• Tax evasion has been in existence for as long as humanity has existed.
• Christians would remember the maxim “Give to Caesar what belongs to Caesar.”
Image: FILE
Image: FILE
Have you ever wondered why your supplier or “plug” as young people call them is always cheaper than the regular, more established suppliers? Have you ever wondered why this particular store could sell a highly competitively priced item like cement or sugar cheaper than almost everyone else and yet they all get similar volume discounts? Have you ever wondered why an umbrella sold in front of a legitimate store is cheaper than a similar one inside by margins that cannot be explained by rent and overheads alone?
The answer is almost always tax evasion. Those who have to charge and remit VAT cannot possibly give you a 15% discount the same way a person who does not would. If a businessman selling cement suddenly has huge amounts of money to donate to politicians, the first question one should ask is whether they pay taxes especially in a business with very small margins. President Kenyatta’s administration is finally having a close look at these businesses and taking necessary corrective measures. There is no way you can be donating so much money in harambees yet you self-report that your business has a gross profit rate of 5%!
One such case was recently adjudicated on. And after a five-year legal battle, the Kenya Revenue Authority finally got a verdict against Palea Stores Limited for a nine billion-shilling tax evasion claim over unremitted corporation and value added tax covering the period 2008-2014. This is part of the vigorous investigation and enforcement efforts that have been put in place by the Kenya Revenue Authority in collaboration with other agencies under the multi-agency task team put in place by His Excellency The President.
On 22nd January, 2021, the Tax Appeals Tribunal delivered a judgment upholding tax assessment of Kshs 1,361,746,295.00 and Kshs 7,891,387,842.00 being corporation and VAT, respectively against Paleah Stores Limited, a wholesale trader dealing in building materials and food products, mainly cement, iron sheets, sugar and rice. According to KRA, the Authority commenced investigations on the tax affairs of the trader for the years of income 2008 to 2014 following intelligence that the Company was involved in malpractices leading to tax evasion. On 10th June, 2016 the Authority communicated its tax findings to the tax payer and asked the trader to avail all bank statements and purchase documents to enable the Authority complete the audit.
Based on the information received from the trader, bankers and suppliers, the Authority on 30th December, 2016 issued additional assessment amounting to Kshs 4,938,411,518.00 for VAT and Kshs 1,551,145,378.00 for Corporation tax. On 30th January, 2017, the taxpayer objected to the assessments on grounds that they were excessive and incorrect. Upon consideration of the objection, the Authority issued an objection decision on 29th March 2017 for Corporation tax at Kshs.1,585,436,863/- and Kshs 6,741,168,322/- for VAT.
Amongst the defences put up by Palea Stores includes an admission that they were victims of bad professional advice. Like the famous legal maxim puts in, ignorance of the law is no defence. And tax professionals exist to ensure that businesses do not fall victims to such unscrupulous advisors. It is also common knowledge that businesses have a tendency to demand that their advisors help them cut corners so that they can avoid and in some instances evade taxes.
In the above-mentioned case of Palea Stores, they claim that they were entitled to input VAT recoveries yet they filed the claims long after the statutory timelines expired. As the Tribunal puts it in their judgement, there’s no legal remedy for such a business as the law expressly prohibits such considerations after the timelines expire. It is unthinkable that a business with a turnover of over 33 billion shillings over a period of six years could be so callous as to not hire competent tax advisors. Unfortunately, whether or not a taxpayer is misled by a tax advisor not to pay taxes is irrelevant in this instance - the vice remains tax evasion, an offense punishable by law.
Tax evasion has been in existence for as long as humanity has existed – Christians would remember the maxim “Give to Caesar what belongs to Caesar.” And with time, technology and easier movement of people and goods, the vice has become more sophisticated and costlier to countries. It is reported that Kenya alone could be losing hundreds of billions in lost tax revenue arising out of tax evasion schemes annually. Renown Italian economist and scholar Rosella Levaggi, in one of her opinions, states that, “Tax evasion raises the relative cost of producing goods and services in the sectors where evasion is more difficult.” Relatively, economists argue that the cost of living goes up and a country’s total wealth reduces since a few taxpayers pocket billions and live the rest struggling to bear their tax burdens.
Through collaborations with other agencies under the Multi-Agency Task Team (MATT) and our international partners, KRA is prosecuting tax cheats and bringing down tax evasion schemes. In the last financial year for instance, KRA successfully intercepted spirituous illicit products with an estimated tax loss of Kshs. 1.2 billion that were destined for the local market. KRA also profiled 1,309 individuals and companies with tax-loss estimated at approximately Kshs. 259 billion. These entities are earmarked for further investigations and legal action for non-compliance.
KRA through multi-agency collaborations, has managed to seal several loopholes in tax evasion that are translating into revenue. In the first half of the year 2020/21, KRA posted improved revenue performance rate of 101.3%. This was the first positive and above target collection rate since the outbreak of Covid-19 pandemic. The improved performance is attributed to enhanced compliance efforts and the relaxation of Covid-19 regulations. The Kenya Revenue Authority collected Ksh. 166 billion against a target of Ksh. 164 billion representing 3.5% growth over the same period last year.
KRA continues to intensify the use of a robust intelligence network to curb tax evasion and the use of technology to support tax collection including a web-based anonymous reporting system to enable the public to report tax evasion while remaining anonymous. The government is also exploring the deployment of the Tax Appeals Tribunal (TAT) on a full-time basis to expedite resolution of tax disputes which are currently holding more than Ksh. 200 billion.
These efforts, coupled with others like the Voluntary Disclosure Program (VDP), are definitely yielding results. Under VDP, taxpayers are urged to pay their taxes, those with tax arrears should disclose and pay taxes that may not have been declared for the last 5 years. Upon disclosing these arrears, the taxpayers enjoy the benefit of waived interest and penalties.
Makodingo is a devolution and governance expert