Opinion and Analysis
Deal with the VAT refund nightmare to sustain growth
Posted Monday, October 29 2012 at 20:18
- Ultimately, the public has a right to know how well the VAT service is performing, especially given the widespread perception in the business community that refund delays are a serious burden.
The Kenyan Value Added Tax (VAT) Act provides for refunds arising from excess input tax resulting from zero-rated goods and physical capital where input tax is Sh1 million and above provided investments are used for production of taxable supplies.
Most businesses and manufacturers have complained over the long periods the process takes, noting that it impacts on the already high costs of doing business in Kenya. A time has come when we need to come up with possible solutions to address the problem.
Currently it takes an average of six months to recover VAT funds from the taxman, a process that has seen the authority accumulate Sh 6 billion in unpaid refunds.
The long list of the zero-rated supplies has on top of contributing to the complexity of the system, yielded unprecedented volume of VAT refunds which is estimated to grow at a rate of Sh1.5 billion every year.
This position is further exacerbated by withholding VAT system which has left taxpayers with increased VAT refunds. The situation gives rise to competition between processing refunds to tax payers and meeting the costs of basic services to the general public.
Treasury has in this regard focused on paying for services hence the growing VAT refund position.
Arising out of the complexity of the current Value Added Tax law, we are faced with a huge VAT refund problem.
The Kenya Revenue Authority (KRA) estimates the problem of VAT refunds rises to approximately Sh1.5 billion every year.
This is indeed unsustainable. The magnitude of the refunds implies committing capital that would have otherwise been applied by the private sector in productive ventures.
On the flip side, it presents an administrative challenge to the KRA as additional resources that would have otherwise been engaged in efforts to enhance level of compliance is now committed to operational functionalities around refunds.
It has therefore, become a necessity to address the root cause of the refund problem by seeking to reform the VAT Law. The Value Added Tax Bill of 2012 is still awaiting its first reading in Parliament.
The KRA concedes that long delays are as a result of improper documentation or disputes arising from rejected claims.
Officials have also stated most refunds are paid within the legally mandated period, and that processing times have improved.
The divergence of views between the private sector and the government is symptomatic of the lack of transparency in the refund process.
Lacking data on the extent and magnitude of the delays, the best way to assess the cost to affected enterprises is by examining some illustrative examples. Generally speaking, the cost to the firm of waiting for a refund increases with several factors; the amount of the refund due, the length of the delay, the interest rate on working capital, audits and management time entailed to deal with refund delays.