Traders making false value added tax (VAT) claims will spend up to three years in jail or pay back two times the amount claimed if Parliament passes a new set of proposed laws.
The Bill, which goes to the House this week, is seeking to establish a Tax Appeals Tribunal to deal with rampant fraudulent claims that have partly contributed to the recent rise in stock of unpaid refunds from Sh27 billion to Sh30 billion.
“A person who knowingly makes false claim for refund commits an offence and shall be liable, on conviction, to a fine not exceeding Sh400,000 or double the tax evaded, whichever is higher, or to imprisonment for a period not exceeding three years or both,” the Tax Appeals Tribunal Bill 2013 says.
The law seeks to place the burden of proof on claimants unlike the current law that forces the Kenya Revenue Authority (KRA) to conduct lengthy verifications on doubtful refund claims.
“The proposed law should help us address the issue of tax refunds that now stand at about Sh30 billion,” said John Njiraini, the KRA commissioner-general. “Each year, we accumulate about Sh15 billion in claims.”
KRA has in the past said fraudulent claims are part of the reason it takes long to pay the refunds.
The Bill, published by the Finance, Trade and Planning Committee chaired by Benjamin Langat, the Ainamoi MP, is in line with the proposals that Treasury secretary Henry Rotich announced in the 2013/14 budget.
To deal with the refund cheats, the Tax Appeals Tribunal Bill proposes that those who pass as registered persons or have ceased to be registered but are charging VAT will forfeit the supplies for which the tax is charged or be penalised for the value of supplies as assessed by the court.
Claimants who fail to keep, retain or maintain accounts, documents or records as required under the law are also liable for fines.
The Bill further proposes that those contesting the taxman’s assessment of their tax obligations will bear the burden of proof. The proposed appeals tribunal that will comprise a minimum of 15 and a maximum of 20 members has power to enforce orders for costs.
Dissatisfied appellants, however, have a window to appeal to the High Court against the verdict of the tribunal or its committees within 30 days.
The new Bill goes to Parliament barely three weeks after the new Value Added Tax Act 2013 took effect on September 2, reducing the number of zero-rated or tax-exempt items from about 400 to 27.
The coming into force of the new VAT law has, however, caused a steep rise in the cost of basic consumer goods, forcing MPs to propose amendments.
Speaker Justin Muturi who received the VAT Amendment Bill sponsored by the minority Coalition for Reforms and Democracy (Cord) has to approve the Bill for publication before it is tabled for debate.
The taxman has blamed unscrupulous businessmen for the widespread rise in prices of consumer goods and announced a national crackdown on traders who are charging tax on zero-rated or exempt goods.
“Most of the traders who have increased retail prices fall below the taxation bracket and must face the full force of the law,” Mr Njiraini said.
Scores of traders arrested in a sting operation launched on Thursday last week are expected to appear in court this week. KRA commissioner of domestic taxes Alice Awuor said at least 45 traders were arrested on the first day of the operation.
“We arrested 45 offenders and they have been bonded to appear in court. The exercise is ongoing,” Ms Owuor said.
The traders were suspected of charging VAT on unauthorised items or while not registered as collecting agents for the tax. To become an agent, a trader is required to have an annual turnover of more than Sh5 million.
The Thursday crackdown in Nairobi involved 400 KRA officials accompanied by armed police. A number of shops on Nairobi’s Biashara Street were raided for charging VAT on tax-exempt goods.
Mr Njiraini said while launching the operation that many traders had increased prices of goods and services that are exempt.
Goods that are exempt but whose prices have been revised include unprocessed milk, bread, rice, maize flour and wheat flour.
President Kenyatta has instructed the Treasury and KRA to move quickly and clarify the status of various goods, while arresting profiteers.
Cord MPs Ababu Namwamba and John Mbadi have proposed amendments to the law that would see processed milk, crisp bread. mobile money transfers, electricity, postal services; newspapers, journals and periodicals; ambulances and hearses and fishing nets removed from the tax.
Mr Njiraini said maize flour, wheat flour, rice, bread, infant foods, agricultural seeds, medical equipment, pesticides, fertilizers, veterinary medicines, machinery, aircraft and oil drilling equipment had been exempted from the tax.
There has, however, been a general rise in the cost of tax-exempt goods as opposed to those that are zero-rated.
Traders have argued that the increases are linked to the higher cost of production incurred by manufacturers using inputs that qualify for VAT but cannot offset the same through refund claims.
“Once you have VAT on most goods and you cannot claim any refund on inputs used to produce or supply them, then even prices of exempt goods will rise,” said PKF tax director Michael Mburugu.
The new VAT Act has largely eliminated tax refunds by limiting the number of items that are zero-rated.