Value added tax (VAT) collections slowed in the year ended June on the back of a fresh wave of fraudulent deals, which prompted the Kenya Revenue Authority (KRA) to launch investigations that triggered internal staff redeployments and flagged more than 4,000 shrewd traders.
Domestic VAT receipts posted the first single-digit growth in four years, with collections rising a modest 4.20 percent to Sh327.34 billion.
This was a slowdown from 15.31 percent growth to Sh314.16 billion in the prior year ended June 2024.
The performance was the worst since Kenya started implementing VAT reforms, following the International Monetary Fund-backed overhaul of the previous legislation in September 2013, excluding the pandemic years of 2019/20 and 2020/21.
This came in a financial year when the KRA removed 475 officials from approving applications for VAT and flagged 4,434 traders linked to a fraudulent scheme, which it estimated was siphoning about Sh2.5 billion monthly in the first half of the year.
“In the first half of the financial year, KRA collected Sh148.37 billion. In the second half of the financial year, KRA implemented a raft of VAT compliance initiatives to seal revenue loopholes, enabling the collection of Sh178.962 billion,” KRA Commissioner-General Humphrey Wattanga wrote in the annual revenue performance report released last week.
The reforms included VAT registrations revert to a manual system whereby traders are required to physically present proof of identity.
This, KRA officials told the Business Daily in May, was aimed at sealing revenue leaks through the notorious 'Missing Trader Scheme' which shrewd traders have exploited to issue fictitious invoices depicting a business transaction where no goods and services were supplied.
The traders penetrated the VAT system despite heavy investment in technology to enhance compliance and mitigate revenue leakage by use of the VAT Automated Audit (VAA) system and the Electronic Tax Invoice Management System (eTIMS).
VAA system detects inconsistencies in VAT returns by comparing PIN, invoice number, date and value of transactions declared by the buyer to that of the seller. The system then generates reports to taxpayers who have to amend the returns within 15 days or risk losing refund claims.
eTIMS, on the other hand, monitors business transactions for registered companies in real-time, enabling the taxman to flag discrepancies in income tax returns filed by firms.
The continued VAT fraud, where traders collude with KRA staff, has seen the Treasury in recent years push for full enforcement of the IMF-backed reforms by restricting zero-rating for VAT purposes, to export of goods and services, while limiting exemptions to goods supplied in raw form.
Recent proposals to remove a raft of goods such as raw materials for the manufacture of animal feeds, bioethanol vapor stoves, and motorcycles, as well as locally assembled and manufactured mobile phones, electric bicycles, solar and lithium-ion batteries, from VAT zero-rated to exempt through the Finance Bill 2025 were shot down by lawmakers.
“We should have taken all goods from zero-rated to exempt. The reasoning is very simple. Zero-rating, theoretically, should make the product cheaper than when the product is exempt. However, experience and practice show us that that benefit is never passed to the consumers,” Treasury Cabinet Secretary John Mbadi said in May.
“Secondly, and the worst is that, it [VAT zero-rating] is abused. There are a lot of fictitious refunds at KRA where people sell to themselves by creating fake companies. You create a company X and another Y, and then X invoices Y when there are no goods sold. After the invoice is made, I go to KRA and say I paid X this much, and that is what we call a missing trader. When you check the record, you will never find anywhere where that company is operating.”
