The Kenya Revenue Authority (KRA) has received backing from the Tax Appeals Tribunal to tax unexplained bank deposits in the fight against tax evasion.
The tribunal ruled that money flowing into bank accounts is presumed to be income unless the savers can prove with documents that the cash is not profits.
To shore up revenue, President William Ruto’s administration has deepened its crackdown on tax cheats and it is expected to be more aggressive, having avoided new or higher taxes in the previous two Finance Bills in the wake of the deadly anti-tax protests that killed over 50 people in 2024.
The legal backing came in a dispute between the KRA and Naivasha hotel businesswoman Virginia Wangari, where the tribunal supported the taxman in seeking Sh6.5 million as tax from cash and M-Pesa deposits that lacked supporting records.
After reviewing the banking records, the KRA established total credits of about Sh52.6 million between 2018 and 2022.
Following adjustments for supported non-income items, the authority treated net deposits of Sh50.9 million as income subject to tax.
The taxman initially raised a Sh18 million assessment covering income tax and VAT.
At the objection stage, the KRA reviewed the records, adjusted the figures and applied an industry profit margin of 18.49 percent for the hospitality sector, cutting the tax demand to Sh6.5 million.
The taxpayer challenged the assessment, arguing that the KRA wrongly assumed all deposits were income, ignored explanations, applied an arbitrary margin and subjected her to double taxation.
However, the tribunal rejected the arguments and sided with the KRA, holding that the law places the burden of proof squarely on the taxpayer.
“The assessment of tax by the Commissioner enjoys a presumption of correctness until rebutted by probative documentary evidence,” the tribunal said, in a ruling that strengthens the KRA’s hand in seeking tax from bank and M-Pesa deposits.
The tribunal backed the KRA’s push to rely on banking analysis as an anti-evasion tool, especially where taxpayers file nil or low returns despite significant cash flows.
It reiterated that the KRA is justified to treat unaccounted or unverified deposits as taxable income.
The taxman, the tribunal ruled, does not have to show proof that cash that has flowed to bank accounts is taxable.
It reckoned that the burden shifts to account holders to explain, with documents, why the funds should not be taxed.
The panel found that it is the taxpayers’ duty to produce bank reconciliations, source documents, ledgers or contracts to show that the funds were capital injections, loans or agency collections.
General explanations, it said, do not displace tax liability.
The tribunal also held that where taxpayers fail to keep proper records, the KRA is entitled to make a best-judgment assessment using indirect methods such as banking analysis.
To reinforce the verdict, the tribunal cited earlier rulings holding that all bank deposits are taxable unless the account holder explains, with evidence, why they should not be taxed.
The suit emerged in a period when banks blocked the KRA’s push to integrate its system with that of 38 lenders amid fears that the taxman could access sensitive personal information like the flow of cash in accounts without guardrails.
The KRA wants access to the bankers’ data system in line with the quiet change to the law, which gives the taxman powers to compel a taxpayer to integrate with the authority in fresh efforts to weed out tax evaders and boost revenue by billions of shillings.
Bankers are fretful that the KRA could use the integration to access customer information unlawfully, exposing the banks to lawsuits and penalties from the data watchdog.
Banks say they require additional legal safeguards in the wake to the changes made in December via the Tax Procedures (Amendment) Act, 2024.
“The Commissioner may, by notice in writing, require a person to integrate the electronic tax system authorised under section 75 to the system referred to in subsection (1) for the purposes of submission of electronic documents including detailed transactional data in the prescribed form,” says the Act.
The plan by the Treasury to access sensitive personal data like details of properties owned and bank accounts as well cash transfers on mobile phones without a court warrant was scuppered by the withdrawal of the Finance Bill 2024.
The KRA wants to leverage on increased use of data and linkages between its systems with third parties such as banks and mobile money platforms like M-Pesa to spy on taxpayers’ activities, use of Internet-enabled cameras at excisable goods processing plants and full rollout of digital electronic tax registers (ETRs) to grow revenue.
To ease the pain of additional taxes, Kenya has launched an aggressive crackdown on tax cheats and evaders.
The KRA’s enforcement unit has been using various databases to pursue suspected tax cheats, including bank statements, import records, motor vehicle registration details, Kenya Power records, water bills and data from the Kenya Civil Aviation Authority (KCCA), which reveals individuals who own assets such as aircraft.
Car registration details are also being used to smoke out individuals who are driving high-end vehicles but have little to show in terms of taxes remitted. Kenya Power meter registrations are helping the taxman to identify landlords, some of whom have been slapped with huge tax demands.
The taxman has also sought details of suppliers and contractors hired by county governments in the quest to tighten the noose on individuals and firms evading tax.
