Tax disputes deny KRA Sh313 billion in revenue

The billions in unrealised taxes point to a growing number of cases as individuals and businesses challenge KRA’s interpretation of the tax laws while others dispute the demands on grounds that they are erroneous.

The KRA has increasingly come under pressure for missing tax revenue targets, even as individuals and firms decry over taxation that has hit domestic spending power and business profits.

“Ongoing legal challenges highlight the complexity and financial impact of unresolved tax disputes, emphasising the need for efficient resolution mechanisms to unlock this significant amount of revenue for the government,” says the PBO.

The office adds that there is a need for the KRA to change and improve its relationship with taxpayers. The PBO advises MPs on budget planning, economic matters, and policy.

Most of the cases have been either at the court or TAT for years, as taxpayers push to thwart the aggressive onslaught by KRA.

KRA’s push for tax compliance recently attracted criticism from President William Ruto, who directed the taxman to slow down on what he termed harassment of Kenyans.

“Effective revenue collection doesn’t need to be unpleasant and demeaning to members of the public, it is possible to be courteous, kind, and gentle to taxpayers and at the same time become even more effective and efficient in tax collection,” said Dr Ruto in October last year.

PBO adds that 2,543 have been resolved, yielding tax collections of Sh71.89 billion. The office did not disclose for how long these cases have been pending.

Faced with increased litigation from aggrieved taxpayers, KRA has over the years turned to arbitration to end wrangles with aggrieved taxpayers.

The taxman launched alternative dispute resolution (ADR) in 2015 as a way of fast-tracking the resolution of cases for taxpayers who disagree with the tax demands from KRA. The ADR is seen as the first platform to resolve cases before they are escalated to the TAT or courts in case the parties fail to agree.

Tax cases criminal in nature, such as evasion or fraud, cannot however be heard via the ADR.

“There is a need to improve the relationship between the KRA and taxpayers. The key among these strategies is the promotion of an ADR framework, which offers a more collaborative and less adversarial approach to resolving tax issues,” PBO added.

Before KRA rolled out the ADR, aggrieved taxpayers used to challenge tax demands at the TAT, which was started in 2013. Those not content with the ruling of the appeals body would then seek redress at the High Court.

KRA has also turned to amnesty in a bid to woo taxpayers who have altogether opted not to settle their dues, leading to the accumulation of penalties running into billions of shillings.

For example, taxpayers with interest and penalties of up to December last year are currently on an amnesty programme. The relief was introduced via the Finance Act 2023 and allows taxpayers to suggest a repayment plan for the outstanding amounts.

The KRA has been given a target of Sh2.91 trillion in tax collections for the current financial year ending June 2025, up from Sh2.54 trillion in the last financial year.

Besides the settlement of the pending cases at TAT and courts, the taxman is also counting on widening the tax base and clamping down on evasion to meet the ambitious target.