The Kenya Revenue Authority (KRA) will deny businesses and individuals close to Sh21 billion in liquidity after it suspended payment of tax refunds to pave the way for the audit of reliefs.
On Tuesday KRA suspended indefinitely tax refunds, signalling a tough time for businesses whose working capital is now locked up in the taxman’s accounts as excess payment.
With the suspension, it means that requests for tax waivers and exemptions, which are normally given by the Treasury Cabinet Secretary, will also not be granted.
“In a bid to enhance the current processes related to the payment of tax refunds, exemptions, waivers and abandonments, the Kenya Revenue Authority in concurrence with the National Treasury and Economic Planning has suspended all tax relief payments with effect from February 28, 2023, until further notice,” said Antony Ng’ang’a, chairman of the KRA.
He said the suspension was informed by “concerns” from taxpayers, initiating the need to restructure rules and procedures governing tax exemptions.
The chairman did not elaborate on what the ‘concerns’ were but the suspension comes at a time when the new administration of President William Ruto has questioned how some firms connected to powerful individuals benefited from tax exemptions.
Every year, the Treasury incurs what is known as tax expenditures — or the value of revenue foregone by the government due to tax reliefs.
And while tax expenditures such as exemptions and waivers do not reach the coffers of the taxman, the KRA is expected to reimburse excess tax paid or tax paid in error in a given period, which is known as a tax refund.
A tax refund arises when the tax liability is less than the taxes paid. The different types of refunds include value-added tax (VAT), income tax, excise duty and stamp duty.
The largest component of tax refund in the current financial year is VAT, amounting to Sh20.04 billion, according to figures from the Treasury.
Tax refund on VAT results from zero-rated goods and services such as maize flour, bread, cooking oil and other foodstuffs.
Other tax refunds earmarked for this financial year included excise duty amounting to Sh480 million, income tax (Sh180 million), and stamp duty (Sh3 million).
An official at the KRA, who did not want to be quoted as they are not allowed to speak to media, said that while payment would not be made by the Treasury until the audit is complete, applications for tax exemptions will continue to be processed.
In the first half of the current financial year, the KRA failed to meet its target by Sh32 billion, which means that the Treasury will be forced to increase its borrowing or cut its spending should the taxman continue to underperform.
The KRA, which has been given a tax collection target of Sh3 trillion in the upcoming financial year, said the move was to meant to audit and assess the tax relief processes and procedures.
Nonetheless, some analysts that Business Daily spoke to, on condition of anonymity, questioned the government’s motive, noting that with the KRA holding to cash this reduces its liability.
Tax reliefs are given to encourage investment and job creation with some of the major beneficiaries including companies operating in the Export Processing Zones, which get a tax holiday from the 30 percent corporate income tax in their initial years of operation.
The KRA says it grants an average of Sh122 billion in tax reliefs annually, totalling Sh610 billion in the last five years.
Tax reliefs increased to Sh316 billion in the financial year ending in June 2021 despite spirited efforts by the Treasury to reduce claims by getting rid of unnecessary waivers.
The suspension took effect on Wednesday, with the tax authority adding that it is also aimed at increasing the impact of tax expenditure on the economy.
Suspension of the payment will, however, hurt the cash flow of businesses, most of which rely on these funds as working capital.
