Mystery of Missing Sh432bn China Imports on KRA Books

The Kenya Revenue Authority (KRA) has not included Chinese imports worth Sh431.9 billion for the first 10 months of last year in its official records, which raises questions about the extent of tax evasion during the election year.

The value of imports from the Asian economic powerhouse differs significantly, according to a review of official trade data that was issued separately by the tax authorities of the two countries.

The Kenya National Bureau of Statistics (KNBS) revealed official KRA data that put the value of imports from China at Sh377.5 billion during the review period.

The General Administration of Customs of the People’s Republic of China (GACC), the counterpart of the Kenya Revenue Authority (KRA), claims on its website that the value of the items exported from China to Kenya during this time was Sh809.4 billion, more than twice the amount provided by the KRA.

Given that goods imported into the nation are subject to a variety of levies, including import duty, value-added tax (VAT), excise duty, import declaration fees (IDF), and the railway development levy, this enormous variation is also likely to raise concerns about the amount of taxes gathered on imports from the second-largest economy in the world (RDL).

Trade mis-invoicing, when imports or exports are falsely quoted at the port to avoid paying customs charges, is a problem that Kenya is now dealing with. This type of tax evasion can also take place when imports are undervalued, which results in lesser payments of VAT and customs taxes because the value of the items is lower.

Trade mis-invoicing allows importers to acquire ten phones but only declare two, a technique that is widespread with the consolidation of imported items, or understate the price of an imported item like a phone.

Since last Wednesday, the KRA had not publicly responded to the Business Daily’s inquiries over the discrepancy.

An insider who cannot speak to the media claimed that the agency was equally perplexed by the enormous discrepancy between the two data sets.

According to the source, the KRA has now gotten in touch with the Chinese Embassy in Kenya to see how Beijing calculated its figures in response to the Business Daily inquiry.

According to the official, the discrepancy may be caused by some cargo from China that travels through the port of Mombasa on its way to countries in East Africa like Uganda, South Sudan, Rwanda, Burundi, Tanzania, and the Democratic Republic of the Congo.

“Such cargo could have been erroneously captured by the countries of origin as goods coming to Kenya and not as goods in transit,” the KRA official said, adding that some countries use different codes to identify imports and exports.

However, the discrepancy may also support claims that massive amounts of cargo posing as products in transit are ultimately dumped in the nation on their way to other destinations in the region in order to escape taxes.

The use of technology and improved data analytics at customs and border control is one of seven steps prioritized by President William Ruto’s new administration to increase tax collection to Sh3 trillion in the upcoming fiscal year

Import duties are applied on imported items and range from 0% for raw materials to 10% for intermediate goods and 25% for finished goods.

While imported excisable commodities will be subject to various excise duty rates as set forth by the Excise Duty Act 2015, VAT is charged at the usual rate of 16 percent, with a few exceptions.

Additionally, import declaration fees (IDF) of 3.5 percent and a 2.0 percent railway development levy are charged on imported commodities (RDL).

With this imbalance, the KRA may have lost at least Sh66.95 billion in tax collections from the 10% import duty, IDF, and RDL alone. If the import duty is raised to 25%, which is levied on finished goods, and there is a 16 percent VAT, the total may rise to Sh135.95 billion.

According to a 2018 analysis by Global Money Integrity (GFI), mis-invoicing and illegal financial flows may have cost Kenya $907 million (Sh112.8 billion) in revenue in 2013.

Due to import under-invoicing, used clothing and cereals lost the most money ($21 million), followed by automobiles ($18 million), electrical machinery ($17 million), and mineral fuels ($15 million).

$140 million in lost revenue as a result of mispriced exports was attributable to the trade in coffee, tea, and spices.

The KRA’s Customs and Border Control Department—as well as KNBS—collect the export and import data for Kenya.

Tax experts say this gap could be explained by other reasons in addition to the potential under-declaration of imported items.

One of the causes of the discrepancy, according to Robert Waruiru, a partner at Ichiban Tax & Business Advisory LLP, could be transhipment, in which cargo that the Chinese tax agency had identified as headed for Kenya is instead moved to another ship for delivery to a different nation.

However, Chinese contractors have also temporarily imported items into the nation, such as the specialized machinery needed to transport concrete beams for the Nairobi Expressway project.

“Such equipment is not captured as imports by KRA,” said Mr Waruiru.

Some products are imported into the nation just to be exported again to nearby landlocked nations like Uganda, Rwanda, and Burundi. Other elements like time lag or variations in the exchange rate could have also contributed to the discrepancy, albeit insignificantly.

The vast discrepancy between the two sets of trade data, however, cannot be fully explained by any one of these factors, according to experts. Some have suggested that tax evasion, including under- or non-declaration of income, tax fraud, dishonest tax reporting, and overstating of deductions, was the most likely cause.

The KRA anticipates collecting Sh145.9 billion from import duties in the current financial year ending in June. This amount is anticipated to increase to Sh173.3 billion in the next year.

One or more of the causes of tax leakages has been identified as under- or non-declaration of imported goods.

As part of its campaign against fake goods, the previous administration of former President Uhuru Kenyatta started a crackdown on consolidators.

In order to address the issue of under- and non-declaration, the government gazetted several facilities in 2021 to be used for deconsolidation and clearing of cargo imported by small-scale traders.

“All cargo consolidated at the countries of export will, upon importation into the country, be deconsolidated at facilities designated for that purpose,” said a statement from the KRA.

At the Kenya Railways Corporation (Boma Line) Transit Shed, all consolidated cargo that had been imported by sea and brought to Nairobi on the standard gauge railway had to be deconsolidated, cleared, and collected by the owners.

The other authorized facilities were to be used to deconsolidate cargo headed for different regions of the nation.