Taxpayers to Deposit 20% of Dispute Tax Before Suing Regulator

If new Treasury proposals are approved, businesses and individuals who are battling the Kenya Revenue Authority (KRA) in court over tax demands will be required to deposit 20% of the in-dispute sum in a Central Bank of Kenya (CBK) account.

In an effort to promote out-of-court settlements in response to complaints that the KRA is unable to collect billions while lawsuits take years to be resolved, the Finance Bill 2023 proposes amendments to the Tax Procedure Act that would require parties to disputes with the KRA to deposit a portion of the amount.

“Provided that where a party is not the Commissioner, that party shall deposit with the Commissioner an amount equivalent to twenty percent of the disputed tax before filing the appeal” the Finance Bill stated in part.

The proposal states that if the court rules in the taxpayer’s favor, the KRA must credit the money or security within 30 days of the appeal’s verdict.

However, this represents a decrease from the 50% deposit that the former Treasury Cabinet Secretary Ukur Yatani had suggested last year.

However, MPs rejected the 50% deposit proposal, claiming it would hurt businesses.

Courts have established the amount to be provided as a deposit or bank guarantee after determining if KRA’s demands for security are justified over the years.

Concerned that cases totaling billions of shillings have been sitting before the courts for years, limiting its capacity to improve revenue collections, the KRA has been pressing for deterrent measures like the deposits.

However, due to its predicted effects on the cash flows of companies embroiled in the tax warfare with the KRA, the proposal is likely to encounter pushback.

To lessen the obstacles impeding efforts to reclaim taxes, the KRA has backed alternative dispute resolution.

Prior to being escalated to the Tax Appeals Tribunal and the courts, the Alternative Dispute Resolution system is often viewed as the first stage of settling issues resulting from tax audits.

But situations involving fraud, misconduct, and tax evasion are barred from the tax arbitration process.

As per official data, KRA arbitrated 319 disputes in the first half of the fiscal year that concluded in June 2022. In comparison to the first half of the previous fiscal year that ended, this represented 57 percent of the cases sent to arbitration.

According to the taxman, ADR’s revenue increased by 11% during the first half of 2021/2022, bringing in Sh10.4 billion as opposed to Sh9.4 billion gathered during a comparable time in 2020/2021.

Before the introduction of the ADR procedure, which is managed by the KRA, taxpayers who disagreed with tax assessments may appeal to the Tax Appeals Tribunal, which took effect in 2013, and then, if they were still unsatisfied, the High Court.