This archive report was first published on 13 December 2019.
IMF Blames Treasury's Flawed Tax System for Cash Shortage ¶
Published on December 13, 2019, the International Monetary Fund (IMF) has identified Kenya's defective tax system as a major contributor to the ongoing cash crisis. According to the IMF, the large accumulation of Value Added Tax (VAT) refunds has had a negative bearing on cash flow to businesses, and by extension, to Kenyans' pockets.
The IMF notes that VAT is a broad-based tax levied at multiple stages of production, and in Kenya, it is charged at the rate of 16 per cent on the final product. However, the mechanisms employed by Kenya, Zambia, and Zimbabwe to respond to the challenge of large accumulation of VAT refunds have only made matters worse.
These countries have established special tax treatments for particular taxpayer groups, which has further complicated the administration of VAT. The IMF also notes that other mechanisms, such as Withholding VAT and the imposition of a 'reverse charge,' have resulted in taxpayers paying more than they receive, thus amplifying the problem it was intended to address.
The Kenya Revenue Authority (KRA) has been under pressure to pay tax refunds running into billions of shillings. In a recent joint communique with the Kenya Alliance of Private Enterprises (KEPSA), KRA said it has paid Sh20.4 billion in tax refunds between July 2018 and October this year.
The taxman has also established a team to facilitate the clearance of 6,000 VAT refund cases worth Sh27.6 billion outstanding as at the end of October. However, huge refunds have also been a subject of a rigorous audit by the taxman owing to fears that some of these refunds have been fraudulently incurred.
The IMF recommends that Treasuries set aside part of VAT revenue to cover expected refunds. The Government plans to reduce Withholding VAT from six per cent to two per cent to unlock funds held in VAT credits.
