The Kenya Revenue Authority (KRA) has flagged a suspicious spike in the shipment of fuel meant for exports amid fears that marketers are dumping the cargo in the local market to evade taxes.
KRA Commissioner for Customs and Border Joseph Kaguru raised the red flag after oil marketers increased the share of fuel targeted for sale in neigbouring countries while cutting the portion for local consumption.
Fuel labelled for exports accounted for 56 percent of cargo in three ships that docked at the port of Mombasa last month, raising the alarm bells at KRA.
Consumption in Kenya dominates sales of fuel imported through the port. Imported fuel destined for neigbouring countries like Uganda, Rwanda and DR Congo does not attract the 25 percent import duty.
The tax difference motivates crooked dealers hungry for higher margins to sell the produce locally.
The revelations by KRA come amid a sustained onslaught against tax evasion in efforts to increase revenue collections.
The KRA raised Sh519.2 billion from VAT and import duty in the full year to last June, accounting for a third of the Sh1.562 trillion collected as ordinary revenue in the period.
“We have noted with concern the recent change in local/transit ratios that have dropped to 44/56 as observed from recent three vessels, MT Tavisock Square, MT Solidarity and MT Front Vega where transit petroleum products is more than the local allocations imported through Kenya,” Mr Kaguru says in a February 23 letter seen by the Business Daily.
Super, diesel and kerosene ratios are based on the consumption demands and orders by the respective companies but Kenya’s consumption is higher than the region, meaning that ratios for the local market should be higher than those for transit.
Firms are required to ship out the transit fuel within 30 days but sources say some unscrupulous marketers apply to the KRA to convert part of the fuel earlier labelled for export markets in a bid to avoid suspicions that they are illegally selling the commodity locally.
But delays mean that they pay VAT based on the old prices, hurting the KRA’s collections from the sector given that the cost of refined fuel is rising every month on supply fears due to the Russia-Ukraine war.
Petroleum expert Powell Maimba, who also served as chair of industry lobby, Petroleum Institute of Africa, said that the companies may be turning to the trick to protect their cash-flows at a time they have been compelled to endure a long wait for compensation.
“Firms are faced with the nightmare of paying taxes upfront on fuel meant for local market yet they have to wait for compensation for months to get compensation because of the unchanged prices… So now the only legal way of avoiding the immediate taxes is declaring vast amounts for transit market,” Mr Maimba told the Business Daily.
Kenya has since November kept pump prices unchanged but delayed compensation, hurting oil marketers who are also grappling with increased costs of shipping the product and immediate demands to pay VAT and import duty.
The global rally in prices of crude on the back of supply fears over the Russia-Ukraine war means that VAT on imported fuel is increasing with every subsequent shipment.
The KRA has since moved to block the firms from converting transit fuel for the local market, saying that the companies must ship it out within one month.
“Any product that will not have been exited within 30 days shall be subjected to auction as per Section 42 (1) of East African Community Customs Management Act, 2004,” Mr Kaguru said in the letter.
The East African Community Customs Management Act 0f 2004 gives the KRA Commissioner-General powers to auction any transit goods that are not moved outside Kenya within 30 or any period that the authority approves.
Money raised from the auction is used to pay taxes due from the goods, storage costs, port and freight charges and any other levy due to the customs.
The KRA has increased surveillance on various sectors of the economy in a bid to weed out cheats in a bid to increase revenue collections.
The authority says that lower tax rates in neighbouring countries and less stringent laws are a major reason behind the diversion of transit cargo into the local market.
The KRA has since deployed satellites and electronic seals on cargo ferrying transit cargo, enabling it to monitor the exact location of the goods in real-time.