The Treasury Cabinet Secretary (CS) on April 7 read the budget statement before the Parliament. Among the changes proposed by the CS was the amendment of the Tax Appeals Tribunal Act, 2013 to require a deposit with the Central Bank of Kenya of 50 percent of a disputed tax amount where a taxpayer intends to appeal to the High Court against an unfavourable ruling by the Tribunal.
Whereas the goal of this proposal is to protect the disputed tax revenue during the lengthy appeal process, the burden on and the inconvenience to the taxpayers likely to result from this proposal if passed is apparent.
First, to ask for a 50 percent deposit of the disputed tax before the determination of the dispute by the appellate courts presupposes that the said taxes are, in fact, due and payable. This not only lacks legal backing but will also give the Kenya Revenue Authority (KRA) an undue advantage and power over the taxpayer in case of a dispute.
Besides, it has the potential of limiting the taxpayer’s access to justice and his right to appeal. Further, the proposal postures to challenge the High Court’s jurisdiction to determine the treatment of disputed taxes. Indeed, this proposal, if adopted, will likely deny the taxpayer his right to fair administrative action, a constitutional right.
Also, the motive behind the proposal may be questionable. While concern about protecting the disputed tax revenue in light of the lengthy appeal process appears legitimate, this would only be so far as it can be demonstrated that the KRA currently suffers prejudice in the collection of taxes that remain due after a final determination of a tax dispute by the High Court.
The question that then lingers in many taxpayers’ minds is whether it is within their control that tax appeals take too long to conclude and why the government is not, instead, proposing measures to expedite the appeal process for mutual benefit.
Additionally, depositing 50 percent of the disputed tax will unduly boost the KRA’s cash flows, at the expense of the taxpayers. Tax disputes mostly involve huge sums of taxes in dispute, running into millions and in some cases billions of shillings. The 50 percent of all disputed taxes will nourish the cash accounts of the KRA, obviously. But at what cost?
If a taxpayer locks millions of shillings with the CBK for months or years within the period of the dispute, this negatively impacts his cashflows, with the ripple effects of reduced production levels or operations to fit within the available resources and a potential negative impact on the economy.
It is trite law that money circulation spurs economic growth rate, and it benefits no one to lock such huge sums of money from circulation. Another risk of adopting this proposal is the potential incentive for the KRA to inflate tax assessments.
With the mounting pressure to grow tax revenues, the authority may be tempted to bridge revenue gaps with inflated or erroneous tax assessments, with the assurance that 50 percent will accrue to them, at least should the court rule in their favour.
This is likely to increase the cost of tax management to the taxpayers both from a monetary and a time investment perspective. Tax disputes are a costly affair.
Further, the proposal by the CS to have the deposit refunded within 30 days should the courts rule in the taxpayer’s favour is impractical. First, the CS did not indicate the mechanisms of applying for and obtaining this refund.
It is hoped that this will be outlined properly in the Finance Bill when published. Secondly, as it is, the law provides that every application for tax refund must be subjected to an audit by the KRA before approval and payment.
Also, the current refund process takes months and sometimes years, mostly due to cash flow issues at the Treasury. The questions of how possible it will be to process this refund within 30 days, and what remedies are available should the process delay remain unanswered. Will it attract interest charges at market rates?
That disputed taxes are payable tax liabilities is not only preposterous but also exposes taxpayers to undue prejudice.