The national Treasury’s growing bloopers in designing new tax policies have put the Kenya Revenue Authority (KRA) in an awkward position in which it is fighting with taxpayers over interpretation of tax clauses.
KRA’s squabbles with betting firms is the latest in a series of rows facing collection of new taxes, usually introduced at the start of every financial year as the Treasury comes under pressure to cut on debt appetite and raise more revenue.
The taxman is currently in dispute with the gaming firms over Sh61 billion in withholding tax arrears.
At the centre of the stand-off is the definition of “tax on winnings”.
This places KRA in a difficult spot in raising taxes from the betting craze that has gripped the country.
It brings into question the quality of consultations between KRA and taxpayers in adequately interpreting new tax measures.
In its revenue performance report for 2018-19, KRA said tax policies for the last financial year raised Sh48.2 million compared to a forecast of Sh62.9 million.
The State agency blamed the revenue shortfall of Sh14.7 million or 23 per cent of the overall revenue target on the standoff with betting firms that has so far seen the suspension of the operating licences of 27 of the companies.
“Non-compliance with withholding tax on winning betting provisions is the principal cause of this shortfall,” KRA said in the report.
But the squabbles go beyond the betting industry, piling pressure on the taxman to meet the ever-growing revenue targets.
New tax measures have faced stiff opposition as companies have gone to court seeking redress, compensation and quashing of tax claims.
At the centre of these disputes is the interpretation of clauses as introduced in the Finance Act each financial year.
Some firms have been successful at this, dealing a blow to KRA but decrying the lost business hours.
Audit and advisory firm Ernst & Young (EY) poured cold water on government’s tax policy measures for 2019/2020, saying they cannot raise even half of expected Sh37 billion.
Withholding tax on winnings
While the taxman holds out that the Finance bill of 2018 thrashed out the contention over the definition of “winnings”, betting firms have stuck to their guns that KRA has mis-interpreted the law in pursuit of their billions as withholding tax.
The betting firms have been withholding 20 percent of the positive difference between winnings and the amount staked and later paying to the taxman. But the definition of the term “winnings” under Section 34(1), 34(2), 35(1) and 35(3) of the Income Tax Act has split KRA and betting firms.
While the taxman insists on calculating a 20 per cent withholding tax on all the money in punters’ e-wallets, betting firms hold that KRA has lumped together customer stakes and winnings and calculated 20 percent withholding tax, instead of doing so on winnings alone.
In July, KRA deputy commissioner Elizabeth Meyo told the Senate committee handling the dispute with betting firms that amendments to the Finance Act 2018 changed the definition of bet winnings, placing new demands on firms that are expected to withhold 20 percent of the winnings.
This has led to disruption of business that betting firms and KRA hoped to collect revenue from.
The government has delays to thank for the wording goof that was in the controversial housing levy. Had this been implemented within the initial timelines, the government would have ended up paying, rather than levying taxpayers.
In the previously published guidelines, contributors to the levy would have enjoyed up to Sh9,000 monthly tax relief, being nearly four times the maximum Sh2,500 that an employee is allowed to contribute to the Fund.
This is after the National Treasury tied tax relief of contributors to the basic salary, a move that would have seen many contributors make zero payments to the controversial National Housing Development Fund.
Only through the Finance Bill 2019 did then Treasury Secretary Henry Rotich make amends by capping monthly relief at 15 per cent of the monthly contributions, a departure from 15 per cent tax relief on gross earnings.
Had the enforcement of the levies not been met by court injunctions and admission, the initial error-strewn regulations would have seen the Treasury award contributors hefty allowances.
Yet, the government had kept pushing for its implementation, slamming the doors on consultations.
While presenting the budget for the 2018/2019 financial year, suspended Treasury Secretary Henry Rotich introduced new taxes compelling Kenyans withdrawing any amounts of Sh500,000 or more transferred through banks or other financial institutions to pay 0.05 per cent of the value of the transaction.
But this ran into headwinds as the Kenya Bankers Association (KBA) moved to court seeking interpretation of the clause “bank transfer.”
The bankers’ lobby argued the term was vague and had not been defined by the Treasury.
KBA further said there was no public participation — a requirement of any new tax and that computer software in use by banks were not configured to support the charges.
The bankers carried the day as Treasury later dropped the proposed tax as President Uhuru Kenyatta rooted for a rushed supplementary tax that came up with new collection measures.
Analysts had argued the tax would have not yielded anything even in the absence of the problematic clause. This was because those transferring money would have easily opted to move say, Sh499,999 and escape the tax.
Tax on returnable containers
In July, KRA lost a decade-long case with giant beverages maker, Coca-Cola, over tax on returnable containers (bottles and crates) which was to be applied every time they are refiling beverages.
In submissions to court in 2009, Mount Kenya Bottlers Ltd, Rift Valley Bottlers, Nairobi Bottlers and Kisii Bottlers challenged outstanding aggregate sum of Sh5.62 billion on account of alleged arrears of excise duty, value-added tax and interests.
Three judges of the Appellate Court ruled that charging a levy every time the bottles are re-filled amounted to multiple taxation which was “unconscionable and unlawful”.
KRA had carried out various tax audits on the bottling firms for the period between 2006 and 2008, leading to the claims on the billions of shillings.
Excise duty on cigarettes
Cigarettes-maker Mastermind lost a long-running battle with the taxman over Sh442.2 million that KRA demanded on its Supermatch brand.
Before 2003, excise duty on cigarettes was determined by production costs incurred by manufacturers.
But a new tax regime was introduced under which excise duty on cigarettes was to be calculated on the basis of retail selling price so that the higher the retail price, the higher the excise duty.
In 2008, the Finance Act made changes to the 2003 Act so that product characteristics such as plain cigarettes, soft-cap cigarettes or hinge lid cigarettes would determine the rate of excise duty where retail selling price was not applicable.
Mastermind, in court submissions, argued that KRA had erroneously calculated excise duty payable, adding that 2008 amendments created ambiguity and uncertainty in tax payment, claims the court dismissed.
The cigarette-maker argued that the taxman made reference to “the 5th column”, which did not exist, making the law ambiguous.
The court ruled that Mastermind had no legitimate expectation that it would not pay excise duty owing to reference to a non-existent column.
But the case brought to the fore yet again the lack of refined and watertight tax document that leaves no loopholes for a mischievous taxpayer to dodge taxes.