Auditor General raises red flag over missing billions at KRA

 

KRA officials Daniel Mugo helping Standard Group staff file their tax returns. [File, Standard]

The Kenya Revenue Authority (KRA) has come under fresh scrutiny after Auditor General Nancy Gathungu revealed significant discrepancies in tax revenue collection and outstanding refund claims running into hundreds of billions. 

In her damning audit report, the Auditor General accused KRA of failing to collect hundreds of billions of shillings in tax revenue denying the government much-needed revenue.  

The report, released recently reveals that the taxman under-collected income tax revenue by Sh147 billion in the 2022-2023 financial year. 

The Auditor General found that 1,486 taxpayers declared a gross turnover of Sh2.54 trillion under their VAT (Value Added Tax) obligation, but only Sh2.05 trillion under their income tax obligation, resulting in an under-declaration of Sh490 billion. 

“The underdeclared turnover of 490 billion shillings under the income tax obligation would have attracted a corporation tax of 147 billion shillings which the Authority did not collect,” she notes in the report. 

According to Ms Gathungu, KRA’s statement of revenue collections and transfers for the period reflects total Treasury collections of Sh2.05 trillion. Included in the treasury collections are receipts of Sh944.4 billion from income, profits and capital gains and Sh844.9 billion from taxes on goods and services. 

However, a review of taxpayers’ declarations in the i-Tax system from the Large and Medium Taxpayers Offices for the 2022-2023 financial year revealed that 1,486 taxpayers declared a gross turnover of Sh2.5 trillion under the VAT obligation, while the same taxpayers declared a gross turnover of Sh2.04 trillion under the income tax obligation, resulting in an under-declaration of Sh490 billion turnover under the income tax obligation. 

“The under-declared turnover of Sh490 billion under the income tax obligation would have attracted a corporation tax of Sh147 billion, which the Authority did not collect,” said Ms Gathungu. 

She said although KRA Management indicated that action has been taken through the issuance of additional assessments, amendment of returns and compliance audit of the clients, no explanation was provided as to why action was not taken as required by Sections 6.02(ii) and 6.03(v) and (vi) of the Domestic Tax Department Compliance Management Manual.

It requires Management to establish the inconsistencies and underlying causes and further prepare a report recommending action by each of the taxpayers’ account managers. 

“In the circumstances, the Authority under-collected revenue by Sh147 billion in respect of income taxes,” said the Auditor General.   

KRA has been under pressure to seal revenue leaks against the backdrop of higher collection targets set by the Kenya Kwanza administration. 

President Ruto has often expressed his frustration with KRA’s failure to reach targets and wants the taxman to end graft and adopt technology to boost collections. 

His government has sought to broaden the country’s tax base and raise revenue to enable him to deliver on his raft of pledges over the next financial year. 

The Auditor General also raised concerns about the management of outstanding tax refund claims, which totaled Sh107.5 billion as of June 30, 2023. 

Her report found that 19,978 refund claims worth Sh46.5 billion had been outstanding for over two years, with potential penalties of Sh16.1 billion. 

Furthermore, the report highlighted long-outstanding revenue debts, with the KRA classifying Sh904.6 billion shillings, or 95 per cent of the total Sh999.6 billion in outstanding debts, as uncollectible, doubtful or under validation. The Auditor General’s report called for the KRA to take immediate action to address the issues raised, including establishing the causes of the inconsistencies and taking appropriate action against the taxpayers. 

As of June 30, 2023, she noted the KRA had outstanding refund claims of Sh.107.5 billion, comprising 183,262 claims. 

However, 19,978 of these claims, totaling Sh46.5 billion, had been outstanding for over two years. KRA indicated that these claims were under verification and had not been approved for payment. 

Further, 488 claims amounting to Sh5.9 billion had been outstanding between five and 15 years with no explanation provided for the delay in reviewing and settling these claims. 

Ms Gathungu noted that KRA’s Tax Manual does not provide guidance on prioritising the payment of refund claims, leaving the decision at the discretion of the staff processing the claims.