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Timeous processing and approval of Income Tax refunds is likely to boost businesses

For a long time, majority of taxpayers would automatically offset income tax overpayments against their tax liabilities. This was largely informed by the fact that Kenya operates a self-assessment regime and one’s tax affairs are believed to be reasonably in order unless successfully queried by the Kenya Revenue Authority (‘KRA’). Therefore, if one has an overpayment, they are eligible to offset against tax liabilities falling due. Unfortunately, this practice was frozen after KRA asserted that a refund of overpaid tax should be lodged and validated before it can be utilized.

Arguably, the position held by KRA was informed by KRA’s interpretation of Section 47 of the Tax Procedures Act (‘TPA’). The Tax Appeals Tribunal (‘TAT’) solidified this position vide a recent judgement involving one of the banks in Kenya. This decision has already been appealed at the High Court.

On the other hand, the KRA has intensified its efforts to ensure that no overpayment is utilized prior to approval by the Commissioner. Some of the efforts include configuration of iTax to ensure that there is no slot to key in tax overpayment brought forward from previous years of income.

Without going to the merits of the efforts deployed by KRA since this may be considered pre-judicial, it would be paramount to device ways of ensuring that income tax refunds are processed and approved timeously to cushion businesses. To achieve this, all stakeholders including the KRA, National Treasury and taxpayers need to play their rightful roles.

Refund of non-VAT related refunds is guided by Section 47 of the TPA. This section requires taxpayers to lodge a refund of overpaid tax within five years from the date the tax was paid. On the other hand, KRA is required to ascertain the validity and communicate to the applicant within 90 days after receiving application. Once a refund is determined to be correctly due, it is supposed to be applied sequentially in settling any outstanding tax liability, offsetting tax owed under any other tax law and remainder refunded to the taxpayer no later than two years from the date of application. The law unequivocally states that failure by the KRA to refund the remainder of the tax within two years will attract interest at 1% per month or part thereof.

Despite this clear prescription by the TPA, we are yet to see income tax refunds being processed within the time frames envisioned by the law.

KRA’s overriding focus on confirming the validity of refunds will most times result in protracted audits. Rightfully, the taxman should engage in verification exercises as provided for by law, to avoid paying out fictitious or erroneous claims. However, there may be a need for additional reforms within KRA to help fast track the process. First, with a digital infrastructure already in place (iTax) the taxman could consider investing in manpower, either through enhanced staff numbers or reallocation of resources, to avoid relying heavily on a lean audit refund team.

Secondly, the KRA must be deliberate in adhering to the time limits provided for within the law despite the fact that the law may have not prescribed punitive consequences for non-adherence. To this end, emphasis by KRA to the refunds team on the statutory timelines and the consequences of non-adherence (interest at 1% p.m) is paramount. 

Aside from human resource, the refunds team needs to adopt an assertive practice. On paper, the taxman is supposed to initiate the verification exercise. However, most times, taxpayers find themselves burdened with the duty of initiating the refund review process. The taxman has to be intent on reviewing applications promptly, which will help clock these timelines.

Conversely, taxpayers could also apply some strategies to tamp down the refund process.  First, applications should be made timeously if the intent is to offset against liabilities in the immediate future. To pre-empt being time barred, income tax refunds should be applied for within 5 years as provided for under the TPA. Further, it is advisable that applications are lodged at least ninety days before the deadline of the tax that a taxpayer intends to offset against.

Secondly, taxpayers should be audit ready as soon as refunds are lodged. Rather than wait for the information requests to be sent out, taxpayers should be proactive in preparing refund related records. Common documents required for refund audits include; audited financial statements, income reconciliations, tax receipts, etc.

Thirdly, taxpayers should aggressively pursue the refunds by way of constant follow ups. Needless to say, ordinarily, majority of taxpayers submit refund applications and abandon them in the hope that the funds will be paid out by a stroke of luck. From experience, the absence of consistent intervention by applicants reduces the chances of getting approvals timeously.  

It would however not pay any dividends where the KRA and taxpayers play their rightful role but there is no allocation to facilitate refund from the National Treasury. To this end, it would be advisable to increase the allocations and ensure that disbursements are made to KRA in a timely manner to facilitate refunds. The allocations could be reviewed quarterly based on the amount of refunds applied for by taxpayers.

There’s however no denying that KRA has made strides on some income tax applications especially in instances where the audits were managed properly.

Being the first year when the KRA appears to have fully enforced the requirement to lodge a refund, KRA is likely to see a burgeoning of refund applications and it is time that they double up their efforts to speed up the process. Delays lead to wastefulness and in some cases, businesses are forced to take up loans to stay afloat. The attendant interest expense increases their cost of doing business that have already tightened their belts in these tough economic times. 

The writer is tax consultant at Deloitte East Africa, The views expressed represent those of the author and do not necessarily represent those of Deloitte East Africa.