Chinese imports valued at Sh431.9 billion for the first 10 months of last year are missing from official data reported by the Kenya Revenue Authority (KRA), raising concerns over the scale of tax evaded in the election year.
An analysis of official trade data published separately by the two countries' tax authorities has revealed a wide disparity in the value of imports from the Asian economic giant.
Official KRA data, as published by the Kenya National Bureau of Statistics (KNBS), placed the value of imports from China at Sh377.5 billion in the review period.
However, the General Administration of Customs of the People’s Republic of China (GACC), which is the equivalent of KRA, says on its website that the goods exported from China to Kenya during this period were valued at Sh809.4 billion — more than twice the figure given by the KRA.
This huge variation is also likely to bring into question the amount of taxes collected on imports from the world’s second-largest economy, as goods shipped into the country attract a myriad of levies, including import duty, value-added tax (VAT), excise duty, import declaration fees (IDF) and the railway development levy (RDL).
Kenya is grappling with a problem of trade misinvoicing, whereby imports or exports are misquoted at the port in order to avoid paying custom duties. This form of tax evasion can also occur when there is import under-invoicing, which would cause fewer payments of VAT and customs duties due to the lower valuation of goods.
With trade mis-invoicing, importers could under-declare the price of an imported item, such as a phone, or buy 10 phones but only declare two, a practice that is common with the consolidation of imported goods.
The KRA had not responded officially to the Business Daily’s queries on the disparity since Wednesday last week.
However, an insider who is not authorised to speak to the media said the agency was equally baffled by the huge variance between the two data sets.
The KRA, said the source, has since contacted the Chinese Embassy in Kenya to understand how Beijing computed its data following the Business Daily inquiry.
The official said the disparity could arise from some of the cargo coming to East African states such as Uganda, South Sudan, Rwanda, Burundi, Tanzania, and the DRC from China passing through the port of Mombasa.
"Such cargo could have been erroneously captured by the countries of origin as goods coming to Kenya and not as goods in transit," the KRA official said, adding that some countries use different codes to identify imports and exports.
But the variance could also lend credence to reports that the huge volumes of cargo disguised as goods in transit end up being dumped in the country en route to various destinations in the region to evade taxes.
The new administration of President William Ruto has prioritised the deployment of technology and enhanced data analytics at the customs and border control among the seven measures to scale up tax collection to Sh3 trillion in the upcoming financial year is the use of.
Imported goods are subject to import duty ranging from zero percent for raw materials to 10 percent for intermediate goods and 25 percent for finished products.
Except for a few exempted goods, VAT is charged at the standard rate of 16 percent while imported excisable goods will attract different excise duty rates as prescribed under the Excise Duty Act 2015.
Imported goods also attract import declaration fees (IDF) at 3.5 percent and 2.0 percent railway development levy (RDL).
With this deficit, the KRA might have lost at least Sh66.95 billion in tax revenues from 10 percent import duty, IDF and RDL alone, a figure that could jump to Sh135.95 billion if you increase the import duty to 25 percent, that is charged on finished goods, and 16 percent VAT.
A 2018 report by Global Financial Integrity (GFI) estimated that Kenya potentially lost $907 million (Sh112.8 billion) in revenue in 2013 due to misinvoicing and illicit financial flows.
Second–hand clothes and cereals lost the largest revenue at $21 million due to import under-invoicing, vehicles at $18 million, electrical machinery at $17 million and mineral fuels at $15 million.
Lost revenue due to mispriced exports was related to the coffee, tea and spice trade, which accounted for $140 million.
The Kenyan export and import numbers are collected by the KRA’s Customs and Border Control Department — and KNBS.
Tax experts, while admitting that the variation might be due to the under-declaration of imported goods, say this difference could also be explained by other factors.
Robert Waruiru, a partner at Ichiban Tax & Business Advisory LLP, said that one of the reasons for the variation could be transhipment, where cargo that had been captured by the Chinese tax agency as coming to Kenya is instead transferred to another ship to be transported to another country.
But there are also temporary imports into the country by Chinese contractors such as the specialised equipment used for carrying concrete beams in the construction of the Nairobi Expressway.
"Such equipment is not captured as imports by KRA," said Mr Waruiru.
There are goods that are shipped into the country only to be re-exported to neighbouring landlocked countries such as Uganda, Rwanda and Burundi. Other factors such as time lag or differences in the exchange rate used could also have had an effect in the variation, albeit a negligible one.
But the experts agree that all these factors do not adequately explain the massive difference between the two sets of trade data, with some suggesting tax evasion — including under declaration or non-declaration of income, tax fraud, dishonest tax reporting, and overstating of deductions – was the most likely reason.
The KRA expects to collect Sh145.9 billion from import duty in the current financial calendar ending June, a figure that is projected to rise to Sh173.3 billion in the upcoming fiscal year starting July.
Under-declaration and non-declaration of imported have been flagged as some of the reasons for the tax leakages.
The previous administration of former President Uhuru Kenyatta launched a crackdown on consolidators as part of a fight against counterfeit goods.
In 2021, the government gazetted various facilities to be used for deconsolidation and clearance of cargo imported by small-scale traders in what was aimed at addressing the problem of under-declaration and non-declaration.
"All cargo consolidated at the countries of export will, upon importation into the country, be deconsolidated at facilities designated for that purpose," said a statement from the KRA.
All consolidated cargo imported by sea and transported to Nairobi through the standard gauge railway was to be deconsolidated, cleared and collected by the owners at the Kenya Railways Corporation (Boma Line) Transit Shed.
Cargo destined for other parts of the country was to deconsolidated at the other designated facilities.