One more reason to file tax returns: preventing tax
evasion
The Sunday Nation
Nairobi,
19 June 2022
There are just 11
days remaining before the June 30 deadline for filing income tax returns
at the Kenya Revenue Authority (KRA). Many taxpayers, especially those
whose sole source of income is employment find this process an
unnecessary bother by the KRA. After all, they argue, “all my taxes are
deducted by the employer and KRA has those records; why are they
bothering me now?”
Well, I have
explained this in the past: in 2009. One of the benefits is that you can
detect whether you have been over-taxed. This happens quite frequently
for people whose salary is below the top tax bracket. Because of the way
Pay-As-You-Earn (PAYE) tax is calculated, there is a likelihood of
getting deducted more than the rightful amount when one gets a pay-rise.
Recently, I
discovered another reason for filing tax returns. I was helping my
friend John to file his. John works abroad where he moved about 25 years
ago and he hasn’t been filing. So, when he visited Kenya, I advised him
that it is good to bring his tax records up to date.
While doing the
returns, we discovered that there are some Kenyan based companies that
have been paying PAYE taxes on his Personal Identification Number (PIN)
since 2016. According to the records, John has been earning about
Sh20,000 per month since then! We reported the matter to KRA and it is
being handled.
However, my immediate
reaction was that this is a tax evasion scheme and I suspect it is not
an isolated incident. Think about it: Suppose the company makes a profit
of Sh100,000 in a month. The corporation tax on this is 30 per cent;
that is, Sh30,000.
When they add John as
their employee earning Sh20,000, they can deduct this as a legitimate
business expense. Thus, their profit now becomes Sh80,000 and the tax
comes down to Sh24,000. Remember, they are not actually paying anything
to John! They are just listing him in their payroll.
Now, the PAYE tax for
John’s salary is 10 per cent, which comes to Sh2,000. But, like all
other individual taxpayers, John gets Personal Tax Relief of Sh2,400 per
month. So, the “employer” doesn’t remit anything to KRA since the
payable tax is less than the relief. And, just like that, the company
evades Sh6,000 in taxes every month.
It is therefore very
important for every taxpayer to file their own tax returns – in person.
And; don’t just click “NEXT” and “SUBMIT”. Check the record carefully
and verify that it is correct.
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