MPs intensify probe on how KRA abandoned Sh2.1bn in sugar taxes

The Kenya Revenue Authority is on the spot on how an import duty for raw sugar placed at more than Sh2.15 billion was overturned by the National Treasury.

This is after fresh details emerged on how a dispute over raw sugar classification saw tax demand collapse from Sh2.9bn to duty remission with MPs questioning KRA's independence.

Appearing before the National Assembly committee on Trade on Thursday, KRA commissioner for customs and border control Lilian Nyawanda faced sustained questioning from MPs over the authority's decision to abandon its initial assessment after a meeting convened by the Cabinet Secretary for the National Treasury.

At the centre of the dispute is a 27,839-metric-tonne consignment of raw cane sugar imported by Mombasa Sugar Refinery Limited from South Africa.

KRA's submission to Parliament shows the importer ultimately paid Sh511.8 million in taxes, including VAT and other levies, but acknowledged foregoing Sh2.152 billion in import duty under the East African Community Duty Remission Scheme.

Other taxes forgone included Sh208.8 million in excise duty, Sh490.1 million in VAT, Sh57.8 million in Import Declaration Fees and Sh46.3 million in Railway Development Levy, among others.

However, MPs established that this was not KRA's original position. The committee heard that customs officers had initially rejected the importer's tariff classification after laboratory analysis and demanded taxes amounting to approximately Sh2.9 billion, arguing the sugar did not qualify for the preferential treatment accorded to raw sugar imported for industrial refining.

Trade Committee chairman Bernard Shinali repeatedly sought to establish why the assessment changed.

"So until you went to the CS, KRA had a position that taxes must be collected. Is that true?" Shinali asked.

"That's true, yes," Nyawanda responded.

The admission exposed the sequence that has now become the focus of Parliament's inquiry.

According to KRA, the importer objected to the assessment under the dispute resolution provisions of the East African Community Customs Management Act.

Nyawanda told the committee that the dispute eventually culminated in a multi-agency meeting convened by the Treasury Cabinet Secretary, bringing together officials from KRA, KEBS, the Kenya Sugar Board, the Ministry of Agriculture and the importer.

Following that meeting, KRA released the consignment under a controlled multi-agency monitoring framework.

 “The classification dispute has since been resolved following the direction from the Cabinet Secretary, National Treasury and Economic Planning to align with the KEBS determination," Nyawanda said.

The committee appeared unconvinced by KRA's explanation. Shinali questioned whether it was normal practice for the Treasury Cabinet Secretary to intervene in disputes involving tax assessments.

"Is it a process to go to the CS in KRA to resolve a matter?" he asked.

Nyawanda acknowledged that the case was "unique", saying it was the first time Kenya was implementing an EAC Council of Ministers' legal notice allowing remission for imported raw sugar intended for industrial refining.

Pressed further on whether such intervention was provided for in law, KRA officials cited the dispute resolution provisions under the customs law but conceded they could not point to any legal provision specifically empowering the Cabinet Secretary to convene such a meeting to determine the dispute.

The exchange prompted MPs to question how independent KRA remained in making tax decisions.

The hearing also exposed conflicting interpretations between KRA and the Kenya Bureau of Standards (KEBS).

KRA maintained that its classification relied on the World Customs Organization tariff framework for taxation purposes, while KEBS relied on East African quality standards to determine that the sugar qualified as raw sugar destined for further refining.

KRA officials said KEBS based its determination on laboratory tests conducted by Société Générale de Surveillance (SGS) before shipment.

However, MPs questioned why KRA abandoned its own technical assessment if its customs laboratory had already concluded differently.

Funyula MP Wilberforce Oundo argued that the authority appeared to have relied largely on verbal presentations made during the Treasury meeting rather than formal written technical advice from KEBS.

KRA admitted it did not have written correspondence from KEBS supporting the decision during the hearing and requested seven days to submit the laboratory reports, technical standards and minutes of the multi-agency meetings to Parliament.

Deputy committee chairperson Maryanne Kitany demanded documentary evidence showing how KRA officers participated in the multi-agency process and the safeguards put in place to ensure the sugar was not diverted into the local retail market.

She also questioned the origin of the sugar after noting that the commercial documentation identified a seller in Singapore while the certificate of origin indicated South Africa.

KRA was unable to conclusively explain the manufacturing source, saying it would require further factual verification.

“Table Three of the authority's report shows taxes actually collected amounting to Sh511.8 million, while Table Four details taxes forgone under the remission scheme, including over Sh2.15 billion in import duty,” noted Kitany

Further questions emerged over why the customs declaration initially reflected zero import duty, despite the applicable EAC legal notice requiring a 10 per cent concessional duty rate for the approved raw sugar imports.

KRA attributed this to what officials described as a system error and said the additional taxes were subsequently collected through an electronic adjustment.

The committee has directed KRA to submit within seven days all correspondence from the Treasury Cabinet Secretary, minutes of the multi-agency meetings, KEBS laboratory determinations, SGS testing reports and system records detailing how the disputed consignment was eventually cleared.