other targets

The PMRT meetings are chaired by Prime minister Odinga and brings together top government officials and business leaders in tackling Kenya’s investment climate challenges.

Apart from tax reforms, the forum has been pursuing other targets like licensing reforms, intellectual property rights protection, improved infrastructure, reducing crime rate and transforming the SMEs sector.

Other targets are labour law reforms, robust ICT growth and transformation of agriculture to cope with modern production and marketing challenges.

In appreciation of the challenges facing the country today, Mr Odinga added climate change and food sufficiency to the original list of NBA that the fourth PMRT discussed under closed doors.

Other items discussed by the government-private sector team yesterday were regulatory reforms, transportation policy, security, SME and youth empowerment

“The three roundtables have enabled us to move half the distance in most areas such as licensing reforms where 300 out of the 600 licences have been eliminated by the local government from last year but a lot more still needs to be done to reform our labour laws which are currently aping other countries whose circumstances are not similar to Kenya’s,” said Mr Shah of KAM.