Firms and individuals fighting the Kenya Revenue Authority (KRA) in courts over tax demands will have to deposit 50 percent of the disputed amount in a Central Bank of Kenya (CBK) account.
Treasury Cabinet Secretary Ukur Yatani says the proposed changes to the Tax Procedures Act are aimed at encouraging out-of-court settlements amid complaints that the KRA is unable to collect billions pending the conclusion of suits that take years to conclude.
But the proposal has the implication of hurting companies’ cash flow and discouraging many from suing the KRA.
Currently, courts determine whether KRA’s demands for security are justifiable and then set the amount to be given either as a deposit or bank guarantee.
The KRA says that cases worth billions of shillings have been pending before the courts for years, hurting its ability to increase revenue collections.
The proposal is, however, likely to face opposition due to its anticipated impact on the cash flows of businesses caught up in the tax wars with the KRA.
“As a business what will happen if I cannot afford the 50 percent? And if I pay and as we know some of these case take years then that means my capital will be tied up and I may be forced to shut down,” Nikhil Hira, a tax expert at Kody Africa LLP, said.
Mr Yatani says that taxpayers will be refunded the deposit within 30 days if the cases are ruled in their favour.
The requirement for the 50 percent deposit will hit big businesses caught up in disputes with the taxman estimated to be worth billions of shillings.
Naivasha-based Keroche Breweries would have been compelled to deposit Sh11 billion under the proposed law. The brewer is fighting the KRA over a tax bill worth Sh22.79 billion.
Disputed tax demands are first heard at the Tax Appeals Tribunal. Firms and people who are not satisfied by decisions of the tribunal then take the cases to the High Court and Court of Appeal.
There has been an increase in the number of cases where firms and people have challenged tax demands worth billions of shillings.
Most of the cases have dragged on for years highlighting the hit that businesses are likely to face if the proposed law is adopted.
The KRA has vouched for alternative dispute resolution in a bid to ease hitches hurting efforts to recover taxes.
The taxman says out-of-court settlements recorded an 11 percent growth in revenue during the first half of the year to June, unlocking Sh10.4 billion compared to Sh9.4 billion collected during a similar period in 2020/2021.
The Alternative Dispute Resolution mechanism is largely seen as the first layer of resolving disputes arising from tax audits before they are escalated to the Tax Appeals Tribunal and onto the courts.