GEORGE OBELL: VAT compliance a necessity for fair business environment, not burden

Tax compliance is the fundamental pillar of a country’s healthy business environment and national development.

When individuals and businesses file their returns on time and pay taxes accurately, it not only contributes to a stable economic climate but also ensures the government can fund critical public services and infrastructure that support growth and social well-being.

Beyond revenue collection, fairness and equity are essential to sustainable business growth. One of the most effective ways to create a level playing field among businesses is by ensuring all businesses pay their fair share of levies and taxes, safeguarding consistent and strong compliance with tax regulations.

This ensures that all traders, regardless of size, operate under the same rules, fostering a culture of accountability and transparency.

Among the various tax obligations, Value Added Tax (VAT) is one of the most far-reaching. Levied on the sale or importation of taxable goods and services, VAT affects a wide spectrum of businesses.

Those with annual taxable supplies of Ksh 5 million or more are legally required to register for VAT. However, registration is only the starting point. These businesses must also submit monthly VAT returns and remit the tax they collect from their customers.

VAT compliance goes beyond being a legal duty; it is a reflection of a business’s integrity and commitment to fair trade. When traders register, file accurate returns, and remit their taxes responsibly, they help build a market where success is driven by merit, innovation, quality, and service, rather than by evasion or manipulation.

VAT non-compliance continues to pose a significant challenge in Kenya. According to the Medium Term Revenue Strategy (MTRS), VAT revenue in the 2021/22 financial year underperformed by 39.8 per cent.

The government aims to reduce this shortfall to 19.8 percent over the medium term. This gap is particularly troubling considering that various initiatives, such as the VAT auto-population system, have been introduced specifically to enhance VAT collection.

Kenya Revenue Authority (KRA) has flagged several practices contributing to this revenue gap. These include cases where businesses file VAT returns but fail to remit the corresponding payments, fail to file returns altogether, or repeatedly submit nil returns while still seeking refunds. Other businesses demonstrate a broader disregard for VAT regulations entirely, further undermining efforts to ensure compliance.

To address these challenges and improve visibility into VAT transactions, KRA implemented the Electronic Tax Invoice Management System (eTIMS) under the VAT (Electronic Tax Invoice) Regulations, 2022. This system was designed to simplify the tax process, improve transparency, and minimize the risk of tax evasion by electronically capturing transactional data in real time.

Despite being a legal requirement, uptake of eTIMS has been slow. Only about 508,000 businesses have so far complied, which is a low number given the millions of registered businesses across the country.

Even more concerning is that many of the businesses that have not onboarded eTIMS continue to receive Tax Compliance Certificates (TCCs), allowing them to operate as though they are fully compliant.

A TCC is meant to be issued only to taxpayers, including businesses that adhere to all tax regulations, meet all their tax obligations, including adherence to VAT regulations and the use of eTIMS. This inconsistency raises a serious concern. Why are non-compliant businesses still able to obtain these certificates?

In response, KRA is introducing a new initiative, the Business Tax Compliance Certificate. This new certificate will be distinct from the general TCC and will specifically require that a business be fully compliant with all tax regulations, including having adopted eTIMS.

The aim is to enhance transparency in business transactions, reduce tax fraud and evasion, broaden the tax base, and improve overall revenue collection.

This initiative, along with other regulatory measures that drive eTIMS onboarding and VAT remittance, will help restore fairness in the marketplace by ensuring visibility and participation of all businesses.

It will also close loopholes that allow certain businesses to sidestep their obligations while gaining a competitive edge over those that comply fully with the law.

Ultimately, VAT compliance is not just a revenue issue; it is a matter of justice. When all businesses pay their fair share of taxes, the market becomes more equitable, and opportunities are distributed more fairly.

No enterprise should gain an advantage by exploiting weaknesses in the system. Fair taxation is particularly vital for micro and small enterprises, which often operate on slim margins and cannot afford to be undercut by larger or less scrupulous competitors that flout the rules.

Kenya’s National Tax Policy envisions a tax system built on the pillars of equity, inclusivity, and integrity. Holding all businesses to the same standard brings us closer to achieving that vision.

VAT compliance, therefore, should not be viewed as a burden; it is a vital tool for creating a just and thriving business environment.

A fair and transparent marketplace instills confidence, attracts investment, and supports inclusive economic growth.

For Kenya to prosper, every trader must play their part, not just by complying with the law, but also by upholding the principle that the rules apply equally to all.