The Kenya Revenue Authority (KRA) has now suspended online registration of value-added tax (VAT) obligations amid an ongoing clean-up of its registers to weed out ghost traders suspected of siphoning billions of shillings through fraudulent schemes.
In a radical shift, VAT registrations have been reverted to a manual system whereby traders are required to physically present proof of identity to seal loopholes that resulted in revenue leaks through the notorious ‘Missing Trader Scheme’, which involves issuing fictitious invoices to depict a business transaction where no goods and services were supplied.
The taxman confirmed the changes saying that applicants are now required to make in-person visits to its offices for VAT registrations as part of a ‘know-your-customer (KYC)’ strategy to thwart the ghost traders.
“Tightened the VAT guidelines relating to the addition of VAT obligations including manual registration,” it said in a brief seen by the Business Daily.
Previously, traders keyed in their details on a digital platform and were presented with registration certificates without setting foot at KRA offices as part of reforms aimed at improving the ease of doing business.
Officials at KRA claimed that some rogue traders used stolen identification documents to register companies and later used the ghost firms to siphon an estimated Sh2.5 billion monthly from the State through fictitious transactions.
“We are demanding to know who is registering for VAT so that we can track and confirm their transactions as part of a KYC strategy. We have had cases where stolen IDs are used to register fictitious companies that are later used to siphon money from the State” a KRA official told Business Daily.
With the tightened guidelines, traders now have to fully comply with full provisions of the VAT Act.
For example, Article 34 of the VAT Act demands that a person who has applied for voluntary VAT registration presents proof of a fixed place from which the business is conducted and present a proper record of the business.
“A registered person shall display in a conspicuous place —(a) the tax registration certificate at the principal place at which the person carries on business; and (b) a copy of the certificate at every other place at which the person carries on business” the Act partly states.
“A registered person shall notify the Commissioner, in writing, of any change in the name (including the business name), address, place of business, or nature of the business of the person within twenty-one days of the change” it adds.
VAT is an indirect tax that is paid by the person who consumes taxable goods and taxable services supplied in Kenya or imported into the country. VAT on goods and services supplied in Kenya is collected at designated points by VAT-registered persons who act as the agents of the government. VAT on imported goods and services is paid by the importer.
Any person supplying or who expects to supply taxable goods and taxable services with a value of Sh5 million or more in a year is required to register for VAT.
In instances where one has not attained the Sh5 million threshold, voluntary registration can be granted subject to conditions. The VAT-registered persons or businesses are identified with Personal Identification Numbers (PINs) with a VAT obligation.
KRA said an audit had revealed widespread ‘Missing Trader’ fraud hence its decision to crack down on manipulation of its VAT registration system.
In the ‘Missing Trader Scheme’, business firms simulate a genuine trading process by trying to meet all the legal requirements of a 'supply' for tax purposes. However, the traders in the fraudulent scheme do not supply any goods or services, but "payment" is made to create a notional cost of goods sold. The scheme aims to delink and hide the final economic beneficiary of the purchases to avoid tax obligations.
“A thorough review of VAT data has revealed that unscrupulous traders are registering new companies solely to perpetrate VAT fraud. This fraud typically involves multiple companies or individuals, known as “missing traders,” who vanish with the VAT owed, severely undermining our tax collection efforts,” KRA revealed in an internal report.
The audit revealed that out of approximately 90,127 existing VAT obligations cases listed under a special category known as ‘special table’, some 20,981 were inactive taxpayers, raising suspicion of tax evasion schemes through fictitious transactions.
"These (inactive taxpayers) have been targeted for bulk deregistration to clean up the register and reduce opportunities for fraud. The remaining taxpayers under the special table are undergoing further review to determine eligibility for dormancy or suspension status, thereby limiting their ability to engage in fraudulent activities,” KRA said about the inactive taxpayers on its VAT ‘Special Table’.
A taxpayer added to the ‘Special Table’ is restricted from filing VAT returns.
The ‘special table’ chiefly contains ‘missing traders’, non-filers or taxpayers who have not filed returns for six months; nil filers or taxpayers who have filed nil returns for six months or more but have input tax claims made against them; VAT registered taxpayers who have not complied with the VAT electronic tax invoice regulations; and taxpayers who have filed returns and not made payments for six months and all efforts have been made to collect the debt but cannot be traced.
Internal records by KRA show that VAT registration applications dipped to 317 in May compared to a peak of 1,980 in March this year—an indication that a purge by the taxman may have rattled some fraudsters.
A group of traders has since sued KRA for allegedly placing them on the “special table” unfairly. The matter remains active in court.
