Excesses by the revenue agency can destroy taxpayer morale which is a valuable but delicate national asset.
The Kenya Revenue Authority’s on-going crackdown on tax evaders has sent shockwaves through Nairobi’s trading community. It follows the taxman’s recent success in cracking one the most complex and egregious tax fraud schemes ever to be discovered in years.
The whole of this week, there has been brisk activity at KRA’s corporate business centre in the Upper Hill where traders have been flocking to respond to demands by the taxman.
It is amazing indeed that even large trading groups and big companies that enjoy high-profile and positive reputations have found themselves in the drag net— exposed as perennial tax evaders.
The list of the evaders read like the ‘Who is Who’ of Nairobi’s trading and construction community.
From what I gather, the biggest culprits are importers of hardware material, big local construction companies, big importers of computers and accessories and traders and importers of construction materials.
The amounts involved are simply mind-boggling. Indeed, the crackdown has the potential of visiting major implications for private equity firms with investments in some of the groups that have found themselves in the drag net.
Clearly, tax evasion is the national sport of the trading community in this country.
I say so because one of the key findings of the investigations by the KRA is the existence of a parallel market for trading in fictitious invoices.
Away from the limelight, this lucrative industry and brisk business for manufacturing and selling fictitious invoices and Electronic Tax Registers (ETR) stamps has been alive and kicking- allowing traders in imported goods to evade billions of shillings in customs duties, value added tax (VAT) and income duties.
The fraud scheme works as follows: When you want to sell and stock imported goods for which you did not pay neither customs duty nor VAT, you go to parallel market where scammers buy fake invoices and ETR stamps.
Similarly, when you want to evade incomes taxes, the manufacturers of fake invoices will be at hand to provide you with documents to make it possible for you to inflate your expenses.
When you have to pay a bribe but find yourself unable to remove money from the books of the company, you just purchase the fake invoices to cover it all up.
But perhaps most intriguing are the trends and observations that emerge as you observe the exploits of the perpetrators of this complex tax fraud scheme?
First, it is clear from the exploits of the perpetrators that such tax fraud schemes cannot happen without internal co- ordination, shared knowledge and a vertical exchange of benefits.
Secondly, the schemes operate through networks of operatives sharing not only rewards but also risks.
Indeed, this whole thing has exposed a complex system and networks that is cannot function with links between principal and agents both within and outside KRA itself.
How did KRA managed to crack it? More investment in intelligence gathering? Maybe. My own view is that improved and better application of the I-Tax system has been the biggest factor.
I support the present crack-down on tax-evading traders as long as it represents a credible long-term commitment to dealing with corruption and tax evasion.
KRA must demonstrate that it is focusing on reforming systems- and that it is too greedy for money even when it is clear some the tax demands it has slapped on traders could drive the companies out of business.
Indeed, most of the businesses have found themselves in a dilemma because under the current circumstances, paying the money amounts to conceding that they participated in criminal activity.
We must remind ourselves that in dealing with tax evaders- in our desire to bring about a total revolution in the mentality of the taxpayer, we must guard against the dangers of introducing a police state.
No one would wish that any of those who defraud the revenue should go free. They must be found out and brought to justice. But the means which we adopt to this end must be must be put into context.
Excesses by the revenue agency can destroy taxpayer morale which is a valuable but delicate national asset.
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Note: The results are not exact but very close to the actual.
