VAT refund dilemma, a costly manufacturers pain point

Picture this. You are a Kenyan manufacturer, producing high-quality products for export. After months of sourcing raw materials, investing in machinery, and ensuring compliance with regulatory requirements, your first shipment is finally ready. The buyer, whether in Europe, Asia, America, or even within Eastern Africa, is eager to receive the consignment.

Your team processes the necessary paperwork, the goods leave the factory, and you breathe a sigh of relief. The deal is sealed, and you anticipate the return on your investment. But beneath this optimism lies an unsettling reality: the Value Added Tax (VAT) refund you are owed is nowhere in sight.

As an exporter, you were assured that your goods are VAT zero-rated, a tax incentive designed to encourage exports and keep Kenyan businesses competitive in the global market. The logic is simple: since exported goods are not consumed locally, VAT should not be a cost burden.

However, while no VAT is charged on the final product, businesses still incur VAT on raw materials, machinery and utilities.

The law provides for a refund of this input VAT, ensuring businesses are not unfairly taxed on goods destined for international markets. In theory, this system should work seamlessly. However, in reality, it has become an endless waiting game.

For many manufacturers, VAT refunds are not just a matter of convenience. They are crucial to cash flow. Delays in processing refunds mean businesses are left in financial limbo, unable to reinvest in production, pay suppliers on time, or expand their operations.

The government, too, faces the challenge of balancing tax collection with expenditure needs, making it critical to find sustainable solutions that support both economic growth and fiscal responsibility.

Looking at global best practices, some countries have successfully streamlined their VAT refund processes, demonstrating that efficiency is achievable.

South Africa processes VAT refunds within 21 days through a real-time risk assessment system that fast-tracks low-risk claims. Singapore has automated most VAT refund processes, ensuring businesses receive payments within 30 days. Egypt provides VAT refunds within 45 days, demonstrating how a well-structured tax administration can support exporters.

The Kenyan government has made efforts to improve tax administration and enhance revenue collection, recognising the importance of a robust business environment.

However, balancing tax collection with timely VAT refunds remains a challenge. Addressing this issue is crucial, as delayed refunds create unintended consequences that can slow economic growth.

Industries that require significant capital investment and are heavily involved in exports such as agro-processing, textiles, and apparel, are the hardest hit. Many operate on thin margins and rely on timely refunds to sustain operations.

A steel manufacturer exporting construction materials to the East African Community, a confectionery company exporting candy to Central Africa, or a vehicle manufacturer exporting trailers to Southern Africa, all face the same issue. Without predictable VAT refunds, their ability to plan and grow is severely constrained.

Meanwhile, competitors in other countries enjoy better cash flow, allowing them to scale their businesses more effectively. This makes Kenya a less attractive investment destination.

To salvage their situation, the manufacturers do voluntary export restraint; just to ensure that they reduce their cash flow erosion to non-paid VAT refunds. To Kenya, this amounts to losses in jobs, foreign exchange and economic growth.

An underlying key issue on these delays is the mismatch between VAT refund claims and the budget allocated for processing them. While refund claims stand at approximately Sh5 billion per month, only Sh2.5 billion is allocated, creating a shortfall. Additionally, inefficiencies in tax administration have further complicated the process.

For example, import VAT remains locked within the customs system due to integration issues between KRA’s integrated Customs Management Systems (iCMS) and iTax platforms.

Read: Kenya should diversify trade ties amid unpredictable global shifts

This disconnect means businesses cannot access rightful refunds simply because the systems do not communicate effectively.

Concerns over fraudulent claims have also led to heightened scrutiny, often causing unnecessary delays for legitimate claims. While curbing fraud is critical, there is a need to distinguish between high-risk and low-risk claims to ensure efficiency.

To keep Kenya’s economy competitive, VAT refund processes must be reformed. The Kenya Association of Manufacturers (KAM) recommends a multi-faceted approach that ensures predictability, efficiency and transparency.

First, establishing a time-bound, legally backed refund mechanism is critical. Just as businesses must remit taxes within strict deadlines, VAT refunds should also be processed within a set time-frame—failure to which penalties in the form of interest should apply.

Second, the government should consider creating a dedicated VAT refund fund that would prevent delays caused by budget constraints and ensure businesses receive refunds without unnecessary disruptions.

Other countries have successfully implemented similar measures to maintain consistency in tax administration while safeguarding economic activity.

Third, improving digital integration for seamless processing would significantly reduce bottlenecks. By enhancing system coordination and reducing manual interventions, efficiency gains can be achieved, allowing for seamless processing of legitimate claims.

Lastly, the government should consider adopting a more effective and efficient tax administration system, that enhances fraud detection without penalising legitimate businesses.

Instead of delays, pre-refund verification checks should focus on high-risk claims while ensuring that legitimate exporters receive their refunds without undue delays.

Manufacturing remains a critical pillar of Kenya’s economy, with the potential to drive industrial growth, job creation, and export expansion.

Addressing VAT refund challenges would create a more predictable operating environment, making Kenya a more attractive destination for investment.

A tax system should not only focus on revenue collection but also on creating an environment where businesses can thrive. Resolving VAT refund issues will unlock business potential, strengthen investor confidence and reinforce Kenya’s position as a regional industrial leader.

The writer is the chief executive of Kenya Association of Manufacturers (KAM).