Kenya Revenue Authority's fast collection, sluggish refunds

The cliche goes that nothing in life is more certain than death and taxes. Well, nothing could be more painful than either of those two things, especially if you are a Kenyan.

Every time we have a conversation about taxes, it inevitably degenerates into an emotional diatribe about how much we pay in taxes versus how little the said taxes do for us. In fact, every time I sit in a forum with representatives of the Kenyan tax revenue agency, they tend to bear the brunt of any and all corruption-related conversations.

It is not that we do not understand that the mandate of the agency is one of efficient collection and not distribution. We do. And we also understand that the agency’s mandate is not to ensure, similarly, efficient allocation.

Which is why I called the conversation emotional. And while we cannot lay the responsibility of the what and how of our hard-earned resources, there are certainly areas where the authority could and should be doing better if the larger goal of economic progressiveness is to be achieved.

For the past couple of years, the issue of refunds, specifically VAT refunds, has been the proverbial thorn in our sides.

Back when I worked in Kenya, I remember every end of month and quarter found me in a state of consternation. It doesn’t matter what kind of business you are in, the conversation around cash flow always takes front and centre stage. There is a reason we use the other cliche, cash is king.

It does not matter that you’re a highly profitable organisation, if your liquidity is poor. It matters even less if your top line, sometimes referred to as the vanity line, is robust - if these sales do not translate into cash in the bank. A highly profitable organisation that is unable to pay its debts as and when they fall due faces the risk of being wound up faster than you can say bankruptcy. And one of these creditors tends to inevitably be the taxman, which is ironic when he is the source of your financial angst, as has been the case with VAT in recent times.

Back to my end-of-month and quarter woes. See, the VAT collection model in Kenya is interesting, to say the least. Filing monthly returns involves declaring your output tax (VAT on sales) versus your input tax (VAT on purchases) and where the output is higher, making payments on the difference of the two. Simple up to that point. In the normal course of business, this shouldn’t present a challenge. However, certain periods give rise to a reversed scenario.

During say, periods of expansion when allowable inputs, or purchases are much higher, or where the sales are accompanied by taxes that are lower for example, or for tax-exempt bodies, then firms are left with a negative VAT, commonly known as a VAT refund.

And here your woes begin. Ideally, just like you pay for your VAT when you owe the authority, so should you be paid for the refund if you are in a negative position, especially if this position persists for an extended period of time.

When the refund does not occur, you are forced to carry an ‘asset’ in your books that you cannot encash at will, that is garnering you no operational benefits and that you are not earning any interest on. Now, try explaining to your board of directors that you are in a cash crunch because you are owed money by the revenue authority or even worse, you have no idea when or if you will receive it.

Unfortunately, this is the situation that a lot of Kenyan firms with refunds have found themselves in over the past couple of years. While the authority is nothing but aggressive in collection, inaccessible cash assets that earn no interest are sitting in books of firms, curtailing their ability to expand and stretching their ability to fulfill current day-to-day operations.

The reasons given by the authority are that there is a backlog, the audit process takes long, there are no funds allocated for refund and so on. All those are well and good, but if firms are paying to Caesar what they owe to Caesar when it falls due, then the reverse should apply.

I recall the last initiative we were following before I left was for the Commissioner to allow, once amounts were cleared as payable, for refund amounts to be applied to other payable taxes such as income tax (PAYE) and end-of-year corporate taxes) in order to reduce the unfair tax burden for already encumbered taxpayers.

However, knowing that aggressive collection is a one-way-street though, I would be surprised if this has yielded any returns and would be happy to hear of any success stories.

In fact I also recall the assertion that the revenue authority should start paying interest on long-held refunds to dissuade dragging out the process. Now, that is one initiative that we can all subscribe to.