It takes two to tango; that’s so true in business. Every transaction has two parties involved. Every seller must have a buyer, every employee must have an employer and every service provider must have a service recipient.
Therefore, for each transaction, there must be an equal and opposite effect. Income to one party must be an expense to another.
This basic fact is useful to tax collectors, information from one party is enough to trace the other. Tax systems are so designed that taxpayers involuntarily report one another.
We must assume that not all taxpayers have the motivation to evade tax.
If the government itself remits a lot of taxes, other taxpayers will voluntarily or in some other way pay their taxes.
In paying taxes, some deductions are allowed which are to the taxpayer’s advantage. This is the point when counterparties are dragged along.
A tax deduction to one party is the taxable income of another. In claiming an expense, details of the other party with income must emerge.
VAT automated audit is designed on this premise. The tax charged by the seller to the buyer is deductible by the buyer, however, the buyer cannot claim such tax until the seller has already remitted such tax.
The buyer remains tied to the seller, which means that the buyer cannot accept fake invoicing, again he must push the seller to comply.
A much-improved version of VAT automated audit is in the offing. The tax invoice management system (TIMS) to be launched on August 1, 2022, is designed to ensure instantaneous filing of VAT returns.
All the information on the seller and the buyer will be received in one go.
For incomes subject to withholding tax, the payer and the payee remain tied to one another.
The party making payment must quote the Pin of the Payee that generates information in the ledgers of both parties.
The paying party will be claiming such payments to reduce tax payable. Expenses subject to withholding tax are not allowed if tax has not been withheld. Further failure to deduct withholding tax is an offence.
The payer has no reason not to withhold tax, in doing so the income recipient is revealed.
Another case of two parties tied together is between employers and employees. Employers must remit Paye monthly and the employees declare the same in the end of year return.
Employees can now file returns on pre-populated forms meaning they find Paye information gathered from employers already in their ledgers.
That’s an idea that needs to be replicated in other returns.
There is no point in giving the taxman information that he already has.
The information already received by Kenya Revenue Authority (KRA) from counterparties needs to be pre-populated in the tax return forms.
Information gathered from VAT and withholding taxes should be locked in taxpayer return forms.
This not only reduces the chances of tax evasion but also makes tax filing easier.