By CPA Julian Njoroge Maina
The Impact of Reporting No Taxable Income Can Be Serious and Long-Lasting
Filing a tax return is a statutory requirement in Kenya. Every business and individual with a KRA personal identification number (PIN) must undertake this civic responsibility regardless of whether or not they generated income during a tax year. Taxpayers with no income, as well as those earning below the basic exemption limit, can file a nil return through the iTax portal. While filing via the “File Nil Return” function presumably offers some taxpayers a seamless way to comply with tax laws, it is a pitfall every taxpayer should avoid, as the cost of filing nil returns mounts as time passes, potentially preventing the taxpayer from seizing the opportunities that emerge from compliance with tax legislation. Filing nil tax returns is a quiet crisis that unfolds over time, yet the full impact of reporting no taxable income can be serious and long-lasting.
The Kenyan self-assessment tax system generally allows filing nil tax returns. Primarily based on the premise of self-assessment reporting, which allows individuals and corporates to voluntarily assess their income and pay the taxes due to KRA in a particular tax year, the system is susceptible to abuse. Some noncompliant taxpayers often take advantage of this trust for personal gain by either under-declaring or failing to declare their earnings. The Tax Procedure Act (TPA) addresses this inherent shortcoming by providing a clear framework for enforcement actions. KRA officials have the explicit power to request tax documents, records, and other information from nil-return filers for the purpose of verifying their returns. Where the tax administrators identify gaps, they issue additional assessments. Because voluntary compliance with tax obligations is open to scrutiny, taxpayers with income in a particular tax year must avoid filing nil-tax returns.
Yet this position is the antithesis of what actually happens locally. An increasingly growing number of taxpayers file nil-tax returns every year. This is unsurprising, as filing nil returns on iTax is a simple, straightforward way to comply with tax laws. However, before a taxpayer jumps at the chance, it is important to realise that the option exposes them to various issues that they must be ready to face in the long term. In other words, filing a nil-tax return is generally a quick way to comply with tax obligations without the consequences being obvious at first to taxpayers. As a result, taxpayers need to consider four potential consequences before declaring nil-tax returns.
Firstly, filing nil-tax returns is a sure way to lose the right to claim tax relief and credits. Individual and corporate taxpayers are eligible for varied tax benefits under the Income Tax Act. In addition to personal relief, Kenyan tax laws allow individual taxpayers with non-zero income to claim insurance relief. The idea behind these tax reliefs is to help individuals reduce their taxable income and comply with tax laws. Furthermore, corporations with a positive income declaration may be able to reduce their tax liabilities by claiming tax incentives such as investment allowances and prior-year losses. The benefit of these tax credits is that they result in a direct reduction in tax due in a given tax year. Hence, nil-tax return filers should know that their tendency to report no taxable income hinders their ability to legally claim tax deductions and reduce their tax bills.
Secondly, submitting a nil-tax return after generating an electronic tax invoice is a direct violation of the Electronic Tax Invoice Management System (eTIMS) regulations. The (Electronic Tax Invoice) Regulations affect all taxpayers. In particular, they require each system user to record each sale and generate an invoice. While some taxpayers understand and abide by these rules, they nonetheless choose to file a nil return even when they generate an eTIMS invoice. The result is a mismatch between the tax data transmitted via eTIMS and the tax returns filed. This inconsistency is a serious violation of tax laws and a sufficient ground for KRA to suspend a taxpayer’s eTIMS software solution, or, at worst, add them to the added tax, VAT, or the special table if they are registered for the obligation. The implication here is that filing a nil-tax return having generated a tax invoice is a clear violation of eTIMS regulations that carries long-term consequences.
Thirdly, consistently filing nil tax returns is one of the main triggers for a KRA tax audit. As mentioned, the Kenyan tax system is based on self-assessment reporting, which may be prone to misuse by some taxpayers. To address this shortcoming, the tax laws grant KRA the power to review nil-tax returns for accuracy through comprehensive investigations or audits. The process can largely involve verifying declared tax returns against financial data from third parties, such as banks and major suppliers. Additionally, tax authorities can summon nil-tax filers and demand the inspection of a taxpayer’s books of account and tax records. Taxpayers found in violation of existing tax laws face serious consequences, including additional tax assessments and/or prosecution for fraud. Therefore, filing a nil-tax return is not only a clear red flag of noncompliance with tax laws but also a trigger for KRA tax audits and increased scrutiny by tax authorities.
Fourthly, filing a nil-tax return denies taxpayers the chance to document their financial history. By declaring non-zero taxable income each year, taxpayers establish a clear historical record that can be beneficial in the future. These data are readily and freely available for download from a taxpayer’s iTax account. Some creditors and lenders often consider past tax returns when making lending decisions. Equally important, some countries use previous tax records to determine whether or not to issue visas. While an acknowledgement receipt for a nil-tax return is sufficient as a tax record, it merely indicates the taxpayer is in financial distress. Having copies of past non-zero returns ease the immigration process, as the vast majority of the best countries to visit, live, and work only allow financially stable migrants. Therefore, a nil-tax return is a real barrier to documenting proper financial records with long-term consequences.
Going forward, taxpayers who filed a nil return in the last five years but had taxable income need to act before the long-term consequences of noncompliance with tax obligations affect them. The first and most important step towards compliance is seeking professional advice. The benefit of a seasoned tax professional is that they stay abreast of ever-changing tax laws and are well-positioned to help taxpayers fulfil their statutory obligation to file taxes. This includes, and is not limited to, filing an amended return declaring the actual income in a given tax year. Tax professionals are also well equipped to help taxpayers maintain proper records as required by tax laws. The suggestion is that consulting with a skilled and experienced tax advisor can provide invaluable guidance on complying with tax laws.
While filing a nil-tax return offers a simple way to comply with tax laws, individual and corporate taxpayers with taxable income should keep in mind the four far-reaching ramifications. In addition to losing the right to claim tax credits and reliefs, filing a nil return is a serious audit trigger. Nil-tax return filers with taxable income need to take proactive steps, including amending their tax returns and maintaining proper records, to protect themselves from increased scrutiny by KRA. Professional tax advisors have acquired years of experience and can provide a step-by-step guide to staying compliant with tax laws. The “File Nil Return” button is a clickbait that taxpayers with income must avoid going forward.
The author is a finance and accounting professional with a Master’s degree in Commerce (Finance and Investment) from KCA University and a Certified Public Accountant (CPA).
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