Can Kenya’s VAT refund reforms propel the best global practices?

The Finance Act 2025 has introduced pivotal amendments to Kenya's Value Added Tax (VAT) system, particularly focusing on the VAT refund process. These reforms aim to streamline operations, reduce administrative burdens, and enhance compliance. As businesses adapt to these changes, it is crucial to understand the implications and how they compare to global best practices, especially those advocated by the Organisation for Economic Co-operation and Development (OECD).

One of the changes is the time frame allowed for lodging VAT refund claims. Registered persons must now lodge claims within 12 months from when the tax becomes due and payable, a notable reduction from the previous 24 months. This change is designed to speed up the refund process by shortening the time limit for claims. It also seeks to align the timelines to those prescribed under the Tax Procedures Act (TPA).

Additionally, the Act amends the TPA by increasing the processing time for VAT refunds to 120 days up from 90 days. While this extension may seem counterintuitive to speeding up refunds, it reflects a balance between providing the KRA with sufficient time to conduct thorough claim verification processes and efficient service delivery.

VAT refunds are essential for businesses, ensuring they are not overburdened by taxes on inputs used in producing goods and services. Efficient refund systems help maintain liquidity, encourage investment, and contribute to economic growth. Kenya's recent amendments reflect an effort to align with international standards and improve the business environment.

Globally, efficient VAT systems are characterized by quick processing times, robust digital infrastructure, transparency, with minimal administrative hurdles. The OECD promotes VAT systems that facilitate fast refunds, as delays can adversely affect business cashflow and investment decisions. In many OECD countries, VAT refunds are processed within weeks, supported by clear guidelines, and streamlined systems.

Faster processing and settlement of VAT refund claims improves liquidity, allowing businesses to reinvest in operations, expand their workforce, and pursue growth opportunities. This is particularly beneficial for small and medium enterprises (SMEs), which often face cash flow challenges and rely on timely refunds to sustain operations.

The success of the new legislative change hinges on the implementation of efficient systems. Businesses must prioritize accurate record keeping and timely submission of documentation to avoid delays and optimize refund processes. This may require investment in accounting systems and staff training to comply with new requirements. Additionally, the government must invest in infrastructure and automation tools to facilitate quick processing and reduce administrative burdens.

Advanced economies have leveraged on automated processing and risk-based assessments to tackle fraud. These innovations have reduced processing times and improved transparency, providing businesses with greater certainty and confidence in the refund system.

Kenya stands to benefit by adopting similar technologies and methodologies to streamline the VAT refund process. Implementing streamlined systems can reduce errors and enhance compliance. A risk-based approach can help identify and address fraudulent claims, ensuring refunds are processed efficiently and accurately.

Ultimately, efficient VAT refund provisions benefit individual businesses and contribute to broader economic growth. By improving liquidity and reducing administrative burdens, businesses can focus on innovation, expansion, job creation, driving economic growth and enhancing competitiveness. Moreover, a transparent and efficient refund system can enhance Kenya’s global competitiveness and attract foreign investment.

In conclusion, the Finance Act 2025 VAT refund reforms represent a positive step towards aligning Kenya's tax system with global best practices. By expediting the refund application timeline and reducing administrative burdens, the government aims to enhance business liquidity, encourage investment, and foster economic growth. However, the success of these changes depends on implementing efficient systems, requiring investment in technology and training. With strategic investment in technology, adherence to international standards and collaborative efforts between the government and private sector, Kenya can establish a VAT refund system that supports business and contributes to the nation's development goals. As the country continues to refine its tax policies, businesses play a crucial role in driving economic growth and advancing Kenya’s development goals.

Marlene Blessing is a senior tax consultant at Deloitte East Africa. The views presented are his own and not necessarily those of Deloitte. He can be reached at mablessing@deloitte.co.ke.

This article was originially published on Business Daily here.