Firms cite VAT formula for rise in loan defaults

Kaushik Shah
Mr Kaushik Shah, the group governance officer at steel roofing firm Safal. FILE PHOTO | NMG 

Manufacturers have blamed change in the formula applied in calculating Value Added Tax (VAT) refunds for cash flow challenges resulting in piling loan defaults.

The taxman in September 2017 enforced the formula meant to ensure traders only claim refunds for zero-rated supplies as part of the VAT regulations published by Treasury Cabinet Secretary Henry Rotich earlier in April that year.

The Kenya Revenue Authority (KRA), as a result, uses the ratio of zero-rated supplies to the total taxable sales revenue to arrive at refunds as opposed to the previous system where it was based on difference between output and input tax.

The Kenya Association of Manufacturers (KAM), the sector lobby, in a presentation to KRA on January 29 protested the change in the formula which it said has made it difficult to lodge withholding VAT claims.

The onset of withholding VAT regime at the rate of six percent deducted by appointed agents, KAM added, has compounded the cash crunch challenge for some firms.


Some 23 manufacturers were owed Sh3.59 billion last August, which comprised Sh2.68 billion in withholding VAT dues and Sh908.56 million in VAT export refund claims, according to KAM

“Some claims lodged in 2014 are yet to be verified due to system changes at the Tax Authority and lack of proper records at custom border points,” the lobby said.

This is against 60-90 days period set under the KRA Service Charter.

“Currently, there is no provision that allows us to claim this (withholding) portion of the VAT despite being in a continual VAT refund position.”

Mr Kaushik Shah, the group governance officer at steel roofing firm Safal, said the liquidity challenge as a result of VAT refund delays had forced the firm with operation in 11 countries to resort to borrowing from banks.

“Effectively, what’s happening is the portion of money that would have been paid to us as a refund is actually lying as credit there (at KRA) because they said we couldn’t claim and it’s lying in our account,” Mr Shah said in an interview in Nairobi.

“This VAT contributes 3-4 percent of the cost of funding and then there’s liquidity that is tied up that you still have to go and borrow from the bank and, in today’s environment, to borrow from the bank is not easy.”

Gross non-performing loans in the manufacturing sector stood at Sh51.6 billion in June 2018 from Sh39.6 billion in December 2017 and Sh37.1 billion in September the same year.