Firms and individuals battling the Kenya Revenue Authority (KRA) in courts over tax demands will have to deposit 20 percent of the disputed amount in a Central Bank of Kenya (CBK) account if new proposals by Treasury are accepted.
The Finance Bill 2023 proposes changes to the Tax Procedure Act to introduce a requirement that a party in a dispute with KRA deposits a portion of the amount as part of a strategy to encourage out-of-court settlements amid complaints that the KRA is unable to collect billions pending the conclusion of suits that take years to conclude.
“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.
If the Court decides in favour of the taxpayer, the KRA would be required to credit the amount or security within 30 days after the determination of the appeal, according to the proposal.
This however marks a reduction from the 50 percent deposit that had been proposed by the former Treasury Cabinet Secretary Ukur Yatani last year.
MPs however shot down the 50 percent deposit proposal arguing that it would harm businesses.
Courts have over the years determined 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 has been pushing for deterrent measures such as the deposits amid concern 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.
The KRA has vouched for alternative dispute resolution in a bid to ease hitches hurting efforts to recover taxes.
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 the courts.
The tax arbitration process, however, locks out cases that are criminal such as tax evasion, malpractices, and fraud.
Official data shows that KRA resolved 319 cases referred to arbitration in the first half of the financial year that ended in June 2022. This represented 57 percent of the cases referred to arbitration in the first half of the current financial year ending compared with 49.29 percent in the previous period.
The taxman says ADR recorded an 11 percent growth in revenue during the first half of 2021/2022, unlocking Sh10.4 billion compared to Sh9.4 billion collected during a similar period in 2020/2021.
Before the implementation of the ADR process, which is handled within the KRA, taxpayers aggrieved with tax assessments appealed to the Tax Appeals Tribunal which came to force in 2013 before escalating to the High Court if not satisfied.