A digital audit of tax refunds has delayed payment of half of the applications by businesses amounting to Sh5.8 billion.
The Kenya Revenue Authority introduced the digital Value Added Auto Assessments (VAA) system which compares VAT returns by suppliers and buyers to curb the use of fake invoices or inflated refunds.
The taxman says by April this year, it has received more than 2,000 applications for withholding VAT refunds and has cleared and paid 1,000 applicants Sh6.6 billion worth of refunds.
“Of the 2,098 withholding VAT refunds applications worth Sh12.4 billion received, 1,041 applications worth Sh6.6 billion have been processed as at the end of April 30, 2021,” KRA said in a statement.
Since 2018, KRA has been comparing declarations made in VAT returns of the seller and the buyer, singling out invoice errors, foreign exchange issues, and sending VAT inconsistency reports to both parties.
The VAA is designed to identify fictitious VAT inputs mismatched against VAT outputs, to broaden the tax base and increase revenue collection.
The taxman says that the invoice matches have increased to 65 per cent from 28 per cent since the rollout of the digital VAA and plans to ensure taxpayers place claims on verifiable records.
However, the drawn-out reconciliation has often led to delay in the processing of VAT refunds.
Some businesses claim they have been unable to lodge claims on iTax because the system has been generating an error: “You can only apply for a refund within 12 months after July 2019.”
This has affected businesses’ cash flows especially during the coronavirus pandemic leading to rounds of negotiations with KRA through business lobbies.
Some even resorted to going to court like French retailer Carrefour which sued the taxman for rejecting its Sh523 million VAT refund claim.
Carrefour owners, Majid Al Futtaim Hypermarkets Limited said they raised an objection over a year ago and supplied KRA with 11,000 invoices each month without getting a resolution even as the disputed tax claim continued to incur an additional Sh65 million interest.
Ahmed El-Gindy Majid, the Al Futtaim Hypermarkets country finance manager asked the court to declare the implementation of the digital VAA as illegal and force KRA to accept the disputed input tax.
The problem of delayed refunds and their effect on businesses has been a big issue that it was included in the talks with the International Monetary Fund when it gave Kenya the Sh79.3 billion under the Rapid Credit Facility last year.
IMF specifically told the National Treasury to spend Sh10 billion of the loan to pay tax refunds to enable businesses to survive the pandemic.
“To mitigate the impact of the shock on businesses and vulnerable households, the authorities have instituted significant fiscal measures. Accordingly, the recently approved supplementary budget reflects measures to protect vulnerable groups and increased expenditure for the health sector; cash transfers to the elderly, disabled, and low-income households; and allocations to expedite clearance of unpaid bills to suppliers and VAT refunds,” IMF said.
Treasury enhanced funding for VAT refund payments in the current financial year hence alleviating claim delays associated with funds shortage.
KRA says they have been engaging with buyers and sellers to ensure correct invoice records are captured and fast track delayed refunds from VAA reconciliations
“Administratively, there were delays initially relating to system enhancements required to process refunds arising from Withholding VAT when the same was introduced in 2019, but this is now fully resolved. In addition, most Withholding VAT refund claimants were first-time applicants whose refund applications required to be audited in line with the risk profiling framework put in place by the Authority,” KRA said.