Traders resort to debt as VAT refunds delay

The Kenya Revenue Authority (KRA) has accumulated another Sh3 billion in VAT refunds over the last two months, bringing to Sh30 billion the money companies cannot access for their operations.

Treasury secretary Henry Rotich said the increase in refunds would now be checked by the new VAT law, which has reduced by more than 300 the number of goods on which refunds can be claimed.

“The refunds claims now stand at Sh30 billion. This is one area that we are going to deal with now that we have a new VAT law in place. Compliance costs will also come down for businesses as we simplify the law,” Mr Rotich said on Friday during a briefing on the VAT 2013 Act, which took effect this month.

The accumulation over the last two years has been caused largely by lack of resources to pay back the money and lengthy verification procedures before the claims are authorised for payment.

The Treasury only reserved Sh15 billion for refunds in the 2013/14 fiscal year, meaning that it can meet only half of the Sh30 billion arrears in claims.

Kenya Association of Manufaturers (KAM) chairman Polycarp Igathe said delays in releasing refunds was hurting the cash flow of companies, forcing them to incur more costs on overdrafts from commercial banks.

“We appreciate the new law is addressing the refund claims which is a major burden and which has negatively affected our cashflows,” said Mr Igathe.

KAM members, Mr Igathe said, were often forced to borrow money from banks at rates as high as 18 per cent especially when exporting products even as their claims remained pending at the KRA.

The claims resulted from the fact that many goods were previously zero-rated in terms of VAT, allowing manufacturers to claim back related input tax.

The new VAT Act is expected to cut back the refund claims by half as it has drastically reduced the number of goods and services that are zero-rated from nearly 400 to less than 40.

(READ: New VAT law set to reduce refund claims by Sh600m)

Mr Rotich said VAT tax yields (tax collected as a percentage of gross domestic product) had come down to five per cent in the 2012/13 financial year from 10 per cent some years back.

Mr Rotich said that the clamour for more goods to be exempted from tax was not justified because it had been proved over the years that sellers did not pass on the benefits to consumers.

Mr Igathe blamed traders for taking advantage of the new tax regime to increase the prices of goods across the board, saying manufacturers had not reviewed prices.

Mr Rotich warned traders against charging VAT on exempted goods that they would be arrested and charged in court.

Since the implementation of the VAT Act began on September 2, many traders have taken the chance to increase prices of various exempt and zero-rated goods.

Even for goods and services on which VAT is levied, a trader is supposed to be formally registered by the KRA and have an annual turnover of at least Sh5 million to qualify as a tax agent and subsequently remit the collection to the revenue authority.

KRA commissioner-general John Njiraini said the taxman would collaborate with consumer associations to tackle the menace of over-pricing.