Manufacturers seek policy changes to unlock Sh15b unpaid VAT refunds

Manufacturers’ lobby wants the government to do away with the two per cent withholding Value Added Tax (VAT) to improve liquidity in their businesses.

The push to scrap this tax emanates from the Sh15 billion Kenya Revenue Authority (KRA) owes manufacturers as VAT refunds according to the latest data.

Non-payment of these funds, they say, has crippled their businesses which are cash-flow dependent. As such, they have tabled a raft of policy recommendations among them doing away with the two per cent withholding VAT.

Others include recapitalising Kenya Development Corporation (KDC) to provide long-term capital to manufacturers at a single digit, establishing a tax refund fund, enactment of the Prompt Payment Bill 2021, and implementing a 60-day payment period provided under the Public Procurement and Asset Disposal (PPAD) Regulations, 2020.

Withholding VAT is the tax paid to KRA when businesses purchase supplies from other enterprises. The purchasing businesses, in this case a manufacturer, is required to withhold two per cent of the value of the taxable supplies and remit to the taxman.

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Since VAT is at 16 per cent, the balance of 14 per cent is required to be paid by the supplier. Such a move is meant to enhance compliance.

Kenya Association of Manufacturers (KAM) wants this amount slashed to one per cent then do away with it altogether.

“Reduce the withholding VAT rate from two per cent to one per cent and have it removed after one year,” says KAM in their Manufacturing Priority Agenda (MPA) 2025, an annual document that details the policy recommendations on how to improve the sector.

KAM states that manufacturing businesses need patient capital which can be provided by KDC and Kenya Industrial Estates (KIE) which are State-funded entities.

“Public financial institutions such as KIE and KDC should be adequately capitalised to offer long-term loans at a single-digit interest rate. This is considering that manufacturing enterprises have a long maturation period requiring patient capital,” KAM says in the policy document.

The pain point of these recommendations, as noted in the document, is the Sh15 billion KAM says its members are owed by KRA which is causing cash flow challenges to businesses.

KAM wants the Sh2.5 billion monthly allocations to KRA for settling VAT refunds to be doubled.

“Liquidity is the 'blood' that keeps the businesses running. The government should ensure the timely refund of VAT to businesses. This should include immediate settlement of the estimated Sh15 billion outstanding VAT refunds and increasing monthly allocation of VAT refunds to at least Sh4 billion,” says KAM.

“The National Treasury usually allocates Sh2.5 billion per month to the Kenya Revenue Authority (KRA) for VAT refunds against a requirement of about Sh4 billion per month. This has several ripple effects such as cash flow constraints, increased cost of doing business, reduced competitiveness, as well as slowed investment and expansion.”

During the 2024 Taxpayers Day celebrations held at State House, the issue of refunds was noted by KRA Commissioner General Humphrey Wattanga as he pushed to make the agency meet international standards of paying refunds in 30 days.

“We wish to request a one-time allocation of at least Sh10 billion to pay a significant number of verified and approved refund claims,” he said.

At a recent sit down with Kenya Private Sector Alliance (Kepsa), a lobby body for the private sector, the same issue was also highlighted by the Commissioner General.

“While acknowledging a funding shortfall that had delayed processing of refunds, KRA encouraged taxpayers to use approved funds to offset tax liabilities in line with the law, even a it engaged the National Treasury for additional resources,” read a statement from KRA following the meeting.

The use of VAT refunds to offset tax liabilities came to be as a pronouncement by President William Ruto in March 2023 as he addressed the private sector during the American Chamber of Commerce (AmCham)-Kenya summit held in Nairobi.

The move was to make Kenya more attractive to investors. Ruto directed that VAT refunds be made within six months. “If for whatever reason a refund is not made by KRA within this period, the taxpayer can net off their claims against future tax liabilities without further applications to KRA,” he said.

“If it is okay for you to pay your tax on time, it must be okay for you to get your refund on time.”

To ensure this process is streamlined, KAM has asked for an amendment to the current law. “Amend law to provide refund of verified refunds reflected on KRA iTax system (Credit adjustment vouchers),” reads the recommendation by the manufacturers lobby.