Friday, May 7, 2010

FACTORS AFFECTING THE EFFECTIVENESS OF VAT REFUND STSTEM IN KENYA.

FACTORS AFFECTING THE EFFECTIVENESS OF VAT REFUND STSTEM IN KENYA.

(A case study of Kenya Revenue Authority)

BY
DIANA P. M. LUKOSI
HD334-034-0043/2008
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A RESEARCH PROJECT SUBMITTED TO SCHOOL OF HUMAN RESOURCE DEVELOPMENT IN PARTIAL FULFILLMENT FOR THE AWARD OF EXECUTIVE MASTER OF BUSINESS ADMINISTRATION DEGREE (EMBA) – JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY.




November 2009


Declaration
This Management Project is my own original work and has not been presented to any Learning institution or Research Institution for the award of any Degree Program

Signed:……..……………………….... Date:……………………………............

Diana P.M.Lukosi Reg No. HD334-034-0043/2008
Box 35006,00200 Nairobidianamuyoka@yahoo.com,Diana.Lukosi@kra.go.ke+254 02 0722155352





Student.
This Management Research Project has been submitted for examination with our approval as the University Supervisors:

Signed:...............…………………………. Date …………………………............
Mr. Shadrack Bett
Signed:...............…………………………. Date …………………………............
Mr. Willy. M Muturi
Supervisor, School of Human Resource,
Jomo Kenyatta University of Agriculture and Technology.
Dedication
This Management Project is dedicated to my parents for their support throughout my education and to the little bundles Sharlyn Nana and Shantal Nina.

Acknowledgement
I am grateful to the Almighty God for His guidance and strength throughout this management research project. In addition, there are other people who have contributed towards my Management Project in one way or the other. First, my special thanks to my supervisors, Mr Shadrack Bett and MR W.M Muturi, for their tireless efforts in guiding, encouraging and directing me through the whole research period.
I acknowledge the support accorded to me by the respondents who took their time to fill my questionnaire, and the Research Assistants who guided me through the data analysis process, without which the project could not have been completed.
To my EMBA colleagues, it was through your suggestions and contributions that I managed to go through the research process.
Finally, I acknowledge the support from my family members who were always available to encourage me and support me in many ways during my busy schedule as I pursued my EMBA studies at the University. To all other participants who contributed in one way or another in the completion of this project and who I am not able to mention by name, May God bless you all.









Abstract
Some of the major problems covered in this project are those of less advanced tax administrations which pursue time consuming and labor-intensive processes to verify claims before approving refunds, resulting in backlogs of refund requests and considerable disquiet among business taxpayers who have been deprived of their working capital. This delay is also caused when state budgets are under pressure and when tax collection targets are not being met. This study is conducted to achieve the objective of investigating factors affecting VAT refund system in Kenya .This study is expected to help officials of KRA to improve on their VAT refund system.
The research design used in this project is descriptive survey which is best suited in collecting data from such sample population of 20 KRA officials in refund section and 200 business men who are KRA clients. Data was collected through the use of questionnaire which was administered by the researcher.
Some of the major findings were those that involved around IT and internal communication which were found to be weak and in appropriate. Statutory deadline were found to be discouraging people from requesting for their claims since their documents could not be ready by the set time of presentation. Some of the limitations encountered during the research that of some KRA clients being inaccessible. This study then suggest that further research should be carried out on VAT refund section taking into considerations some of these limitations encountered during the study.








TABLE OF CONTENTS
Declaration. ii
Dedication. iii
Acknowledgement v
Abstract vi
ABBRIVIATIONS. viii
CHAPTER ONE.. 1
INTRODUCTION.. 1
1.2 Statement of Problem.. 7
1.3 Objective of the Study. 9
1.3.1 Specific Objectives. 9
1.4 Research Questions. 9
1.5 Importance of the Study. 9
1.6 The Scope of the Study. 11
CHAPTER TWO.. 12
LITERATURE REVIEW... 12
2.0 Interest on Refunds. 12
2.1 Time Limits for Making Refunds. 12
2.2 Business Cash-flow Concerns. 12
2.3 Risk Assessments. 13
2.4 Tax reform in Kenya. 15
2.5 The structure of tax revenues. 16
2.5 Specific policy reform measures. 20
2.5.1 Legislation on VAT. 20
2.5.2 Personal income tax. 23
2.5.3 Corporate income tax. 25
2.5.4 Excise taxes. 25
2.5.5 Conceptual Framework. 26
CHAPTER THREE.. 27
RESEARCH METHODOLOGY.. 27
3.1 Research Design. 27
3.2 Target Populations and Sample. 27
3.3 Data Collection Procedures. 28
3.4 Data Analysis Procedure. 28
CHAPTER FOUR.. 29
FINDINGS AND ANALYSIS. 29
4.2 Gender 29
4.3 Designation. 29
4.4 Number of years worked for the company. 30
4.5 Education background. 30
4.6 Analysis of age bracket 31
4.8 Possible solutions to the major tax refund system challenges. 33
4.9 VAT Refund system.. 33
CHAPTER FIVE.. 39
5.1 Summary of the Findings and Conclusions. 39
5.2 Recommendations. 40
5.3 Conclusions. 41
References. 42
Appendix 2……………………………………………………………………………..…….44



LIST OF TABLES
Table 1.1.1 : 2004 tax amnesty results. 6
Table 2.5.3 : VAT rates in Kenya: 1989-2004. 21
Table 4.5.2 Educational Background. 31
Table 4.10: Clients View.. 34
Table 4.6.3 Age bracket 32
Table 4.10 Auditors View.. 37

LIST OF FIGURES
Figure 4.7 Factors Affecting the Tax Refungd System in Kenya. 32
Figure 4.4.1 Years in position. 30
Figure 4.9.5 analyses of clients who use ETR machine. 36
ABBRIVIATIONS

KRA - Kenya Revenue Authority
VAT - Value Added Tax
IMF - International Monetary Fund
VAT - Value Added Tax
PAYE - Pay as You Earn
LTO - Large Taxpayer Office
ITMS -Integration of Tax Management Systems
NESC -National Economic Social Council
CHAPTER ONE

INTRODUCTION
The Kenya Revenue Authority (KRA) is the tax collection agency of Kenya. It was formed July 1, 1995 to enhance tax collection on behalf of the Government of Kenya. It collects a number of taxes and duties, including value added tax, income tax and customs. Since KRA’s inception, revenue collection has increased dramatically, enabling the government to provide much needed services to its citizenry like free primary education and HIV treatment to all. Over 90% of annual national budget funding comes from local taxes collected by the KRA (Wikipedia).
KRA headquarters is the principal occupant of the times tower, the tallest building in East Africa. The tower was completed in 1999, and replaced the Kenyatta International conference Centre as the tallest building in Nairobi (Wikipedia).
The Kenya Revenue Authority (KRA) is government agency under the Ministry of Finance. It was established by an Act of Parliament (Cap 469) on 1st July 1995. The Authority is charged with the responsibility of collecting revenue on behalf of the government. It is under the general supervision of the Minister for Finance; to whom the KRA’s Board and Chief Executive report. (Budget Outlook Paper, Ministry of Finance).
During the past two decades, the IMF’s Fiscal Affairs Department (FAD) has provided substantial technical assistance in implementing and improving value-added tax (VAT) systems in developing and transitional countries. The VAT is now a key component of the tax system in over 130 countries at different stages of economic development, raising about 25 percent of the world’s tax revenue. Building upon The Modern VAT, a study prepared in 2000-01 by a team of FAD economists to evaluate the IMF experience in relation to the VAT, this research paper follows up on a critical area of VAT administration-refunding VAT excess credits.
Experience with VAT implementation in many countries shows that refunding of credits has been the “Achilles heel” of the VAT. It has been a source of tension between tax authorities and the business sector and, in some countries, has led to complex administrative measures that have significantly undermined the functioning of the VAT system. This paper examines refund-related issues and suggests solutions. It is based on responses to a survey of 10 tax administrators in refunds processing section of KRA, 50 VAT tax claimants and 50 AUDITORS (Certified Public Accountants) across the country.
By the method of collection, VAT can be accounts based or invoice based. Under the invoice method of collection, each seller charges VAT rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. The buyer if he is subject to VAT on his own sales uses these invoices to obtain a credit (reduction) towards his own VAT liability. The difference in tax shown on invoices passed and invoices received is then paid to the government (or a refund is claimed, in the case of negative liability). Under the accounts based method, no such specific invoices are used. Instead, the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use invoice method, the only exception in Japan which uses account method.
Tax collection responsibilities are divided between two main departments in the Kenya Revenue Authority, the Domestic Tax Department (DTD) and the Customs and Excise Department (CED). The DTD covers personal and corporate income taxes, withholding tax, VAT on domestically produced goods, and some other small taxes. Until mid-2005 the CED was responsible for all excise tax collection (on both domestically produced goods and imports), all trade taxes, and VAT collected on imports. On July 1 responsibility for domestic excises was shifted to the DTD.
The Authority has 17 so-called stations, or regional branches. Four of these stations are in the capital Nairobi (Nairobi North, South, East, and West) and two are in Mombasa, the main port. Although the responsibilities of the Nairobi stations are geographically determined, all four offices are located in the same building as the central KRA administration.[i] One of the 17 stations is the Large Taxpayer Office, whose clients are not geographically determined (see below). In addition to the stations there are a number of much smaller “satellites” that provide a limited range of services, including taxpayer registration, tax forms, and payment facilities with an additional 9 satellite offices.
In 1997/98 the KRA created a Large Taxpayer Office (LTO) to specifically monitor and provide services to taxpayers that contribute the bulk of revenues. Fully 70 percent of taxes are remitted by around 500 taxpayers, although of course the incidence of these taxes, which include for example PAYE, VAT, and custom and excise taxes, is much broader.
The primary eligibility criterion for treatment as a large taxpayer subject to LTO control is annual turnover of KSh 1 billion (about $US15million). In addition, firms in certain lines of business, including banks, financial institutions, and finance companies, are subject to inclusion in the LTO regardless of turnover. Finally government agencies and certain parastatals are also included. Currently there are approximately 300 companies subject to LTO treatment, and these contribute roughly 60 percent of revenue. A number of companies that meet the threshold are not included (for reasons unknown to the authors), and it is believed that doubling the number of taxpayers covered by the LTO would mean this office collected about 70 percent of revenues.
One internal problem with using a Large Taxpayer Office to focus auditing and taxpayer services on high-yield clients is that revenues from these companies are no longer collected through the relevant branch office, or station. The transfer of responsibility to the LTO meets some resistance from said stations, as they often lose a large fraction of their collections. While in principle this should have no impact on incentives or performance – any explicit or implicit incentive schemes for regional branches should be easily corrected for the loss of identifiable large revenue earners – the expectation is that loss of such clients portends general loss of prestige and influence for the station.
The auditing strategy of the LTO is to audit about one third of firms subject to its control each year. The coverage rate for medium sized taxpayers is much lower, but a target of about 10 percent is thought to be appropriate.
In principle the tax system is moving in the direction of self-assessment, whereby individuals and firms calculate their tax liability directly and submit returns and payments. Administrative assessment on the other hand requires that each taxpayer’s liability is calculated by a revenue official, using data supplied by the taxpayer. In practice there is a continuum of systems between these two, distinguished by the probability of being audited. Auditing activities have recently been streamlined with the merger of the Income and VAT departments under the DTD. This consolidation has allowed joint audits of VAT and income taxes, including PAYE taxes that are the responsibility of the employer (who is often a VAT payer).[ii] In 2004/05 two thousand audits were undertaken, raising KSh 5.5 billion (KRA 2005b). To improve compliance among taxpayers the KRA has developed an audit handbook, and is engaged in continuing taxpayer education activities.
The KRA, the Treasury, and KIPPRA[iii] recently fielded a survey to assess tax compliance issues in Kenya. Preliminary results show that 74 percent and 72 percent of respondents had been subject to a VAT and (corporate) income tax audit. Roughly one third and one quarter of respondents reported being audited annually for VAT and income tax purposes. These audit rates appear high, but as participation in the survey was voluntary, they may well be overestimates of actual audit rates.
It is revealing that while most taxpayers surveyed reported being satisfied with the procedures for tax registration and payment, they also assessed the procedures for appeals, exemptions, remissions, and refunds as “very poor” and “unfair” (Tax Compliance Study). Typically at least 60 days elapse before a refund is processed, and this delay can be up to 120 days. All refunds, including those for VAT collected on imports, are processed by the DTD.[iv] (The CED processes all refunds of import excises and duties.)
All requests for refunds (e.g., for excess VAT paid) must be audited,[v] which may delay, and certainly adds to the cost, of receiving compensation for overpayment of net taxes. A further impediment to the speedy refund of excess payments is that such transfers are treated under the budget as expenditures, not as negative revenues. This distinction is important in practice (although of course not in theory) because it means parliament must pass an appropriation bill with funds earmarked for refunding. This leads to backlogs which are intermittently cleared, only to immediately start growing again. In addition there appears to be disagreement between the KRA and the Treasury over the size of refunds required, which again leads to delays. Refund policy should clearly be much more automatic, unless there are serious concerns over fraud that would be determined on a basis of risk assessment.
Penalties for non- or under-payment of taxes are defined by law, and interest of 2 percent per month is charged on tax arrears, calculated starting from the date the tax was due. While it is standard practice to punish non-compliance starting on the date the tax was due, long delays between submissions of a return and auditing tend to increase interest payments by those who are found to have underpaid. The relatively high (2 percent) monthly interest rate provides the KRA with little financial incentive to speed up auditing.[vi]
Some observers have identified a legislative source of inflexibility in the penalty system. In particular, penalties for non-payment of VAT, income tax, and customs and excise taxes are defined under three separate laws, which are difficult to coordinate and to adjust as changing circumstances require. Proposed legislation would integrate the penalty provisions and leave them to be implemented through regulations.
Eighty percent of respondents to the survey above claimed that penalties and interest were too high, but this is not surprising. Two things that are not clear from the survey are (I) whether the penalties and interest are imposed consistently, or whether tax payments are negotiated with revenue officials on a case-by-base basis, and (ii) what affects these sanctions have on compliance, and the choice to enter the formal sector.
The physical process of paying any bill in Kenya, where the postal system is notoriously unreliable, is costly and protracted, often requiring a personal visit to a far-away office. In light of this, the KRA has attempted to facilitate easier payment of taxes. It has opened a cash-receipting centre for income tax payments in a regional center (Eldoret), and has expanded the number of points at which annual income tax returns can be collected and submitted. However, the process remains exceedingly labor intensive. Even with high unemployment and a low shadow wage, the congestion costs imposed by the mechanisms for interacting with the KRA must surely be large.
The situation is somewhat better for customs duties and VAT collections. Taxpayers are now required to pay self-assessed taxes directly to a bank, although this can simply push the problem on to the banking sector, which itself is not highly automated.
On June 10th 2004 the Minister of Finance announced a tax amnesty that permitted individuals, firms, and other corporate bodies to pay previously undeclared taxes or duties by the end of the calendar year without penalties or interest. The KRA reports the results of this exercise as shown in Table 4. In the table, income tax payments reflect primarily corporate income tax proceeds. It is somewhat difficult to interpret the figures, as the KRA did not report the baseline or counterfactual against which the estimates were calculated. Potentially more importantly, it is not evident what the dynamic effects of this amnesty will be on future incentives to pay tax in full and on time.




Table 1.1.1 : 2004 tax amnesty results

Revenue (billion KSh)
Number of applicants
Income tax
2.98
2,258
Customs and Excise
0.32
450
VAT
1.50
865
Total
4.80


The fixed costs of running a modern tax collection system, coupled with the informal nature of much of economic activity, make it difficult to raise public funds in poor countries. Questions of how to efficiently raise more revenue, and how to reduce the administrative and distortionary costs of raising existing revenue, are two sides of the same coin. Our descriptive summary of the Kenyan tax system above suggests a number of avenues of future research that might yield insights into these questions.
With the recent introduction of mandatory filing of personal income tax returns, the Kenya Revenue Authority is amassing a large amount of micro data that could be used to assess the incentive effects of taxes on labor supply and taxable income more generally. We see two separate avenues of research in this vein. First, we consider focusing on employees who traditionally did not file a return (and had PAYE taxes withheld). For these individuals, the change in filing requirement has effectively reduced the opportunity cost of claiming certain deductions, since previously any filing costs were avoided by not making such claims.
Second, an analysis of the behavior of high-income taxpayers is desirable. Such individuals, to the extent they have had non-wage income; have been required to file individual tax returns since the inception of the KRA in 1995. We envision using the reductions in tax rates over this period – the top marginal rate fell from 37.5 percent to 30 percent between 1995 and 2000 – to estimate the responsiveness of taxable income to those rates, and the associated distortionary costs.[vii] Given the possibility of income shifting – from corporate to personal income – the responsiveness of corporate tax payments would need to be incorporated into this analysis.
Other studies would likely require survey data in addition to information from tax returns. For example, understanding the effects of the presumptive tax, if one is introduced, would necessarily involve collection of data on the nature and extent of informality. Neither are the normative impacts of the policy clear-cut. A revenue maximizing tax collector sees the benefits of reducing informality, but not necessarily the compliance costs imposed. More fundamentally, while entry into the formal sector is often assumed to benefit businesses by improving their access to credit and other financial markets, the extent to which (a) this is true, and (b) informal credit markets are crowded out, can only be assessed empirically.
We have said relatively little in this paper about the distributional impact of the tax system in Kenya. Due to the large proportion of individuals in the informal sector, and the personal relief (exemption) in the personal income tax schedule, the instruments that impose the highest direct costs on the poor are no doubt excise taxes and the VAT (despite zero rating and exemption of some products under the latter). Quantification of the burden requires both more precise information on household consumption patterns by income category, and assumptions or evidence about the incidence of these taxes. We suggest however that an important distributional concern is not so much how much tax is paid by the poor (or more generally what the effect of the tax system is on their welfare), but how little tax is paid by the rich, either due to tax avoidance, tax evasion, or direct manipulation of the tax laws and regulations by the elite.
1.2 Statement of Problem
Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personnel income taxes and corporate profit taxes has been historically weak, VAT collection has been more successful than other types of taxes. VAT has become more important in many jurisdictions as tariff levels have fallen world wide due to trade liberalization, as VAT has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient. (CIAT)
Certain industries (small scale services) for example, tend to have more VAT avoidance, particularly where cash transactions predominate, and VAT may be criticized for encouraging this. From the perspective of government, however, VAT may be referable because it captures at least some of the value added. For example, a carpenter may offer to provide services for cash (i.e. without a receipt, and without VAT) to a homeowner, who usually cannot claim input VAT back. The homeowner will hence bear lower costs and the carpenter may be able to avoid other taxes (profit or payroll taxes). The government, however, may still receive VAT for various other inputs (lumber, paint, gasoline, tools, etc), sold to the carpenter, who would be unable to reclaim the VAT on these inputs. While the total tax receipts may be lower compared to full compliance, it may not be lower than under other feasible taxation systems.
The prevalence of fraudulent claims is often cited by tax officials as a major reason for delaying payment of refunds. Often, less advanced tax administrations pursue time consuming and labor-intensive processes to verify claims before approving refunds, resulting in backlogs of refund requests and considerable disquiet among business taxpayers who have been deprived of their working capital. In contrast, the most effective and efficient tax administrations tackle refund-related fraud as part of a broader VAT compliance strategy based on risk management principles, and generally limit pre-refund verification checks to perceived high-risk claims.
Delays in processing refunds also occur when state budgets are under pressure and when tax collection targets are not being met. This often happens when tax authorities and finance ministries do not have suitable forecasting and monitoring systems in place to anticipate refund levels, and do not set aside sufficient funds to meet legitimate refund claims when they occur. Administrations with more sophisticated forecasting and budgeting capabilities have been able to predict refund levels with a fair degree of precision, given that a pattern of refund claims tends to develop within countries over time.
When tax authorities deny payment of legitimate refund claims, the nature of the VAT is effectively altered, in part, from a tax on final consumption to a tax on production. To avoid this happening, VAT policymakers often advocate that the same tight statutory timetables imposed on persons paying VAT should also apply to tax authorities in refunding VAT. It is little surprise, therefore, that 90 percent of the countries that responded to the IMF survey ported that their tax authorities are bound by law to making refunds within a prescribed timeframe, generally 30 days.
1.3 Objective of the Study
To investigate factors affecting VAT refund system in Kenya Revenue Authority.
1.3.1 Specific Objectives
(i) To establish the impact of IT (integration of tax management systems ITMS) on VAT refund systems.
(ii) To find out the effect of statutory deadlines on the effectives of VAT refund systems.
(iii) To find out how timelines of release of funds from central government affects VAT refund systems of KRA.
(iv) To find out how KRA’s policy formulation affects VAT refunds
(v) To examine the extent to which completeness of documentation affects VAT refunds of KRA.
1.4 Research Questions
(I) How does IT (integration of tax management systems ITMS) and other internal communication channels affect VAT refund systems?
(ii) What is effect of statutory deadlines on the effectives of VAT refund systems?
(iii) How does timeliness release of funds from central government affect VAT refund systems of KRA?
(iv) How KRA’s policy formulation does affect VAT refunds?
(v) What is the effect of completeness of documentation on effectiveness of VAT refunds of KRA?
1.5 Importance of the Study
In his speech during the official inauguration of the expanded National Economic Social Council (NESC) in Nairobi on Monday 6th October 2008, His Excellency the President, Mwai Kibaki directed the Kenya Revenue Authority (KRA) to settle all unpaid Value Added Tax (VAT) refunds within 60 days.
The directive read ‘‘The issue of refunds is a major concern to businesses and I now urge the Kenya Revenue Authority to pay tax refunds within 60 days without fail.’’ He continued “This is possible. What is holding us back? It requires genuine work, that we do it in 60 or even 30 days.” (Daily Nation, Tuesday 6th October 2008)
It is in this quest for a solution and considering that I work in the same department of Refunds in KRA that is causing public outcry, I was touched and compelled to make this my research study because I have hands on experience in this department to address the “What is holding us back” agenda.
(i) To researchers: Recommendations and findings of the study provide these with useful insights on various factors (KRA specific and extraneous) that affect implementation of policy measures to achieve efficiency in the processing and payment of VAT refunds.
(ii) Academicians: The findings, conclusions and recommendations of this research will in addition to the existing paradigm of knowledge on tax administration in Kenya add new concepts and approaches to achieving efficiency in VAT refunds. This field has been inadequately studied in the past.
(iii) Tax administrators/Policy Makers/Government. The finding of the study will enable the government to be conversant with various issues that affect the successful implementation of VAT refunds. This will enable the policy formulators to come up with more effective measures that will lead to successful implementation of the chosen policies.
(iv) Foreign and local Investors:
Foreigners and local investors wishing to invest in Kenya would wish to understand the tax administration policies in Kenya in respect to their rights and obligations governing their refunds because VAT refunds can be substantial amounts and when the release of these funds are delayed, these can cause financial strain on the working capital of an entity hence reducing the income levels through reduced investment, consumption and savings
Y = C+S+I i.e. Income is a function of Consumption, Savings and Investment. (Keynes, Economist)
1.6 The Scope of the Study
The study will be carried out in Kenya Revenue Authority Tax Refund Section. This research will cover four key areas: (I) general information on the VAT system operating in Kenya (e.g. registration threshold. VAT rates, items subject to zero-rating, and number of VAT payers) (ii) details of Kenya’s VAT refund system (e.g., statutory provisions relevant to the treatment of excess VAT credits, categories of refund recipients. It will target mainly those involved in tax refund coordination’s and other refund management issues.














CHAPTER TWO
LITERATURE REVIEW
2.0 Interest on Refunds
In a survey carried out by Eissa and Jack, CPAKs, 2008, it was discovered that some countries (around 40 percent of those surveyed) go further, with their laws providing interest to be paid on late refunds-this recognizes that excess credits not returned promptly to the taxpayer are tantamount to funds loaned to the government. At the same time policymakers acknowledge that safeguards need to be in place to tackle fraudsters who take advantage of regimes providing prompt VAT refunds. Safeguards range from providing tax officials with statutory powers to conduct audits and verification checks, to measures such as requiring security or bank guarantees from traders who seek refunds. In 60 percent of the surveyed countries, mandatory carry-forward periods for excess VAT credits are also imposed, generally for no exporters, to limit the number of refund claims.
2.1 Time Limits for Making Refunds
Notwithstanding the preponderance of statutory time limits for making refunds, experience is that these are often insufficient in guaranteeing that timely refunds will be made in practice. Many examples exist where tax authorities do not meet processing deadlines, and while this is more likely to be the case in developing and transitional countries, it is not confined to them.
2.2 Business Cash-flow Concerns
Various approaches have emerged in an attempt to reduce the number of refund claims and address business cash-flow concerns. Some EU countries (e.g., France and Ireland), as well as countries in North Africa and Asia. Have implemented schemes that apply a zero-rate on supplies to exporters. In addition, a number of countries have special arrangements in place to deal with excess credits associated with imported capital goods. For example, a few countries provide VAT exemptions for investors who import heavy equipment, while others have opted for a system that defers the payment of VAT owing on the imported capital items. While the perceived benefits of these arrangements may be tempting, they also add complexity to administration and present new revenue risks-both of which should be carefully considered if introduction of these measures is contemplated.
With the aim of further shielding the VAT system from refund abuse, and controlling taxpayer behavior, some countries (e.g., Azerbaijan, Bulgaria, China, and Korea) have attempted to cross-check vast quantities of purchases and sales transaction data. With similar objectives in mind, Bulgaria requires its business enterprises to deposit the VAT due on their supplies into special bank accounts (thereby locking away a portion of the enterprises’ working capital). A distinguishing feature of these schemes is that they subject registered businesses to additional compliance costs, and therefore raise questions about the extent to which the business sector should be expected to bear the costs of tax administration. Another approach adopted by countries with large shadow economies (e.g., Azerbaijan), has been to simply deny VAT credits on large purchases where payment is made in cash (i.e. under the law, VAT taxpayers are entitled to input tax credits only where payment has been made through the banks). Of interest, also, is Kenya’s requirement that all large refund claims must be certified by registered Auditors. This scheme, in effect, outsource the refund verification function to accounting professionals, and thereby raises for discussion the scope of their role in VAT administration. . (William Jack, Georgetown University, 2003)
2.3 Risk Assessments
In relation to the survey carried out by the, International Monetary Fund WP/05/218, IMF Working Paper (2005). The risk-assessment models vary, however, in scope and levels of sophistication. At one end of the spectrum are the highly developed risk-assessment processes and systems such as those used in the United Kingdom? These involve gathering information and intelligence from a wide range of sources and, through use of computer applications and statistical methods, identifying suspicion.
The KRA’s risk assessment model named ‘risk profiling model’ has registered a number of successes alongside its many pitfalls and there is a call for subsequent improvement in the model. Statutory requirements to verify every refund claim prior to payment. A third of countries reported that they do not have a VAT audit program, and for those that do, pre-refund audits dominate the audit program in a quarter of the countries concerned.
Reasons cited by many developing and transitional countries for failure to implement effective audit programs include: (1) insufficient numbers of highly skilled and appropriately remunerated audit practitioners; (2) the authorities’ concerns about collusion between taxpayers and Auditors; (3) inadequate preparation at the time of VAT implementation, possibly because the consequences of a weak audit program were not adequately perceptible; (4) the lack of clear political support for the tax administration; and (5) the lack of an appropriate legal and judicial environment. Advanced tax administrations (i.e., those applying principles of self-assessment and administering domestic VAT along with income tax in a function-based organizational structure) give strong emphasis to risk-based audit programs aimed at broad coverage of taxpayer groups and compliance issues. Selective verification of VAT refunds is simply one of many components of a wide-ranging audit program (2005 International Monetary Fund WP/05/218, IMF Working Paper Kenya’s tax system has undergone more or less continual reform over the last 20 years. On the policy side, rate schedules have been rationalized and simplified, a new value added tax introduced, and external tariffs brought into line with those of neighboring countries in East Africa. At the same time, administrative and institutional reforms have taken place. Most notable among these was the creation of the semi-autonomous Kenya Revenue Authority (KRA) in 1995, which centralized the administration of tax collection.
Kenya has the trappings of a modern tax system, including for example a credit-invoice VAT, a PAYE individual income tax with graduated but arguably moderate rates, and a set of excise taxes focused on the usual suspects (alcohol, cigarettes, gasoline, etc.). However, with up to 70 percent of GDP produced, and possibly as much as 75 percent of labor employed, in the informal sector, the ability of the tax system to raise sufficient revenue with minimal distortions is severely circumscribed. In such an environment, raising around one fifth of GDP in tax revenue is likely to impose very large distortionary costs on the economy. Continued reform of both the policy instruments and the administrative and enforcement capacity of the tax system are therefore imperative.
The aim of this paper is to provide a broad overview of the Kenyan tax system, the reforms that have occurred over the past two decades, and the administrative structures in place. To properly assess the distortionary costs of the current tax system, we intend to undertake micro-econometric analysis of the effects of the tax reforms pursued by the government, using individual-level tax return data when available. We discuss the proposed methodology for this subsequent research in the conclusion to this paper.
2.4 Tax reform in Kenya
From independence in 1963 until the early 1980s, public spending in Kenya was financed through a somewhat uncoordinated set of taxes and fees inherited from British rule, and supplemented by foreign aid inflows.
The oil shock in the early 1970s led to the country’s first significant fiscal crisis, in response to which some relatively minor tax reforms were undertaken. Sales taxes were introduced as a means of generating extra revenue, and trade taxes were used in an attempt to reduce the ballooning balance of payments deficit. One motivation for the relatively heavy reliance on good-specific sales and excise taxes was the belief that the government could “get the prices right,” especially through its use of trade taxes in the pursuit of first import substitution policies and then export-led growth strategies.
Personal, and to a lesser extent corporate, income taxes were seen as serving primarily redistributive roles in the 1970s.[viii] During the period 1974 through 1985 tax rates on both personal and corporate income were high.[ix] Marginal personal income tax rates ranged from 10 percent on the first Shilling to a top rate of 65 percent. The tax rate applied to income of domestic corporations was 45 percent in 1974, while foreign corporations faced a rate of 52 percent. Analysts have observed (e.g., Caring et al., 2004a) that little personal income tax was collected in the top brackets of the tax schedule. This could have been due to low labor productivity – few people could hope to earn incomes high enough to put them in the top bracket. But it is likely that both the absolute size of the top personal income tax rate, and the fact that it was 20 percentage points higher than the corporate tax rate, contributed to the lack of reported income by taxpayers at the top end.
In the early 1980s growing budget deficits began to loom. Following the second oil price shock, and fueled by uncontrolled public spending, the budget deficit ballooned to average over 6% of GDP between 1986 and 1993.[x] Perhaps in anticipation of these developments, in 1986 the Kenyan government approved the Tax Modernization Program (TMP) aimed to broadening the tax base, and in 1987 it adopted the Budget Rationalization Program intended to place controls on public spending.
The primary aim of the TMP was to raise the revenue-to-GDP ratio from 22% in 1986 to 24% by the mid-1990s, although this target was increased to 28% in 1992 (Muriithi and Moyi, 2003). These targets have so far proved elusive (see below). The intent of the reform was, in some respects, similar to that of the Tax Reform Act of 1986 in the US – the revenue increase was to come about through lower tax rates, broader tax bases, and closed loopholes.[xi] Whether Kenya was on the wrong side of the Laffer curve before the TMP began is unclear, although the high marginal income tax rates suggest it could have been.
On the other hand, broadening the tax base and closing loopholes would require bringing more individuals and businesses into the tax system, itself a challenge given the administrative weakness of the existing tax system. The main organizational change aimed at strengthening administrative capacity was the incorporation of the Kenya Revenue Authority in 1995.
The KRA centralized tax collection activities which had previously been undertaken by departments in the Ministry of Finance (Muriithi and Moyi, 2003). Over the last ten years the KRA has adopted internal management reforms aimed at combating corruption among revenue officers and improving taxpayer services.
A number of East African countries have created tax collections authorities over the last decade. These institutions are semi-autonomous from government, and act under the supervision of a board of directors that includes bureaucrats, possibly a senior representative from the ministry of finance, and representatives from the private sector. They are meant to have a certain degree of financial and operational independence, for example to allow more flexible employment practices than exist in the public service, and as a means of providing insulation from unwarranted political influence and corruption. In the end however, they rely on discretionary funding from the Ministry of Finance, so their independence from the government is not complete. Of course, the formulation of tax policy is rarely (and should not be) the responsibility of the revenue administration but remains a ministry, and government, prerogative.
2.5 The structure of tax revenues
Tax revenues grew as a proportion of GDP from around 10 percent in the 1960s to about 20 percent by the early 1980s (Karingi et al., 2004b). In the years immediately following the introduction of the TMP revenues gradually increased, reaching 24.6 percent of GDP 1995/96, after which they stabilized at around 23 percent until the end of the decade (KRA 2005, Annual Revenue Performance Report). In 1999/00 revenues fell below 20 percent of GDP, and this decline continued until they reached a low of 17.8 percent of GDP in 2001/02. Since then there has been a slow increase to 20 percent of GDP in 2004/05. This evolution is illustrated in Figure 2.5.1.
Figure 2.5.1: Tax revenue as a share of GDP, 1968-2005
The share of GDP currently collected in taxes is larger than that in many other sub-Saharan African countries. Kenya had a per capita GDP of about $360 in 2000 (in current dollars), and many people peeked out a paltry and miserable existence on less than a dollar a day (and continue to do so). The poverty rate by this standard was 22.8 percent in 2000, and 58.3 percent of the population lived on less than $2 a day. Raising around 20 percent of GDP in taxes is either impressive or dangerous, depending on the distortionary costs, and the productivity and efficiency of public spending.
The share of the economy that is either informal or untamable for other reasons is likely large. For example Table 1 shows the evolution of the sectoral decomposition of output since independence. These data do not translate precisely into measures of easily taxed output, but the fact that agriculture currently contributes 25 percent and other services 47 percent suggests a large share of output is produced in the informal sector.


Table2.5.1: Distribution of GDP by sector

1964-73
1974-79
1980-89
1990-95
1996-2000
Agriculture
36.6
33.2
29.8
26.2
24.5
Manufacturing
10.0
11.8
12.8
13.6
13.3
Public Services
14.7
15.3
15.0
15.7
14.8
Other Services
38.7
39.7
42.4
44.5
47.4

Table2.5.1 provides a more direct measure of the share of output produced in the informal sector, which by 2002 employed nearly three quarters of the workforce. Of course, labor productivity in this sector is likely to be low. Nonetheless, getting 20 percent of GDP out of the rest of the economy suggests relatively high tax burdens and distortions thereon.
Table 2.5.2: Recorded employment ('000)

Formal sector

Informal sector
(percent of total)

Total

Wage employees
Self-employed and family workers
1996
1619
63
2644 (61.1)
4326
1997
1647
64
2987 (63.6)
4698
1998
1678
65
3353 (65.8)
5097
1999
1689
65
3739 (68.1)
5493
2000
1695
65
4151 (70.2)
5912
2001
1677
65
4624 (72.6)
6367
2002
1700
65
5086 (74.2)
6852

The broad structure of tax revenues has changed to some extent. Income taxes (including taxes on both corporate and personal incomes) accounted for about a third of revenues from the late 1970s to the late 1990s, although the share was as high as 44 percent in the early 1970s. Reliance on import duties has fallen as the result of a move away from protectionist tariff policy and the integration of East African economies. They accounted for about one quarter of revenues immediately before the TMP, but had reached only 15 percent by the early- and mid-1990s. Excise taxes, primarily levied on alcohol, tobacco, and petroleum products, offset some of this change rising from 10 to 16 percent of revenues over the same period. Finally VAT revenues accounted for 25 percent of taxes by 2001, down from 36 percent in the early 1990s when the tax was first introduced. Falling VAT rates during this period can account for some of this shift, but evasion and moves into tax-exempt activities could also be at work, as well as improvements in corporate income and PAYE tax collections. Before the introduction of VAT, the sales tax (which the VAT replaced) had contributed between a quarter and a third of revenues from the mid-1970s to the late 1980s. A more detailed view of recent developments is shown in Table 2.5.2, which shows the evolution of the structure of tax revenues since 1995, when the KRA was established. A clear feature is the increase in the relative importance of PAYE income tax withheld at source, offset by a reduction in the share accounted for by corporate tax revenues. Indeed, in 1995/96 corporate tax revenues were 1.8 times PAYE taxes, but by 2004-05 the ratio was only 60 percent. It is tempting to attribute this change to a convergence of the top personal income tax rate and the corporate tax rate, although one might expect to see such a relationship between corporate tax revenues and personal income taxes paid by higher-income individuals who are less likely to in the PAYE group. However the fact that the share of revenue from the two taxes (PAYE and CIT) combined did not change significantly over this period suggests that some of this kind of income shifting might have taken place.
Also from Table 2.5.2 it is clear that import duties have fallen in relative importance over the 10 year period to 2005. Withholding tax revenues (on interest, dividends, and certain other sources of non-wage income) have been steady at between 4 and 5 percent of total taxes, but other taxes have increased from about 3 percent in 1995/96 to over 12 percent last year.


Figure 2.5.2 : Structure of revenues, 1996-2005
2.5 Specific policy reform measures
In this section we discuss the features of the major tax instruments that are currently employed, and how they have evolved over time.
2.5.1 Legislation on VAT
In 1989 the government passed legislation to introduce a credit-invoice Value Added Tax, which became effective on January 1, 1990. At this time the concept of tax policy simplicity had evidently not taken firm root in Kenya: the VAT was introduced with a “standard” rate of 17 percent, but with 14 other rates (the highest being 210 percent) that made the VAT appear more like a differentiated commodity tax regime. This multiplicity of rates was particular difficult to rationalize in light of the fact that excise taxes on specific classes of goods were maintained during (and indeed after) the transition and implementation of the VAT.
The high and wide range of rates is thought to have led to widespread misclassification and other methods of tax evasion. In response to these concerns, the number of VAT rates was quickly reduced to four by 1993/94, when the top rate was set at 40 percent. Since then the rates have been further lowered, and currently there is just a single standard rate of 16 percent, with some sales zero-rated and others exempt. See Table 3.
All businesses with annual turnover greater than KSh 3 million are supposed to register as VAT tax payers and submit monthly returns.[xii] In addition, certain traders and members of certain professions are required to register independently of their turnover, but this requirement is not well enforced. The number of businesses registered for VAT is currently about 54,000, up from 36,000 two years ago. However, only about 30,000 VAT returns were received each month in 2004/05, suggesting that many firms are dormant (have fallen below the threshold, but have failed to deregister, which itself can be a costly process), or non-compliant. The large, and possibly inefficient, increase in the number of registered firms is thought to be due to a number of issues, including the requirement that any firm seeking a contract with a government agency must be VAT-registered (even if it falls below the threshold, and even if it ends up not winning a contract), and the VAT withholding regime, discussed presently. This distribution of VAT payers and collections is shown in Table 5 in appendix 2.
Table 2.5.3 : VAT rates in Kenya: 1989-2004
Year
Number of VAT rates
Standard rate
Highest rate
1995/96
4
15
25
1996/97
3
15
15
1997/98
3
17
17
1998/99
4
16
16
1999/00
4
15
15
2000/01
4
18
18
2001/02
4
18
18
2002/03
4
18
18
2003/04
3
16
16
2005/06
1
16
16

In most VAT systems, the seller of a product is required to remit tax on sales. In practice there are a number of ways in which the system can be implemented. First, the seller might base the calculation of tax payable on an explicit accounting of value added. Alternatively the seller assesses VAT on gross sales, but claims a credit for VAT already paid on inputs. Under both these systems only the net amount of VAT is sent to the tax collection agency. Alternatively, the seller may be required to write a cheque for VAT assessed on gross sales, and claim a refund for VAT paid on inputs.
In Kenya, the responsibility for paying VAT on certain sales rests not only with the seller but also with the buyer, a system referred to as VAT withholding. VAT withholding was first introduced in late 2003 and applied to government agencies that purchased goods and services subject to VAT. There was a concern that the government, through these agencies, was paying VAT-inclusive prices to suppliers, who were not necessarily remitting the revenue to the KRA. Subsequently other purchasers were brought into the withholding regime, and in 2004/05 there were about 2000 so-called VAT withholding agents – purchasers who were required to withhold VAT. In that year, about 40 percent of VAT revenue was collected from these agents.
One concern with withholding is that it can provide too strong an incentive for firms to register for VAT. Suppliers who fall below the turnover threshold but who sell to withholding agents are induced to register in search of refunds on inputs, clogging up the system.
The effect of withholding (see the appendix for an illustrative example) is to put some businesses, in particular importers of oil, in a more or less permanent net credit position, in which they seek VAT refunds from the KRA each month. This however has led to compliance problems, as those subject to withholding rationally expect delays in receiving refund cheques. The mentality of the KRA, given its focus on tax collection, is one of revenue maximization, and refund payment is low on its list of priorities. This policy is of course self-defeating if compliance falls enough. One view among tax administrators is that the VAT withholding system has complicated tax collection and created perverse incentives for tax collectors. The implication is that direct improvements in enforcement (on which the withholding system was first focused) – e.g., through the auditing of suppliers to government agencies – are preferable.
The government is currently considering the introduction of a presumptive tax, referred to as a Unified Tax System (UTS). The intention of this policy is to target untaxed business income by bringing into the tax net those businesses that neither pay income tax nor are part of the VAT system. Included in the latter are businesses which are currently required to register as VAT payers but choose (illegally) not to, and those which have annual turnover less than the existing registration threshold (KSh3 million). In principle, any business that is not required to register for VAT, and does not choose to do so, should be covered by the presumptive tax. That is, the VAT/income tax system and the presumptive tax system are intended to be mutually exclusive, although some businesses can choose under which regime to operate.
It is proposed that the tax, which is yet to be introduced, will be related to gross turnover or, where such information is not available, it will be lump-sum. The proposal is that the lump-sum liabilities will be differentiated geographically and by sector. This two-dimensional stratification, along with the turnover component, is likely to add a degree of complexity to what is supposed to be an administratively simple tax.
For those businesses that currently fall under the VAT threshold there may be some incentive to register under the presumptive tax regime, depending on penalties for non-compliance and the “benefits of formality”. One would expect little participation response however from those that currently have turnovers above the KSh3 million VAT thresholds but choose (illegally) not to register. Indeed, some fear that the presumptive tax could induce informality – in this case defined as deregistration for VAT – as it legitimizes opting out of the VAT system.
2.5.2 Personal income tax
Individuals pay tax on earned income at graduated rates. By administrative necessity, personal income tax has traditionally only been levied on formal sector workers. Until 2003, most payers of personal income tax did not file a return, but simply had tax withheld at source. The requirement to lodge a return is believed by some to have increased compliance costs and administrative costs significantly, while having little impact on revenues.
For example, there are currently about 600,000 individuals who submit an annual income tax return, but only 10,000 to 20,000 businesses that (should) withhold PAYE taxes. If many individuals had other sources of taxable income individual returns might be necessary. However, only about 2,000 individuals submit returns with non-wage income that adds to taxable income. It is likely, although there are no data to confirm this, that many high income individuals simply evade tax through non-reporting and choice of compensation strategy. Thus while there is not much revenue collected from the personal income tax in excess of PAYE taxes, there could be a considerable amount of potential tax revenue from these sources. However, focusing on high-income and politically well-connected individuals is particularly sensitive in Kenya.
In the late 1980s personal income tax was levied at eight different marginal rates ranging from 10 to 65 percent. The top rate was reduced to 45 percent in 1990, 35 percent in 1996, and 30 percent in 2000, where it remains today. The current rates are 10, 15, 20, 25, and 30 percent.
Each taxpayer is eligible for a (non-refundable) credit known as personal relief, which amounts to a little more than the amount of tax that would be payable in the first tax bracket.[xiii] Thus in practice the tax schedule is equivalent to one with a uniform exemption followed by rates ranging from 15 to 30 percent. Karingi et al. (2004, Table 2.5.3) have estimated the maximum income an individual could earn before paying any personal income tax for the years 1995 through 2003. They find that this maximum income increased from 2.3 times to 4.1 time’s national per capita income over this period.
Until recently there were two forms of relief, or credit: a personal relief and a larger family relief. Non-married individuals could claim the former, and married men could claim the latter. Married men were required to pay tax on their combined household income. Although KRA income tax forms are currently divided into “self” and “wife” the incomes of each are now taxed independently and each receives a single personal relief or exemption.[xiv]
Self-employment and partnership income is taxed under the same tax schedule as wage income. Non-wage incomes, in the form of dividends, interest and certain other incomes, including royalties and management, professional, and commission fees, are subject to a final withholding tax at source.[xv] These taxes are effectively separate and at specific rates from the income tax. Given this arrangement, there seems little reason to require wage earners (most of whom have only a limited amount of interest or dividend income) to file formal returns.
Capital gains are exempt from the personal income tax in Kenya. Although there are arguments against the taxation of capital gains, it appears that the dominant reason for the exemption in this case is that one of the primary stores of wealth (and sources of capital gains) is real estate, ownership of which is concentrated in the hands of the political elite.
Pension contributions up to 30 percent of pensionable salary are deductible against gross income, and a credit of 15 percent of the cost of life insurance premiums and education policies for family members (capped at KSh36, 000 each) is also available.[xvi] Mortgage interest payments up to KSh100, 000 (KSh150, 000) effective January 1st, 2006) are also deductible.
During the period of reform some attempts have been made to introduce a presumptive tax in lieu of the income tax to reach the informal sector, in particular agriculture. It is widely believed that these efforts have generally failed. Whether the presumptive tax in lieu of the income tax and as a supplement to the VAT will meet with greater success is yet to be seen.
2.5.3 Corporate income tax
About 40,000 firms are currently registered Corporate Income Tax payers. Tax rates on domestic firms have fallen from 45 percent in the mid-1970s to 30 percent currently. (Tax rates imposed on foreign owned corporations were 52 percent, but have fallen over the last thirty years to 32½ percent now.)
Corporations that locate in Export Processing Zones, which are found in Nairobi and Mombasa, and can show that they produce for export, are granted a generous 10 year corporate tax holiday. Firms outside the EPZs can deduct twenty percent of the costs of investment in (new or second hand) plant and equipment up front (equivalent to a 6 percent investment tax credit), and then amortize the remaining cost of the investment following specified depreciation formulae. Certain investments are given favorable treatment, such as hotel construction and some agricultural investment.
2.5.4 Excise taxes
Excise taxes are levied on (imported) oil products, as well as consumption of beer and spirits, and cigarettes, matches, and tobacco. Before the TMP, excise taxes had been levied at specific rates, but moderate to high inflation induced a change to an ad valium basis. Later, in the 1980s the tax regimes were selectively switched back to specific charges in the face of undervaluation by traders.
Prior to 1990, taxes on cigarettes had provided more than half of non-oil excise tax revenues, and beer about on quarter. However coincident with the introduction of the VAT, the specific tax on beer was replaced with a 100 percent tax rate, and these shares were effectively reversed
2.5.5 Conceptual Framework

Effectiveness of VAT Refund

IT and Internal Communication

Statutory Deadlines
Timeliness of Funds from Central Government


Completeness of Documentation


Auditors

Policy Formulation

The conceptual framework below shows that VAT Refund depends upon IT and internal communication applied the KRA in tax management, statutory deadlines given to clients to comply by, Funds from Central Government, Policy Formulation and Incomplete documentation from Auditors. These are the factors that influence the VAT Tax refund system in Kenya.




CHAPTER THREE
RESEARCH METHODOLOGY
This chapter describes the methods and procedures that were followed in conducting the research. It describes the research design, the population of interest, the sampling frame, the sample size, and the sampling method. It goes on to explain the data collection procedure, the data collection instruments and the data analysis techniques that were involved in the research.
3.1 Research Design
The research design that was used in this case is Descriptive Survey method which covered web-based survey. Survey method is defined by Churchill (1991) and Cooper & Emory (1995), as an observational method of research aimed at a certain sample for examination in order to make statements about the population from which the sample was drawn.
For this reason, the survey method was found to be superior to other methods because of the following reasons:
a) It has the lowest cost option and required minimal staff.
b) In most cases, it’s possible to contact, otherwise inaccessible respondents like top management in the organization.
c) Many of the study variables may not be directly observed, as required under observation methods.
3.2 Target Populations and Sample
The target population studied is the whole twenty employees in tax refund section and the sampled population of 200 business men who have fell victims of tax refunds for the past three months.
Olive M. Mugenda (2003) talked of Stratified Random Sample as a sampling technique that involves grouping the target population with varying characteristics depending on the objective of the Study.
In this situation, clients were grouped according to the level of tax remittance to KRA and also amount of tax refund received.
3.3 Data Collection Procedures
Data was collected from a population sample by the use of questionnaire, video capture, audio recording or interview depending on the resources available and also research design to be used. In this case Questionnaire were used as the main source of data collection. Structured, closed and open ended questionnaires will be administered by the researcher either through drop and pick or through personal interview.
Some questionnaires were administered by online method since some of clients were unreachable and can only be reached through the internet. Lisle of Carolina University (2005) state that web-based Survey also implies online method of data collection.
3.4 Data Analysis Procedure
The qualitative data collected was analyzed using conceptual content analysis which is best suited method of data manipulation as defined by Nachmias and Nachmias (1960) as a technique for making references by systematically and objectively identifying specific characteristics of message and using the same approach to relate trends. The collected data will be taken through a statistical package for data analysis like Excel.









CHAPTER FOUR
FINDINGS AND ANALYSIS
This chapter presents the data analysis and interpretation. This data has been presented using tables and graph for proper understanding, in addition, the researcher has also employed both inferential and descriptive statistics to like mean, standard deviation and to present and rank the received response.
4.1 Demographic Characteristics
The respondents were asked to show their demographic characteristics as was presented in the questionnaire. The characteristics included, departments worked, designation, years in the position, gender and marital status, these have bee analyzed as follows.
4.2 Gender
The respondents were asked to show their gender, this was expected to guide the researcher on the conclusions regarding the congruence of responses to the gender characteristics. The results as in the table below show that a majority of the respondent were male at 55%. To this extent, the findings can be generalized on the male respondents.
Table 4.2.1 Analysis of gender
Gender
Frequency
Percent
Male
12
60
Female
8
40
Total
20
100

4.3 Designation
The respondents were asked to show their designations in the departments they worked, the results as presented in the table below shows that the respondents had different designations such as administration officers, refund directors, information officers, office messengers, receptionists and others in the refund section. The implication on the research is that the respondents were evenly distributed and therefore a variety of the responses were obtained.
4.4 Number of years worked for the company
The researcher sought to establish the years that the respondents had worked for the company. The results show that a majority had been in the firm for more than 10 years, others had also been in the institution for 3 – 4 and some had been there for 6 – 12 months, this implies that the majority of the respondent had enough experience to give acceptable responses to the study questions. The graph below shows the findings.
Figure 4.4.1 Years in position
4.5 Education background
The respondents were asked to indicate their level of education; this was in order to help the researcher judge the ability of the respondent to answer the questions as was set in the study. The results show that a majority of the respondents had attained graduate level of education. A significant number had also attained post graduate level of education while only some mild cases were reported in certificate level. This implies that majority of the respondents had adequate skills to respond to the questions asked in the study.






Table 4.5.2 Educational Background
Level of education
Frequency
Percent
University level
10
50
Post graduate level
9
45
Secondary level
0
0
Certificate level
1
5
Total
20
100

4.6 Analysis of age bracket
The respondents’ age, this was also to assist the researcher in judging the seniority of the respondent and to hint on the general experiences of the respondents with regard to social aspects. The results show that a majority of the respondents were aged between the ages of 30 to 40 years, mild cases were reported in lower ages like that of 18 – 25 ; this was followed by a significant percentage that had also attained ages between 40 to 50 years. The age composition shows that most of the respondents were of the senior age levels and therefore apart from their rich experiences, they could also appreciate the importance of the study. The table below shows the results of the study.








Table 4.6.3 Age bracket
Age bracket
Frequency
Percent
18 to 25
1
5
25 to 30
3
15
30 to 40
11
55
40 to 50
5
25
over 50
1
5
Total
20
100

Figure 4.7 Factors Affecting the Tax Refund System in Kenya
The study discovered that information system is among the factors that face tax refund system in Kenya. This was confirmed when the summary of all the factors that face tax refund were gathered on the yes and no question as shown below in the figure 4.7. Statutory deadline was higly cited as achallange. This was attributed to the failure to submit returns on time due to the fear of receiving penalty. It was also linked to the fear of loosing refunds after much time is spent preparing documents on tax which later get turned down.
These were among the major challenges that faced tax refund systems in Kenya. The employees were of the opinion that most of those challenges were contributed by the weak Government and also some hungry politicians who were out to enrich themselves. Political challenges were being brought about by the fact that Kenya has many different ethnic communities that tend to compete for the countries few resources available. This is propagated by the politicians who incite the public against others to create enmity between people. This fact has eroded the performance of the civil service in Kenya.
The other challenge that was found to affect the tax refund system in Kenya was that of information technology. Due to changes in technology, government premises find it difficult to adapt to changes due to slow rate of policy implementation by the Government. This makes it difficult for KRA to adapt to new changes in technology. That issue was raised by the clients when they complained of the slow rate of processing their documents.
4.8 Possible solutions to the major tax refund system challenges
Solutions to major tax refund system challenges were based on some of the challenges cited in tax refund system as explained. The respondents cited forceful implementation of financial methods, efficiency based control methods, and efficient IT support as shown in figure 3 below:
The possible solutions to the challenges among others were forceful implementations of financial policy as per the requirements of KRA. This can only be achieved through following strict laws and penalties put in place to be abided by everyone bound with it. Efficiency based controls should also be applied to avoid bad behavior by unscrupulous businessmen who forge Auditors signature to avoid tax and obtain excess refunds from the Government.
4.9 VAT Refund system
The differences in opinion on some of the issues that affects tax refund system is portrayed by what others think is appropriate measure by the KRA officials to enhance effective operations of tax refund system. It also shows that which is being done to enable appropriate functioning of tax refund system at KRA. There should be a measure to confirm the completeness of documentations before they are presented to KRA for tax refunds.the figure 4.1 below shows some of the views that were taken from KRA clients.
Table 4.10: Clients View
VIEW
% YES
% NO
% Not sure
Certification of refund claims by Auditors
43
47
10
Time taken to process VAT refund claims
35
45
20
Educating tax-payers on VAT refund requirements
18
42
40
Claims getting lost between stations and headquarters
56
22
22
Preferential treatment of good compliers (Gold Status Scheme)
14
64
20
Reasonable time between receiving and allocation of claims
30
51
19
Shared data base between revenue departments
17
67
16
Zero-rating supplies to exporters
13
16
71
Bank remittance verification/VAT Bank Accounts
10
84
6
Size of VAT refund claims
43
47
10
Deferring Accounting for VAT on imported Capital goods
35
45
20
Budgeting for VAT refunds by Central Government/State Budget
18
42
40
Introduction of ICT in tax processing
22
56
22
Procedures followed to process and pay a refund claim
64
14
20
Incomplete documentation from VAT refund claimants
67
17
16
Availability of funds from the Treasury
13
71
16
Instant availability of technical support e.g. ICT and data capture
84
10
6
Automation of processing frameworks
43
47
10
VAT refund abuse
35
45
20
Setting statutory deadlines for payment of a refund e.g. 90 days
42
18
40
Setting penalties and interests for late payment of refunds
22
56
22
Organization and Management of VAT Refund Operations(Centralization)
13
57
30

From the findings, most of the people believe that auditors do not necessarily certify the claims before they are presented to KRA for refund collection. This is due to uncontrolled market where people decide to practice even those who are not qualified as auditors. This affects the performance of revenue since much of the money from treasury is lost to greedy individuals. This is shown in table 4 where 43% were of the opinion that claims from KRA are being certified before they are presented for refund collection.
Time taken to process the claims is also another problem. This is due to lack of appropriate technology like proper ICT implementations which sometimes make systems to fail. This make refunds to take along time to be processed. This delay make individuals to look for alternatives that can help them recover the money lost in tax or compensate the capital tied up in claims waiting to be received. This problem could also be caused by lack of appropriate knowledge to handle tax matters as shown in the table four above that most of the clients do not get sufficient claims in the tax management system.
Claims were reported to be getting lost between KRA offices that was discouraging tax payers from presenting their details for taxation. These were among the factors that discourage people from asking for claims which are their right. This situation can be bridged by giving presence treatment to clients and ensuring that the speed at which tax refund processes take to mature is reasonable and reliable.
Tax officials do not have enough shared database as shown in table four, this makes refund collection to be unreliable since the officials connote locate the correct amount that is supposed to be taxed. This makes exaggerated claims received by the affected parties. Most of the officials do not have a menace of verifying whiter the bank documents presented to them are genuine or forged. This affects tax refund since some of the claims are not genuine hence over drain of funds from the revenue authority.
The failure that was also noted was that of the Government inability to budget for tax refund processes. This is one factor that contributes to the delay of tax claim since there is not enough money in the treasury to provide for refunds. Most people were of the opinion that at least some money should be set aside to provide for the tax claims.
However much most of the people were of the opinion that the Government had failed in setting up good taxation measures, non of them seems to agree that they have fallen pray to tax refund abuse by claiming more than they should ask for at one of their life as tax payers. This measure can only be solved by setting strong penalty that is followed by all tax parties to ensure there is an appropriate state of tax management system.
All these measure when put together and implemented by KRA can help improve o the revenue system in the country since Kenya rely much on domestic taxes for its operation than donor funding.
Most of the KRA Clients are operating Sole Proprietorship as the type of business. They are individual business owners operating within the country. There are also corporate clients but they do not form a large percentage. It’s discovered that very few of them had received refunds however much they were entitled to receive their due amounts. Most of those clients had their sales in cash which made it difficult for KRA to get their exact financial position since most of them do not keep proper records. When asked whether they had received any tax refund within the previous two years, a number of them had not received any citing that it takes a very long time for it to come like six months or even two years. Figure 4.9.5 below shows the analysis of clients who use ETR machine as was asked:
Figure 4.9.5 analyses of clients who use ETR machine
The figure an above shows that most of the KRA Clients use ETR machine as per the requirement of KRA by laws. This has greater impact in Tax Refund since most of the claims are not genuine. The implication of this is supposed to be taken keenly by the KRA officials to ensure that there is compliance by the regulations of Kenya Revenue Authority to all clients.
Table 4.10 Auditors View
VIEW
% Agree
% Disagree
% Not sure
Certification of refund claims by Auditors
54
26
20
Time taken to process VAT refund claims
43
17
40
Educating tax-payers on VAT refund requirements
34
65
1
Claims getting lost between stations and headquarters
75
15
10
Preferential treatment of good compliers (Gold Status Scheme)
34
66
0
Shared data base between revenue departments
16
6
78
Zero-rating supplies to exporters
81
10
9
Bank remittance verification/VAT Bank Accounts
23
67
10
Big size of refunds
45
5
50
Deferring Accounting for VAT on imported Capital goods
67
13
20
Budgeting for VAT refunds by Central Government/State Budget
66
12
22
Introduction of ICT in tax processing
84
6
10
Procedures followed to process and pay VAT refund claims
30
51
19
Incomplete documentation while lodging claims
67
17
16
Availability of funds from the Treasury
13
71
16
VAT refund abuse
84
10
6
Setting statutory deadlines for payment of refunds e.g. 90 days
43
47
10
Setting penalties and interests for late payment of refunds
35
45
20
Organization and Management of VAT Refund Operations(Centralization)
18
42
40

Most of the Auditors are not for the opinion of educating tax payers on tax requirements since they fear that this might cause them their job. This situation should be overlooked by the KRA to enhance good tax system in the country.
It was discovered that most of the refund claims are never certified by the Auditors since 47% believed that Auditors were not involved in the certification. The other claim that was also raised was that it takes a long time to process the VAT Refund which discourages most of the auditors from claiming refunds. 64% of the clients believed that there was preferential treatment to good compliers that was encouraging people to become good compliers.
However, a number of auditors were of the opinion that should be a number of reforms in tax refund department like introduction of ICT and enough funds set aside by the Treasury for repayment of claims. They were of the support of organization of VAT refund system which would be centralized to ease operations of taxation matters.
This study showed that good response to customer queries had had to a greater extent influence Tax refund as indicated by 48% of response. Security of corporation also could influence VAT refund system to a grater extent as indicated by 51% of the response to that effect. Zero rating of exports could influence tax refund negatively as indicated by 55% of the response. Another issue that also brought a negative response to tax refund system improvement was pressure in state budget which had a response of 30%. The issue that was overwhelmingly supported by most of the clients as that which has positively influenced tax refund system was the introduction of ICT to the tax refund system which had 36% of the support.








CHAPTER FIVE
SUMMARY OF THE FINDINGS, CONCLUSIONS AND RECOAUDITORSENDATIONS
This chapter presents the summary of the findings from chapter four, conclusions and recommendations of the study based on the objectives of the study.
5.1 Summary of the Findings and Conclusions
From the study, most of the responders were male who work in the tax refund section and the respondents had different designations such as administration officers, refund directors, information officers, office messengers, receptionists and others in the refund section. The implication on the research is that the respondents were evenly distributed and therefore a variety of the responses were obtained.
On the number of years that the respondent had worked, the study found that most of the respondents had worked for the company for a period of 1 to 5 years (51 percent) while 32 percent had worked for a period of 6 to 10 years. 17 percent of the respondents had worked for a period of over 10 years.
The study also found that most respondents had attained graduate level of education. A significant number had also attained post graduate level of education while only some mild cases were reported in certificate level. This implies that majority of the staff in refund section had enough skills and good education for their duty.
The failure that was also noted was that of the Government inability to budget for tax refund processes. This is one factor that contributes to the delay of tax claim since there is not enough money in the treasury to provide for refunds. Most people were of the opinion that at least some money should be set aside to provide for the tax claims.
However much most of the people were of the opinion that the Government had failed in setting up good taxation measures, non of them seems to agree that they have fallen pray to tax refund abuse by claiming more than they should ask for at one of their life as tax payers. This measure can only be solved by setting strong penalty that is followed by all tax parties to ensure there is an appropriate state of tax management system.
In marital status, 87% of the population under study was married thus reduced workplace relationship that hinders performance of individual as expected by the employer. A number of tax reforms were got from the people that included Tax Modernization Program (TMP) aimed to broadening the tax base, and in 1987, the adoption of Budget Rationalization Programs intended to place controls on public spending.
On the other hand, broadening the tax base and closing loopholes would require bringing more individuals and businesses into the tax system, itself a challenge given the administrative weakness of the existing tax system. The main organizational change aimed at strengthening administrative capacity was the incorporation of the Kenya Revenue Authority in 1995.
The most effective one was the KRA centralized tax refund activities which had previously been undertaken by departments in the Ministry of Finance (Muriatic and Moyi, 2003). Over the last ten years the KRA has adopted internal management reforms aimed at combating corruption among revenue officers and improving taxpayer services.
A number of East African countries have created tax refunds authorities over the last decade. These institutions are semi-autonomous from government, and act under the supervision of a board of directors that includes bureaucrats, possibly a senior representative from the ministry of finance, and representatives from the private sector. They are meant to have a certain degree of financial and operational independence, for example to allow more flexible employment practices than exist in the public service, and as a means of providing insulation from unwarranted political influence and corruption.
5.2 Recommendations
This research recommends that individual business to have proper accounting records that can be used by tax officials for evaluation. It also recommends that the government should be strict to ensure that proper KRA regulations are followed as required. This will ensure proper management of tax refunds is applied in all tax fields.
The government should ensure that only qualified individuals practice as Auditors which would ensure that documents presented for taxation is complete and has all the requirements by the tax authorities. The speed at which documents presented by Auditors should be improved to reduce discouragement by tax payers that makes people avoids tax payment. It should also ensure that all the work presented for tax manipulation is certified by the Auditors that would build confidence in the presented documents.
At the KRA offices, the management should ensure that there is well shared database that would enhance effective communication with the parties involved in to help reduce tax fraud during refund. There should be a way of communication between the banks, Auditors and KRA to ensure effective verification of the documents presented for tax purposes.
There should be proper staffing at KRA offices that would make people to have adequate and efficient services. Among others, there should be proper campaign to ensure that the public is well informed about their tax rights and how to handle tax issues. Some claims that also get lost between KRA offices should be investigated to ensure that every individual’s right is respected; this would reduce corruption in various government offices and hence good performance of tax refund system.
5.3 Conclusions
The study therefore concludes that more research should be carried out on all the government ministries in order to bring out the comparative effect. Most of the refund claims are never certified by the Auditors since 47% believed that Auditors were not involved in the certification; this means that some people forge financial statements which really affect tax refund since they claim more than they should get. The other claim that was also raised was that it takes a long time to process the VAT Refund which discourages most of the people from claiming refund, this mean that there is tax fraud where people avoid tax and 64% of the clients also believed that there was preferential treatment to good compliers that was encouraging people to become good compliers and this should be encouraged.Various departments should also be included in order to gain the various views on taxation matters that would help improve the shape of our economy. This report should therefore be adopted by KRA to ensure its efficiency in tax management system.
This research further recommends that ICT system should be improved since that is the major cause of delay, forgery and other failures of tax refund system in the organization. Most individuals do believe that when efficient methods of handling tax is introduced as shown in the tables above, then their effects can be felt across the tax life KRA. This should be adopted by the government as a measure of change towards improving our society.
References
Stiglitz A. J (1976): “The design of tax structure: direct versus indirect taxation,” Journal of Public Economics, 6, 55-75.
Auriol, E. and Warlters M. (2005): “The Marginal Cost of Public Fundin Africa,” IDEI Working Papers 371, Institut d'Économie Industrielle (IDEI), Toulouse.
Diamond P. and Mirrlees J. (1971): “Optimal taxation and public production I: production efficiency,” American Economic Review, 61, 8-27.
Frankfurt J. (1971): “Optimal taxation and public production II: tax rules,” American Economic Review, 61, 261-278.
Karingi, S. A , Wanjala, A., Kamau E. ,Nyakang’o, A. Mwangi, M. Muhoro, and J. Nyamunga (2004): “Fiscal Architecture and Revenue Capacity in Kenya,” KIPPRA Discussion Paper DP/45/2004, Nairobi, Kenya.
Karingi, S., B. Wanjala, E. Pamba, and E. Nyakang’o (2004): “Tax Reform Experience in Kenya,” Tax Policy Unit, Nairobi, Kenya.
Kenya Institute for Public Policy Research and Analysis (2005): “Tax Compliance Study,” draft report.
Kenya Revenue Authority (2005): “Annual Revenue Performance Report FY 2004/05,” KRA, Nairobi, Kenya.
Kenya Revenue Authority (2005): “Statistical Bulletin (July 2004-June 2005),” KRA, Nairobi, Kenya.
Kiringai, J., N. Ndung’u, and S. Karingi (2002): “Tobacco Excise Tax in Kenya: An Appraisal,” KIPPRA Discussion Paper DP/21/2002, Nairobi, Kenya.
Mirrlees, James (1971): “An exploration in the theory of optimum income taxation,” Review of Economic Studies, 38, 175-208.
Muriithi, M. and E. Moyi (2003): “Tax reforms and revenue mobilization in Kenya,” AERC Research Paper 131, African Economic Research Consortium, Nairobi, Kenya.

Stiglitz A. J (1976): “The design of tax structure: direct versus indirect taxation,” Journal of Public Economics, 6, 55-75.
Auriol, E. and Warlters M. (2005): “The Marginal Cost of Public Fundin Africa,” IDEI Working Papers 371, Institut d'Économie Industrielle (IDEI), Toulouse.
Diamond P. and Mirrlees J. (1971): “Optimal taxation and public production I: production efficiency,” American Economic Review, 61, 8-27.
Frankfurt J. (1971): “Optimal taxation and public production II: tax rules,” American Economic Review, 61, 261-278.
Karingi, S. A , Wanjala, A., Kamau E. ,Nyakang’o, A. Mwangi, M. Muhoro, and J. Nyamunga (2004): “Fiscal Architecture and Revenue Capacity in Kenya,” KIPPRA Discussion Paper DP/45/2004, Nairobi, Kenya.
Karingi, S., B. Wanjala, E. Pamba, and E. Nyakang’o (2004): “Tax Reform Experience in Kenya,” Tax Policy Unit, Nairobi, Kenya.
Kenya Institute for Public Policy Research and Analysis (2005): “Tax Compliance Study,” draft report.
Kenya Revenue Authority (2005): “Annual Revenue Performance Report FY 2004/05,” KRA, Nairobi, Kenya.
Kenya Revenue Authority (2005): “Statistical Bulletin (July 2004-June 2005),” KRA, Nairobi, Kenya.
Kiringai, J., N. Ndung’u, and S. Karingi (2002): “Tobacco Excise Tax in Kenya: An Appraisal,” KIPPRA Discussion Paper DP/21/2002, Nairobi, Kenya.
Mirrlees, James (1971): “An exploration in the theory of optimum income taxation,” Review of Economic Studies, 38, 175-208.
Muriithi, M. and E. Moyi (2003): “Tax reforms and revenue mobilization in Kenya,” AERC Research Paper 131, African Economic Research Consortium, Nairobi, Kenya


APPENDIX 2 : QUESTIONNAIRE

I am a Master of Business Administration student at Jomo Kenyatta University of Agriculture and Technology. As part of this course, I am carrying out a research on FACTORS INFLUENCING THE EFFECTIVENESS OF VAT REFUND STSTEM IN KENYA


This is to kindly request you to fill in this questionnaire by responding to the questions concerning your experiences and perceptions on the subject. The information gathered shall be treated with confidence and shall be used for this study only.

Sections A and B to be filled by the employees of KRA only while Sections C to be filled by the clients of KRA and Section D to be filled by the CPAs/Auditors





Signed ........................................................... Date.............................................................



DIANA M. LUKOSI .
SECTION A: BIO DATA OF KRA OFFICIALS

1) In what department do you work……..…………………………………………...

2) What is your current job designation?..................................................................

3) For how long have you worked for Kenya Revenue Authority?


1-3 months ( ) More than 10 years ( )
4-6 years ( ) 7-9 years ( )

4) Sex Male ( ) Female ( )


5) Age Group 40-50 years ( )
18-25 years ( ) over 50 years ( )
25-30 years ( )
30-40 years ( )


6) Highest level of education of the respondent:

Primary school level ( ) Diploma level ( )
Secondary school level ( ) Postgraduate level ( )
Undergraduate level ( ) Certificate level ( )

SECTION B: VAT REFUND SYSTEM IN KENYA

7) How has the integration of tax management system affected the speed at which tax refund is processed?….…………………………………………………………………………………
…………………………………………………………………………………………………..
…………………………………………………………………………………………………
8) What are some of the internal communication channels that can be applied by the tax authority to improve on the refund system?
......................................................................................................................................................
......................................................................................................................................................
9) How does release of funds from treasury affects VAT refund systems of KRA?
....………………………………………………………………………………………………
…………………………………………………………………………………………………
10) How does KRA’s new policy formulation affects VAT refunds?
…………….…………………………………………………………………………………….
…………………………………………………………………………………………………..

11) How does incomplete documentation affect VAT refunds of KRA?
……………………….………………………………………………………………………..
…………………………………………………………………………………………………
12) How does certification by CPAK’s affect VAT refunds by KRA?
……………………….………………………………………………………………………..
…………………………………………………………………………………………………
13) Do you have any suggestions on how to implement an effective VAT refunds system?.
……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………
14) In each of the following, state the extent to which you agree with the statements.
To what level do you think the following factors have affected the effectiveness of VAT Refunds at KRA ?
(1-very great extent, 2-great extent, 3-moderate extent, 4-negatively& 5-not sure)

1
2
3
4
5
Certification of refund claims by Auditors





Time taken to process VAT refund claims





Educating tax-payers on VAT refund requirements





Claims getting lost between stations and headquarters





Preferential treatment of good compliers (Gold Status Scheme)





Reasonable time between receiving and allocation of claims





Shared data base between revenue departments





Zero-rating supplies to exporters





Bank remittance verification/VAT Bank Accounts





Size of VAT refund claims





Deferring Accounting for VAT on imported Capital goods





Budgeting for VAT refunds by Central Government/State Budget





Introduction of ICT in tax processing





Procedures followed to process and pay a refund claim





Incomplete documentation from VAT refund claimants and Auditors





Availability of funds from the Treasury





Instant availability of technical support e.g ICT and data capture





Automation of processing frameworks





VAT refund abuse





Setting statutory deadlines for payment of a refund e.g 90 days





Setting penalties and interests for late payment of refunds





Organization and Management of VAT Refund Operations(Centralization)







SECTION C: KRA VAT REFUND CLIENTS

15) What is the nature of your business?............................................................................
............................................................................................................................................

16) Why do you claim for a refund ?.................................................................................
……………………………………………………………………………………………
17) How often do you lodge refund claims e.g monthly, quarterly, half yearly or annually?
…………………………………………………………………………………………….
18) In a span of one year, how many times do you receive a VAT tax refund ?..................
............................................................................................................................................
……………………………………………………………………………………………

19) How long did it take KRA authority to process your refund after applying ?..................
............................................................................................................................................
21) How often has fraudulent claims by other tax-payers delayed your refund collection ?

Never ( ) Once ( ) More than once ( )
22) To what level do you think the following factors have affected the effectiveness of VAT Refunds at KRA ?
(1-very great extent, 2-great extent, 3-moderate extent, 4-negatively& 5-not sure)


1
2
3
4
5
Certification of refund claims by Auditors





Time taken to process VAT refund claims





Educating tax-payers on VAT refund requirements





Claims getting lost between stations and headquarters





Preferential treatment of good compliers (Gold Status Scheme)





Shared data base between revenue departments





Zero-rating supplies to exporters





Bank remittance verification/VAT Bank Accounts





Big size of refunds





Deferring Accounting for VAT on imported Capital goods





Budgeting for VAT refunds by Central Government/State Budget





Introduction of ICT in tax processing





Procedures followed to process and pay VAT refund claims





Incomplete documentation while lodging claims





Availability of funds from the Treasury





VAT refund abuse





Setting statutory deadlines for payment of refunds e.g 90 days





Setting penalties and interests for late payment of refunds





Organization and Management of VAT Refund Operations(Centralization)






Do you have any suggestions on how to implement an effective VAT refund system.
……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

SECTION D: AUDITORS
23) What is the name of your organization/firm?
............................................................................................................................................
............................................................................................................................................
24) Taking a sample of your main clients, how often do you lodge refund claims e.g monthly, quarterly, half yearly or annually?
25) In a span of one year, how many times does your client receives VAT tax refund ?
............................................................................................................................................

26)How long did it take KRA authority to process your clients refund after applying ?...................................................................................................................................................
............................................................................................................................................................................................................................................................................................................
27) How often has fraudulent claims by other tax-payers delayed your refund collection ?

Never ( ) Once ( ) More than once ( )


28) To what level do you think the following factors have affected the effectiveness of VAT Refunds at KRA ?
(1-very great extent, 2-great extent, 3-moderate extent, 4-negatively& 5-not sure)

1
2
3
4
5
Certification of refund claims by Auditors





Time taken and procedures followed to process and pay refund claims





Educating tax-payers and Auditors on VAT refund requirements and new policies





If Auditors were filling required documents for VAT refunds online,it could speed up the VAT refunds processes





Preferential treatment of good compliers e.g(Gold Status Scheme)





Auditors are involved in KRA refund policy formulation





Auditors are updated on the current refund requirements.





Bank remittance verification





Organization and Management of VAT Refund Operations(Centralization)





Deferring Accounting for VAT on imported Capital goods





Budgeting for VAT refunds by Central Government/State Budget





VAT refund abuse





Incomplete documentation from VAT refund Claimants & Auditors





Availability of funds from the Treasury





Properly analysed and certified work takes a shorter time to be processed





Setting penalties and interests for late payment of refunds





Setting statutory deadlines for payment of a refund e.g 90 days






Do you have any suggestions on how to implement an effective VAT refunds system.?
…………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

[i] The building that houses these offices, the Times Tower, was constructed specifically for the KRA. It is the tallest building in East Africa, and has no tenants other than the KRA.
[ii] Prior to the merger, the Income Tax department was organized on a functional basis, with separate offices for, e.g., taxpayer services, auditing, etc. However, multiple tasks in the VAT department were carried out by all individuals, with little functional delineation. The new merged department has adopted a functional organizational structure.
[iii] Kenya Institute for Public Policy Research and Analysis.
[iv] Refund claims that are certified by accredited accountants are, according to KRA policy, supposedly fast tracked. This effectively outsources part of the verification process from the KRA at the taxpayer’s expense – a kind of kind of price discrimination across tax payers. This policy is unique to Kenya.

[v] Similarly businesses are required to submit corporate tax returns accompanied by a set of audited accounts.
[vi] ….except to the extent that a shilling in the hand is worth more than 1.02m in the m-month-old bush.
[vii] In a recent paper, Auriol and Walters (2005) use a CGE model to compute the marginal cost of public funds for a (large) number of African countries. Our micro-level approach would be complementary to their macro simulation methods.

[viii] The theory of optimal taxation (Diamond and Merles, 1971a, b, Merles 1971), including the choice between direct and indirect taxation (Atkinson and Stieglitz, 1976), was of course in its infancy in this period.
[ix] There is a tendency in Kenya to lump discussion of personal and corporate income taxes in to a single income tax category. We will try to avoid this practice in this paper.
[x] If we are to believe that half to three quarters of GDP is produced in the informal sector, then estimates of output and any other quantities as a share thereof need to be interpreted with caution. However, as we do not have specific information on the way in which GDP is calculated, it is difficult to tell in which direction there is likely to be a bias, if any.
[xi] Something about the revenue-neutrality of TRA86 – was it? – compared with the intention of raising revenue in Kenya.
[xii] The government may change the filing requirements of smaller businesses, who would file bimonthly instead.
[xiii] In 2004 the relief was KSh12, 672, while the bottom tax rate of 10 percent applied to the first KSh116, 160 of income.
[xiv] Married women have the option of filing separately.
[xv] The withholding rates are 15% on gross interest earnings, 5% on qualified dividends, and 10% on ordinary dividends.
[xvi] It is believed that the requirement that all wage earners submit a personal income tax return could have led to a loss in revenue to the extent that individuals who were previously unaware of the deductibility of certain expenses began to take advantage of these preferences. Of course, the reduction in revenue (if any) does not mean that the welfare impact of this change in behavior was negative.

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