EDITORIAL: Listen to concerns on new VAT refund rule

Manufacturers have once again protested over the billions of shillings owed to them in Value Added Tax (VAT) refunds.

The Kenya Association of Manufacturers (KAM) says the changes effected by the Kenya Revenue Authority in September 2017 - which now restrict firms to claim refunds on zero-rated supplies only – has put its members in dire cash flow constraints, in the process putting the survival of their businesses in peril.

Computation of VAT refunds used to be a simple process of determining the difference between output and input tax. From September 2017, when the changes took effect, calculating VAT refund has become somewhat arcane, if not complex process that is also unfriendly to businesses.

Firms have to hire experts to calculate the ratios of zero-rated supplies in relation to the total taxable sales revenue before they can determine the refunds due.

That this formula was implemented despite KAM’s protestations betrays the government’s cavalier attitude towards an otherwise important stakeholder and amounts to imposing a disproportionate tax burden on businesses.

Industry statistics indicate that 23 manufacturers were owed Sh3.59 billion by last August, which comprised Sh2.68 billion in withholding VAT dues and Sh908.6 million in VAT export refund claims. By implication, the amount they are now claiming can only have increased.

Official data indicates that gross non-performing loans in the manufacturing sector stood at Sh51.6 billion in June 2018, up from Sh39.6 billion in December 2017 and Sh37.1 billion in September the same year. According to KAM, the high loans default rate among its members is directly linked to the recent change in formula for calculating the VAT refund.

This is why the government must listen to the private companies who are carrying this tax burden.

It is wrong for the Kenya Revenue Authority to hold refunds on which it pays no interest when the affected firms have to borrow at commercial rates to finance their operations.

The business lobby group had all along protested that a change in the formula would make it difficult to lodge withholding VAT claims.

While the Treasury maintained that the change would ensure all refunds were dealt with in no more than 90 days, this promise is yet to honoured, meaning that businesses are not benefiting from the change. Instead, they are hurting all the more.

As they say in business, cash is the king. It is too much for the State to expect jobs and taxes to come from private firms while at the same time implementing an unfriendly regulatory policy that constrains their cash flow.