Taxman wins new powers to exercise pre-emptive strike
Kenya Revenue Authority headquarters in Nairobi. Some firms are already locked in court battles with KRA over taxes due after they changed their status. FILE
What you need to know:
The provision, which is part of the new VAT 2013 law, clears the way for the KRA to invade and demand taxes from an entity preparing to go into liquidation or to leave Kenya.
The provision backs another in the Income Tax Act that holds responsible company officials liable for taxes when companies cease to exist through liquidation.
KRA said it was “excited” by the new law describing it as one whose impact is to give it more teeth in the exercise of its administrative actions besides offering better clarity.
The taxman has won a new set of powers that will enable him to exercise pre-emptive strikes against individuals and businesses intending to use bankruptcy laws or relocation to evade taxes.
The provision, which is part of the new Valued Added Tax (VAT) 2013 law, clears the way for the Kenya Revenue Authority (KRA) to act against any taxpayer on suspicion that it is changing names, voluntarily winding up or relocating to another country to evade taxes.
It was not possible to tell the extent of the powers nor even what the threshold the suspicion reach before any action is taken.
Tax experts said the provision was necessary given the large number of non-compliant companies that have been using insolvency to cheat the taxman of millions of revenue shillings.
“Non-compliant entities have taken to liquidation upon incurring huge tax liabilities,” said George Maina, a senior tax manager at PKF Consulting. “The unique thing is that the same entity will continue in business as a newly-incorporated entity making it impossible for the taxman to recover the taxes.”
Section 23(1) of the Act allows KRA commissioner to issue an assessment of the tax in writing before the due date where he believes there is a risk of non-payment “due to the imminent departure of the person, where a company is about to be liquidated or otherwise wound up, to cease business or for any other sufficient cause.”
The provision backs another in the Income Tax Act that holds responsible company officials liable for taxes when companies cease to exist through liquidation.
Some firms are already locked in court battles with KRA over taxes due after they changed their status. Kingsway Tyres tops the list of companies that are battling KRA in court over non-payment of taxes that were due before change of legal status.
Kingways’ non-payment of taxes was one of the many issues that dogged Mumo Matemu’s quest to become the chairman of the Ethics and Anti-Corruption Commission last year.
KRA said it was “excited” by the new law describing it as one whose impact is to give it more teeth in the exercise of its administrative actions besides offering better clarity.
The new VAT Act, which has removed more than 300 items from the list of tax exempt goods has, however, split opinion over its impact on commodity prices.
Some tax experts reckoned that prices would rise even for items that were retained in the exempt category because producers cannot claim input VAT refunds.
“On exempt supplies, one cannot claim input VAT so the prices of the goods would be higher than on the zero-rated goods. It can only be claimed on supplies taxable at the standard rate of 16 per cent, the special rate of 12 per cent and the zero rate,” said Nikhil Hira, the head of tax at Deloitte East Africa.
Mr Hira has worked out an impact model showing that the most expensive goods will be those bearing VAT, followed by the exempt and the zero-rated ones in that order.
“Essentially exempt status may not reduce prices of commodities. VAT operates an input and output offset model. Since an exempt supplier is not able to recover the input VAT they may end up transferring the tax burden to the consumer and hence increase in the price. The consumer will pay more than where the product or service was zero-rated,” said Mr Maina.
Mr Hira said the removal of basic food items from the VAT net would reduce the pressure for higher prices, checking inflation “to some extent.”
The Act has further allowed KRA to use force to enter business premises for tax administration and collection purposes even without court orders or notices.
“Since a court order is not required KRA officers may abuse this process and target even innocent taxpayers. This provision goes against the spirit of the Constitution, particularly Article 47 which governs citizen rights to a due process and notice, including a warrant to be produced,” said Mr Maina.
Ernst & Young Associate director for tax services Francis Kamau said recently that KRA may be justified to be accompanied by armed policemen where there are fears of encountering hostility from tax evaders.
Mr Hira said the Act would enhance tax collection by bringing more items into the net and removing several remission schemes.
“The old Act had too many items that were exempt or zero rated which meant that not enough tax was being collected and the refund position was becoming unmanageable,” said Mr Hira.
Treasury secretary Henry Rotich said the government was hoping to raise Sh10 billion with the VAT reforms.
