The season for filing annual returns for individuals and organisations that have December year-ends came to an end on June 30, 2019. As usual, Kenyans with their last minute dash jammed the iTax portal to beat the deadline, notwithstanding the fact that they had six months to do so.
Every individual and company in possession of a Personal Identification Number (PIN) should file their tax return at the end of the year.
Kenya operates a self-assessment tax regime where an individual or businesses voluntarily declares the income received during the year and settles the resultant tax liability, if it exists. Where one did not accrue any income, then the law allows the taxpayer to file a nil return.
The Kenya Revenue Authority (KRA) reported that out of the over nine million formally registered taxpayers, only 3.5 million filed their 2018 returns. Despite the effort made by the taxpayer expansion team at KRA, there are still those who are not filing their tax returns. This is the case even with the late filing penalty being set at Sh20,000 for companies and Sh2,000 for individuals.
In order to avoid the aforementioned penalties, most people opted to file nil returns. This is despite some of them earning income during the year. This prompted the KRA to suspend the filing of nil returns in order to buttress the iTax system and weed out tax cheats.
Tough guidelines were issued so as to dissuade people from abusing the system.
For the companies and individuals who filed nil returns, it is important to note this may raise issues that they need to prepare to deal with. First, filing of a nil return communicates that the tax payer did not receive any income within the year in question or that their income falls below the taxable income bracket in Kenya.
Under the Income Tax Act, income includes emoluments from employment, business profits, dividends, interest, disposal of property, natural resource income, and income from gambling.
Having filed a nil return, KRA will then embark on a verification exercise to confirm that indeed the taxpayer did not receive any income as claimed in the return. While this was an uphill task during KRA’s manual days, the story has changed since now KRA has invested in data analytics which can easily compare the taxpayer’s return against their transactions with third parties. For instance, it’s now a requirement that to operate a bank account, one has to provide a PIN certificate.
KRA has powers under the law to compel third parties such as banks, telecommunication companies, insurance companies, betting companies and utility firms to provide data on the ta payer of interest. If this kind of information indicates that the individual has been receiving income yet they filed nil returns, KRA can summon the taxpayer to clarify the anomaly or issue an assessment to the tax payer which is often accompanied with penalties and interest.Further, where the tax authority has information to the effect that the filing of a nil return does not reflect the true picture of the affairs of the tax payer then the Authority is allowed, under law, to demand the inspection of the books of account and records of the tax payer to confirm the status.
Recently, KRA unveiled the use of the Tax Invoice Management System (TIMS) in a bid to tame tax cheats. TIMS is an Information Technology integration of the taxpayer’s systems, that is, the point of sale, invoicing system or billing system to KRA’s iTax system to monitor the generation of tax invoices by businesses.
Therefore it would be difficult for a business that has generated invoices to file nil returns at the end of the year unless there is a plausible explanation to it.
Tax clearance is fast becoming an effective way of catching and deterring tax cheats. Proof of compliance with tax by providing a Tax Compliance Certificate is becoming more common especially when trading with government, responding to tender requisitions, clearance for political office and clearance for employment.
Before a taxpayer can be issued with a Tax Compliance Certificate, their returns have to be scrutinised and if found that they filed nil returns yet they had taxable income to declare they may be denied the certificate on this basis until they settle the outstanding liability.
Therefore what remedies exist for the taxpayers who filed nil returns yet this is not the actual state of affairs?
Under law, they can file an amended return declaring the correct state of affairs. The amended return has to be approved by KRA hence they may request for additional information in order to confirm the amendment.
Once the nil return is processed, KRA may issue an assessment where they disagree that the taxpayer did not have any income. In this case the taxpayer needs to respond to the authority demonstrating their grounds for filing a nil return. Many taxpayers are now receiving assessments on iTax based on their filings for the year 2018.
Before you hit that nil button, stop and consider the implications of such a filing.
The writer is a senior advisor at Andersen Tax, Kenya.