The Treasury has blocked the Kenya Revenue Authority (KRA) from implementing sections of the Finance Act 2025 that allowed businesses and individual taxpayers to offset their tax dues using refunds of excess cash paid to the taxman, dealing a blow to their cash flow plans.
The Business Daily has established that the Treasury has fallen out with the National Assembly about the impact the arrangement would have on revenue performance and has advised the KRA against modifications on its online portal, iTax, to allow users to use claims of excess tax payments to offset their dues.
The Finance Act 2025 amended Section 47 of the Tax Procedures Act, introducing sub-section 1(a) which allows taxpayers to use overpaid taxes to offset, among others, VAT on imported goods, effective July 1, 2025, as part of the measures aimed at providing a shot in the arm for the cashflow position of struggling businesses.
The move was a build-up to changes that started in 2021 when the Tax Procedures Act was amended, allowing taxpayers to use overpayments to offset outstanding tax liabilities and future obligations.
This includes any taxes one is required to withhold and remit on behalf of others, such as Withholding Tax, VAT and Pay as You Earn (Paye).
Taxpayers affected include those who were banking on the new provisions to ease their cash flow in offsetting Withholding Income Tax, Withholding Value Added Tax (VAT), and Import VAT—items that the Treasury has since rejected.
The Treasury reckons that the benefit is limited to the taxpayer affected and not third parties acting as agents.
“The National Treasury has clarified to KRA that offsets under Section 47(1)(a) should apply only to taxes borne by the taxpayer and not the tax liabilities of third parties withheld by taxpayers, such as Withholding VAT and Withholding Income Taxes,” the Treasury said in response to Business Daily’s queries.
“Withholding taxes are an administrative obligation of the withholding agent who collects tax from another party and remits it to KRA. The actual liability rests with the payer (employee in case of Paye, supplier or service provider) and not the withholding agent.”
This position has attracted sharp criticism from tax practitioners and the private sector, with the Institute of Certified Public Accountants (ICPAK) writing to the KRA in protest over the stance.
“ICPAK wishes to draw attention to the ongoing selective application of the explicit statutory provision permitting taxpayers to offset overpaid tax against any other tax debt, future tax liabilities, including input VAT on imports, under Section 47(1)(a) of the Tax Procedures Act. Currently, the iTax portal only allows offset against Corporate Income Tax, local VAT, and Paye. However, it is yet to be implemented against Withholding Income Tax, Withholding VAT, and Import VAT. The law is explicit, conferring on a taxpayer the right to offset the overpaid tax against outstanding tax debts and future tax liabilities,” ICPAK’s letter to the KRA states.
The Kenya Private Sector Alliance (Kepsa) also took issue with this matter during the Private Sector Roundtable with President William Ruto held on August 6.
“We had asked for an offset system, and where we need a resolution is in looking at offset across different tax classes because this is work in progress. We have been engaging KRA, and they are very happy to look at it,” Kepsa CEO Carole Kariuki said during the meeting with the President.
Both the Treasury and KRA have defended the decision to block the provision widening the offset window to include VAT on imported goods, arguing that the amendment, which was brought to the floor of the House, erred by making changes to the Finance Act 2025 that affected the East African Community Customs Management Act.
The East African Community Customs Management Act under the East African Community or East African Legislative Assembly (Eala) governs matters relating to customs and international trade.
“If such offsets are encouraged, they would undermine the customs revenue collection framework, create loopholes for revenue leakage, and negatively impact the revenue received by the Exchequer. It is important to note that the amendment to include VAT payable on imports in Section 47(1)(a) was introduced during the Committee Stage of Finance Bill 2025 without consultation with National Treasury on implementation challenges such a change would pose as well as the negative impact it will cause on the revenue to the Exchequer,” the Treasury said.
“Whereas Section 47(1)(a) allows for utilisation of overpaid tax against any liability, including VAT on imports, it should be appreciated that VAT on imports is administered as though it was a duty of customs, hence the provisions of the East African Community Customs Management Act 2004 and regulations therefore apply. These provisions were not affected by amendments to Section 47(1)(a) of the Tax Procedures Act to allow utilisation of tax overpayments for settlement of liability on imports,” the KRA states.
“The payment and collection of VAT on imported goods is administered in the same manner as Customs Duty under the East African Community Customs Management Act. The customs procedures were not amended by the Finance Act 2025 to conform with changes to Section 47(1)(a), meaning the legal framework still required VAT on imported goods to be paid to the Commissioner in accordance with the provisions of the East African Community Customs Management Act,” the National Treasury says.
The National Treasury says that blocking implementation of the provision is aimed at safeguarding collections by the Customs Department, which has been an outperforming tax head in the recent past, having collected Sh879.3 billion in 2024/25, surpassing its target by Sh48.9 billion.
In the just concluded financial year (2024/25), Customs collections accounted for 37.9 percent of the total revenue collected, up from 33.3 percent in 2018/2019.
The National Treasury’s argument for safeguarding revenue mobilisation comes against the backdrop of taxpayers having utilised VAT offsets to the tune of Sh49.7 billion in 2024/25, double the Sh24.9 billion worth of offsets utilised by taxpayers a year earlier.
Delayed tax refunds have a direct impact on the cash flow of businesses, which can be heavily crippling, especially in these challenging economic times when revenues remain suppressed.
