Kenya Revenue Authority (KRA) will start cleaning its register to de-activate accounts of businesses that have Value Added-Tax (VAT) obligations but persistently fill nil returns in the latest bid to tighten tax evasion loopholes and boost domestic revenues.

The move means that Personal Identification Numbers (PINs) of businesses with VAT obligations will be delisted, effectively cutting them off from making critical transactions like opening bank accounts or property transfers where proof of an active taxpayer’s PIN is always demanded.

An internal memo dated August 5 within the domestic taxes department shows that the drastic move came after KRA realised a surge in the number of taxpayers with VAT obligations in its register but are either not filing their monthly VAT returns or consistently filing nil returns.

“The department has therefore embarked on a taxpayer register cleaning exercise to ensure that it supports complaisance activities,” Evans Nyakang’o, Commissioner for Domestic Taxes said in the memo. It adds; that “identified taxpayers will not be allowed to file original or amended VAT returns and their PINs will not be accepted for VAT input claims by other taxpayers.”

Affected taxpayers will, however, be permitted to settle any pending VAT liabilities.

Erroneous VAT obligation, inactive/dormant taxpayers and closed-down companies are some of the reasons contributing to the huge number of nil and non-filers.

New VAT entrants will be validated as they onboard the tax register.

Taxable goods

Businesses expecting to supply taxable goods worth more than Sh5 million are often required to register for VAT, which is currently charged at a rate of 16 per cent for general goods and services.

Filing nil return often insinuates that a taxpayer did not receive any income within a given fiscal year or income generated was below the taxable level. The rising number of nil VAT returns could, however, be a signal that businesses are either recording losses due to hard economic times or using that strategy to evade taxes.

KRA had in June said plans to deactivate about 100,000 accounts of VAT defaulters aimed at wiping out tax evaders. The taxman is under pressure from the National Treasury to collect more revenue to finance almost three-quarters of the budget hole in the 2022/23 fiscal year.

After dipping in 2021, domestic VAT increased by 24 per cent to Sh244.693 billion when KRA recorded a historic annual revenue collection of Sh2.031 trillion in the 2021/2022 fiscal year. Revenues collected Value Added Tax, which accounts for about 25 per cent of the overall revenues collected, is one of the key tax heads the government relies upon to fund its budget.

The taxman has lately been scrutinising the VAT tax head by rolling out Tax Invoice Management System (TIMS) regulation to tighten loopholes costing it billions in revenue. Businesses are, for instance, under-quoting the amount of taxes payable, commonly done through mis-invoicing of goods sold or produced to reduce their VAT remittances.

To tame such VAT fraud, KRA is pushing businesses to comply with the transition to Electronic Tax Registers (ETRs) under TIMS regulation, whose deadline was extended to September 30 following a shortage of ETR machines.

The taxman anticipates that full TIMS implementation could increase VAT contribution to more than 35 per cent of the total revenue collection.

ACCOUNTS DELETION

• Implementation of TIMS, together with other rolled-out series of new tax surveillance systems will give Times Towers a view of goods as they leave the production line to the exchange point between retailers and consumers.

• The VAT Act 2013 and the Tax Procedures Act of 2015 empower the KRA to deactivate the PINs, ban suspected tax cheats from travel, collect duty directly from suppliers and bankers of defaulters, and prosecute those in arrears.

• VAT is a consumption tax paid whenever a value is added to taxable products and services at each stage of the retail chain from manufacturing to consumption level.