The Kenya Revenue Authority (KRA) faces a legal dilemma in the wake of President William Ruto’s directive to the taxman to go slow on issuing distress orders that trigger asset seizures of suspected tax evaders.
Dr Ruto has asked the KRA to desist from seizing the assets of suspected tax evaders and disabling businesses through forcible occupations and blockade of bank accounts.
This has effectively weakened the KRA’s hand in enforcing sections of the Tax Procedures Act, especially on the distress order.
Going hard on tax cheats, especially closure of businesses, in line with the law could drag the taxman into a fight with the President while a softer approach on suspected cheats could abet tax evasion and derail its efforts to raise tax collections from the current Sh2 trillion to Sh3 trillion in an economic setting where businesses are not expected to deliver outsized profits for taxation growth.
The distress order allows the KRA to forcibly occupy a tax cheat’s house or business premises and failure to settle the demanded taxes can lead to an auction of the business premise or goods in the business.
The Tax Procedures Act also allows the taxman to issue travel bans on suspected tax cheats, collect duty directly from suppliers and bankers of defaulters and prosecute those in arrears.
Suspected tax cheats can have their assets seized and auctioned and their personal identification numbers (PINs) disabled.
“The Commissioner or an authorised officer, may issue an order (referred to as a “distress order”), in writing, for the recovery of an unpaid tax by distress and sale of the movable property of a taxpayer,” says the Act.
“When the taxpayer does not pay the tax liability described in the distress order, together with the costs of the distress… the property that is the subject of the distress order may be sold by public auction or private treaty as the Commissioner or authorised officer may direct.”
This is the law the KRA used in 2019 to close the Thika-based Africa Spirits Limited (ASL) over a Sh17 billion tax evasion claim.
The factory belonging to billionaire Humphrey Kariuki was reopened last week, just days after Dr Ruto appointed the tycoon to head a powerful investment committee.
“The Kenya Revenue Authority is now implementing our new tax administration policy, which has seen manufacturing firms earlier shut down over tax disputes, re-opened, injecting much-needed revenue to the economy and returning thousands of workers to their jobs,” Dr Ruto said this week.
The thinking of President Ruto is that the KRA is better off agreeing to a repayment plan with firms owing tax rather than ordering their closure.
Analysts reckon that the order is a double-edged sword.
“There could be a political bend to the order, which might return to haunt the State,” said a top executive with one of the Big Four audit firms.
“Some businesses like Keroche have defied agreed tax repayments plans with the KRA. And there is a chance they could be emboldened going forward,” said the executive.
Keroche Breweries, which is co-owned by Tabitha Karanja, a Senator belonging to Dr Ruto’s UDA party, has had its premises shut by the KRA multiple times for breach of tax arrears payments plans.
In March, the brewer was offered 24 months to clear tax arrears amounting to Sh957 million which are undisputed.
The clampdown on the rich followed an order from former President Uhuru Kenyatta to recover unpaid taxes from high-net-worth professionals and traders in an effort to raise national revenues.
The KRA is flagging wealthy individuals that have been hiding their sources of income while engaging in luxury spending and accumulation of property, including the purchase of homes and big cars.
It is racing to bring more people into the tax bracket and curb tax cheating and evasion in the quest to meet targets.
But Dr Ruto saw the crackdown differently.
During his campaigns for the August 9 election, Dr Ruto claimed that his close allies were targeted for political persecution or were being intimidated so that they could abandon him.
Corruption and tax suits against Dr Ruto’s allies worth close to Sh30 billion have either been withdrawn or quashed in the recent past, turning the spotlight on the prosecution and investigative agencies in the fight against graft.
The cases have fallen in quick succession, raising speculation about interference with the role of the Director of Public Prosecutions (DPP), Noordin Haji.
The DPP has also signalled the intention of the KRA to withdraw Sh2.5 billion tax evasion charges against Mary Wangui Mungai, who has since been appointed as the chairperson of the Communications Authority of Kenya.