The most common concern for local firms doing business with state agencies is pending bills. Because of the vast quantities owned by the government, some businesses have closed and others have gone bankrupt.
According to the Controller of Budget (CoB), the government owed different enterprises Sh722 billion as of September 2024, with the national government owing Sh538.26 billion and the counties owing a total of Sh194 billion.
Because of the forgoing, Treasury Cabinet Secretary John Mbadi recently revealed at a public participation forum for the Finance Bill 2025 in Nairobi that the pending bills committee had approved the payment of Sh206 billion in pending bills, the majority of which were owed to small and medium-sized enterprises (SMEs), as part of a larger effort to ensure a consistent flow of money throughout the economy.
Treasury Cabinet Secretary John Mbadi recently said that the pending bills verification committee had approved the payment of Sh206 billion in pending bills, the majority of which were owed to small and medium-sized enterprises (SMEs), as part of efforts to ensure a consistent flow of money throughout the economy.
That notwithstanding, maybe we need to explore other options for continued liquidity, including tax credits. The term tax credit refers to the amount of money that taxpayers can deduct directly from their taxes. They are government-issued rights that can be used instead of cash to pay off an existing tax liability.
They are sometimes confused with tax deductions, but they are not synonymous. Tax credits are a shilling-for-shilling reduction in your tax liability or can be used to offset an existing tax liability.
In contrast, tax deductions often reduce taxable income. This, in turn, can lower your tax payment. However, a decrease may not be as advantageous as a tax credit.
The value of a tax credit varies according to its nature. Tax credits are classified into two types: refundable and non-refundable. A refundable tax credit allows a taxpayer to obtain a refund if the credit they are awarded exceeds their tax liability. A non-refundable credit on the other hand reduces a taxpayer's tax liability until it reaches zero.
In simpler terms this is to say, a refundable tax credit is one which the government reimburses the taxpayer if the credit exceeds the amount owed. And the beauty of it is that these tax credits can be sold or transferred between taxpayers, enabling entities and persons with little or no tax liability to monetise the credits and create a new revenue stream.
Transferability enables eligible taxpayers to choose to transfer all or a portion of a qualifying credit in return for cash, with the transferee taxpayer recognised as the taxpayer in relation to such credit (or portion thereof).
The transferee taxpayer is permitted to claim the transferred tax credits on their tax returns while also accepting some risk in the case of a recapture event or a dispute by the authorities about the qualifying of the transferred tax credit.
The main risk connected with transferable tax credit transactions is the possibility of recapture. Recapture happens when a tax credit is reversed or "taken back" by the government owing to a failure to fulfill certain standards. To reduce the risk of recapture, tax credit insurance is recommended.
While insurance may provide an extra degree of security for investors, it is crucial to note that it does not provide complete protection against recapture risk.
That said, these transferable tax credits can be a significant source of money for to small and medium-sized enterprises, and they can sold to buyers who will use them to offset their own tax bills. In theory, it's a win-win situation: the seller raises funds, while the buyer reduces its tax liability.
