Our tax regime is self-defeating

By John Kuria and Arwinder Sandhu

The tighter you attempt to hold sand in your hands, the more it will slip away. A country's tax regime almost works in a similar manner.

The complex tax regulations that currently exist in Kenya seem to create the urge for a taxpayer to gamble with his tax obligations.

As a common citizen, in this fast growing competitive world market, one has a lot more to focus on than the numerous and sometimes onerous tax obligations. It would be beneficial for all if the tax regulations and administration in place were not as involving and time consuming as they presently are.

No doubt history will repeat itself again this year with the Finance Minister reading out the budget with his focal point being to increase tax collections and enhance compliance.

Maybe it’s time that the focus shifts to making our system easier to comply with, less ambiguous and encourage compliance. Perhaps this will lead to the ultimate goal of a wider and more compliant tax base.

Tax reforms

Currently, there are numerous tax forms and returns to be completed. A company, for instance, has among other tax obligations, four installment tax payments, one final tax payment, 12 withholding tax, 12 VAT, 12 PAYE, 12 NSSF and 12 NHIF payments to make in a year. This is laborious and takes away from what would otherwise be productive time. Is this an easy tax system to comply with?

The processing of refund claims creates a logistical nightmare for most taxpayers. Due to the large number of refunds presumably being processed, there is no telling when one might receive their refund.

The opportunity loss of having these funds tied up is often significant. The authorities have always argued that they do not have enough funds to pay out all the VAT claims being made. But as a matter of fact, neither do our businesses. The argument therefore goes both ways, but with the taxpayer, it seems, being the bigger loser.

If VAT refunds cannot be processed and paid out in time, then equity demands that businesses be allowed automatic set off of this refund against other taxes like corporation tax, PAYE or withholding tax.

It does not make much sense to keep paying taxes, when our tax accounts are already in a refundable position. And now that we use a system of self-assessment, why is it necessary to seek approval to offset refunds of one tax against the other – all very frustrating.

Despite the fact that we operate a self-assessment regime, KRA has the authority to conduct tax audits of entities’ operations and tax affairs, which is acceptable.

Punitive law

However, a common trend noted is that KRA usually issues exaggerated assessments. This is counter-productive and does not help build business growth.

Our legislation allows for KRA to go as far back as seven years to audit an entity’s tax affairs. They can audit periods further to this seven-year limit when they suspect fraud or willful omission on the part of the taxpayer.

Where an audit has already been conducted in respect of a certain period, unless KRA closes the audit, which is becoming increasingly rare, KRA can always come back to audit the same period again.

The key question here is when one can consider themselves safe when KRA rarely concludes audits.

Another general observation is that KRA seems to generously issue demand notes whenever they feel that they are falling behind on their collection targets. The basis of these demand notes are usually the difference between the amount of tax declared in the self-assessment return submitted to them and the corresponding tax payments made for that specific year.

Solve issues

One often finds these tax arrears arise because of failure by KRA to transfer tax overpayments arising in one period to another period, or failure by KRA’s system to capture a tax payment that was made.

Admittedly, KRA has improved efficiency over the last few years, but the dreaded statements of accounts remain a reality. Hopefully, the new KRA system will make this a problem of the past.

We do appreciate the fact that a lot has changed from the past, but there is still a lot more that our authorities could do to create a warmer tax environment that taxpayers will appreciate and comply fully with. Perhaps this can be some food for thought.

—John Kuria is a Tax Manager, Deloitte Kenya and Arwinder Sandhu Tax Consultant Deloitte Kenya. The views expressed in this article are the author’s and not necessarily those of Deloitte Kenya.