Create VAT fund to end refund dilemma, government advised

MANUFACTURERS now want the government to create a dedicated fund for VAT refunds to help address delays facing investors in the country which continues to cause cash-flow strains, slowing down investments.

This is on the back of low allocation to the Kenya Revenue Authority to clear VAT refunds, amid a continued rise in pending bills owed to the private sector by both the national and county governments which according to the Kenya Association of Manufacturers (KAM), it has hit Sh800 billion.

This is an increase from the Sh528 billion and Sh168 billion in pending bills owed by both the national and county governments as of September last year, respectively, as per Treasuty data.

Manufacturers alone are owed about Sh15 billion in VAT refunds alone with a monthly claim of between Sh4 billion and Sh5 billion, according to KAM.

“KRA gets an allocation of about 2.5 billion for the same so there is a shortfall. I think we need to address this as a country because the way the system is structured, it is not working well,” KAM chief executive Tobias Alando told the Star.

Value Added Tax (VAT) refund arise from among others, zero rated supplies–whereby the registered VAT taxpayers deal with taxable supplies listed under the second schedule of the VAT Act.

However, the claim should be on the inputs that are solely used in the making of the zero-rated supplies.

Also, the taxpayer has to make the claim within 12 months from the date of the supplies.

“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,” Alando said.

He said the government also 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 of the countries that have successfully streamlined their VAT refund processes include South Africa which 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.

Last year, KRA announced it had reduced the time it takes to process VAT refunds by 59.8 per cent, bringing the timeline down from 102 days in the 2020-2021 financial year, to 41 days as of June 2024.

“Various measures have been put in place to enhance refund processing and payments apart from ensuring optimal allocation for settlement of refunds,” the taxman had said in a statement in September. However, the private sector says it is yet to feel the change as getting refunds remain a nightmare for many. “Industries that require significant capital investment and are heavily involved in exports such as agro-processing, textiles and apparel are the hardest hit,” Alando said