The Kenya Revenue Authority (KRA) announced on February 28, the suspension of various tax reliefs, a directive that has left several taxpayers confused.
The KRA issued follow-up statements to clarify the earlier one, but it did little to answer all the questions arising from the implementation of the suspension.
The taxman explained that the suspension of “all tax relief payments” is aimed at enhancing the current processes related to the payment of tax refunds, exemptions, waivers and abandonments.
The suspension took effect on February 28 until further notice.
What did KRA suspend?
KRA says the suspension was informed by “concerns” from taxpayers, and this caused the new administration to restructure the rules and procedures governing tax exemptions.
Robert Waruiru, a partner at Ichiban Tax & Business Advisory LLP, says the waivers and reliefs that have been impacted are those which have been given under the discretion of the Treasury Cabinet secretary.
This coincides with a recent court decision that saw the High Court quash income tax waivers granted to Japanese workers and companies saying the decision in 2021 was unconstitutional as the Treasury minister has no such powers.
Former Treasury CS Ukur Yatani had exempted income tax for businesses and workers earned from 15 projects valued at Sh328 billion.
Justice Dennis Magare, however, said exemption or waiver of tax income can only be granted by Parliament through legislation and after the same is passed as a money Bill provided in the Constitution and after public participation.
How will the suspension affect personal reliefs given to workers?
Any tax waivers given by law such as personal relief will not be affected. In a subsequent statement signed by Deputy Commissioner for Policy, KRA clarified that tax reliefs given by law will not be scrapped.
“(The suspension) does not mean that the reliefs have been scrapped. The scrapping of reliefs can only be done through an amendment of the law.”
Tax experts observe that the KRA cannot suspend that which is granted by the law. The only way to suspend is by removing it from the law.
This means that personal relief of Sh2,400 that is included in the personal income tax rate will still apply. And so are the many other exemptions that are captured in various tax laws.
What happens to taxpayers who had already applied for an exemption?
The KRA told the Business Daily that although they will continue receiving an application for waivers and exemptions, they will not process them until the audit is complete.
The same applies to those who had applied for the waivers and were awaiting either approval or payment in the case of tax refunds.
In the current financial year alone, KRA was supposed to pay businesses and individuals close to Sh21 billion in tax refunds.
What of those already waiting for tax refunds?
Unfortunately, the suspension also includes tax refunds running into billions. This will hurt the cash flow of businesses owed billions of shillings by the taxman.
A refund arises when the tax liability is less than the taxes paid, basically when you pay the KRA more than it’s due. The different types of refunds include value-added tax (VAT), income tax, excise duty and stamp duty.
The largest component of tax refunds is VAT. Tax refund on VAT often arises from zero-rated goods and services such as maize flour, bread, cooking oil and other foodstuffs.
All the input VAT charged on these items are supposed to be paid back by the National Treasury as consumers do not pay the tax on them.
What is the problem with tax exemptions and waivers?
Tax incentives are given to encourage investment and job creation.
In the financial year ending June 2021, for example, tax expenditures, or the value of revenue foregone by the government due to tax reliefs, increased to Sh316 billion.
This is a rise of Sh48.9 billion from the Sh267.1 billion that the KRA paid out to businesses that enjoy relief on various tax heads including domestic VAT, Domestic Excise duty, Personal Income Tax, and Corporate Income Tax.
This is despite spirited efforts by the Treasury to reduce claims by getting rid of unnecessary waivers. For example, imports of helicopters and their parts were for a long time exempted from import duty.
This is because these birds were to be used for humanitarian reasons such as flying patients from remote areas with no hospitals or even moving relief food to areas suffering from famine.
However, over time, this was abused and even the wealthy started importing their helicopters tax-free.
Another study that was done by KRA showed that while enterprises in the export processing zones had received billions in tax incentives, they had not created as many jobs or exports which means that incentive was not working.
“A review carried out by the World Bank in 2015 on the tax incentives concluded that many had not delivered the expected impact such as lower prices for consumers or increased supply of specific products,” said the Cabinet Secretary for National Treasury Njuguna Ndung’u.
Mwaura noted that the current suspension and ongoing review of tax reliefs are also aimed at increasing the impact of tax expenditure on economic growth.
“This will be achieved through minimizing tax expenditure and aligning it with international best practices for better internal revenue,” said Mwaura.