VALUE ADDED TAX AUTOMATED SYSTEM (VAA)
In our news flash dated 29 October 2018, we discussed the new automated system (the system) that the Kenya Revenue Authority (the KRA) proposed introducing during 2018 to enhance VAT compliance. We now understand that the system has been launched (probably at this stage on a trial basis) and a number of taxpayers have received emails generated by iTax setting out VAT inconsistencies going back to January 2018. These emails are accompanied by spreadsheets listing entries from a taxpayers VAT return which are considered inconsistent.
To recap, the VAA is designed to:
- detect inconsistencies between purchase and sales invoices which have been declared in Value Added Tax (VAT) returns;
- communicate the inconsistencies to both the purchaser and the supplier; and
- (on that basis) raise an auto assessment on the purchaser for any outstanding inconsistencies.
The VAA is designed to identify fictitious VAT inputs mismatched against VAT outputs, broaden the tax base and subsequently increase revenue collection. This is laudable and should, if effectively implemented, go a long way to catching the perineal evader of tax who either does not declare income or issues fictitious documents.
The proof of the pudding is in the eating or, in this case, the implementation; the KRA had indicated that they would roll out the system in 2018 and, indeed, it would seem that the implementation has now occurred although potentially as a trial. A number of VAT registered taxpayers will have received discrepancy notices by now and would have been given a maximum of 30 days to resolve the issues or face an assessment. Resolving these issues requires coordination between buyers and sellers/suppliers and it would appear that, in many instances, the problem arises from how and when the transaction was included in one’s VAT return.
The types of discrepancies that have been identified include:
- When a supplier does not have a customer’s PIN number, the sale is generally included in the VAT return under the section dealing with supplies to unregistered customers. The customer, on the other hand, will have a specific entry in the input tax section claiming the VAT on the invoice. The system is therefore unable to match the sale with the purchase.
- Equally, the supplier above may experience the same issue with its own suppliers giving rise to another set of discrepancies.
- The system matches supplier sales to purchaser input in the same month. However, in many instances, the purchaser may not include the claim in the same month for a variety of reasons. Indeed, the purchaser has up to 6 months to claim the input but if it is not done in the month the sales invoice was issued and reported in the supplier’s VAT return, the system will generate a discrepancy notice where it is unable to make a direct match in the same month.
- Where a purchaser claims VAT on a point of sale receipt (such as from a supermarket), the seller would, quite understandably, not have the PIN number of the purchaser and a discrepancy notice will arise.
Putting it into perspective
What is clear is that VAT has not performed as well as it might in Kenya, averaging at approximately 25% of total collections (see chart). On the other hand, income tax (which would include personal, corporate and capital gains tax) has averaged approximately 49%. Given that the tax is a consumption tax that applies every time a consumer spends, there can only be two reasons for its poor performance:
- evasion is rampant and traders are simply not charging nor accounting for the tax; and
- consumer spending is depressed which may well be the case when the economy is not as buoyant as it could be.
The system the KRA is now using focuses on evasion, which while laudable, will make the administrative burden on an already beleaguered taxpayer much greater. The costs of reconciling the discrepancies is likely to be exorbitant with the need to hire people to carry out the task. In the case of larger businesses, discrepancies could number in the thousands.
VAT law in Kenya places the onus of collecting and accounting for VAT on the supplier. From the purchaser’s perspective, a claim for input VAT can be made if the supplier provides a valid tax invoice and an Electronic Tax Register (ETR) receipt. The system now being used by the KRA seems to shift the burden to the purchaser to pinpoint suppliers that are errant. In our view, this is against the spirit of the law. It is not the purchaser’s responsibility to catch VAT evaders. It is very clear that the KRA that needs to enforce compliance with the tax through a robust audit process, however, the KRA appears to be passing this role on to the taxpayer.
The system appears to look at outputs and inputs in a single month based on returns filed for that month. In instances where the supplier accounts for VAT in a particular month and the purchaser makes a claim in the same month, no issue should arise provided that all the information matches. However, the purchaser may often make the claim in a subsequent month, which remains a valid claim provided that it is made within six months. Attempting to match a claim made by the purchaser in a subsequent month will no doubt result in a discrepancy that is in fact is not a real discrepancy. Perhaps the system needs to be able to seek a match in the previous six months to resolve this issue.
Point of sale purchases at say, supermarkets, are likely to create a number of discrepancies as the purchasers PIN number will not be recorded. Generally, such purchases are of small amounts and perhaps the KRA needs to consider some form of de-minimis limit for a claim which will not attract a discrepancy notice.
Overall, the VAA system is a great idea to catch tax evaders and one that should be encouraged. However, in its current form it is likely to place an additional burden on taxpayers, particularly purchasers. Reconciling discrepancies is going to be a time consuming and costly task but it is possible to minimise the number of discrepancies.
The key to avoiding these notices would seem to be the PIN. Both suppliers and purchasers need to ensure that they have each other’s PINs. The use of the catch all “non-registered” cell in VAT returns because the supplier does not have the purchaser’s PIN needs to become a thing of the past, although this may not be possible for point of sale purchases. The input of data regarding an invoice will be equally important. Assuming that PINs match, the secondary stage of the system must be to look at invoice numbers and amounts; therefore it will be critical to ensure that the data input is accurate.
Taxpayers will have to relook at their systems of data capture if they want to avoid numerous discrepancy notices each month. The system is the right way forward in terms of the KRA using technology and data analytics. What it now needs is some fine tuning to make it effective and not create an unnecessary burden on both sellers and purchasers.
We understand that the KRA will issue further guidelines to assist taxpayers. In the meantime, it is important that taxpayers resolve any discrepancies and officially write to the KRA with how they have been resolved. This is perhaps best done before the KRA issues an assessment. An assessment, if issued, will be subject to the normal objection and appeal set out in the Tax Procedures Act.