Blog

Maybe you have been there. You are minding your business, running your hustle, or waiting for your monthly salary when an email notification pops up. It is from the Kenya Revenue Authority (KRA). Your heart skips a beat. You open the email, only to find a tax demand notification or an assessment with figures that look like a phone number – seven figures.

You do not agree with the tax figures. And just like that, you are in a tax dispute.

With KRA integrating smart tracking systems like eTIMS and advanced data analytics, tax disputes in Kenya have become increasingly common. And will become even more so in the future.

But how do these tax disagreements actually start? What turns a peaceful taxpayer into an active disputant?

Let us demystify how tax disputes arise and how any taxpayer may find themselves in a dispute.

1. Tax Law Interpretations

This is referred to as an Error of Law. Tax laws are not written in plain, everyday English. However, the laws are written in dense legal jargon. But they mean exactly what is written. Because of this, what you think a clause means might be completely different from how a KRA officer interprets it. Tax laws are read as written.

This is what experts call an error of law. For example, you might believe a certain service you offer is exempt from Value Added Tax (VAT) under the VAT Act. You go ahead and invoice your clients without charging them VAT.

A few years later, you find KRA auditing your books and informs you that your service is actually fully vatable.

Suddenly, you are slapped with a massive back tax bill, plus penalties and interest. All this will happen because of a differing legal interpretation.

2. A Case of Mixed-up Facts

We refer to these as Errors of Fact. Sometimes, the dispute has nothing to do with the law itself, but with the facts on the ground. These are errors of fact, and they have happened surprisingly often since KRA’s automated systems began pulling data from other taxpayers’ compliance activities.

Imagine you took a soft loan of kshs 500,000 from a friend and deposited it into your personal savings bank account. Then you transferred that capital from your personal savings account into your business account.

During a tax review, KRA looks at your bank credits and flags that kshs 500,000 as ‘undeclared sales revenue’. Unless you can produce a solid loan agreement or clear bank trails to prove otherwise, you will find yourself in a heated dispute trying to prove that a loan is not taxable income.

3. System Glitches and eTIMS Discrepancies

We are living in a digital tax era where every transaction will be automated. Systems like eTIMS are tracking real-time business transactions. But technology is only as perfect as the data fed into it.

A common dispute arises when your suppliers fail to declare transactions on their end. If you claim input VAT on supplies you bought but your supplier’s eTIMS records do not match yours. The KRA system will automatically reject your claim.

Suddenly, you have an artificial tax deficit. System-generated auto-assessments often catch taxpayers off-guard, forcing them to run around looking for physical invoices to prove their compliance. You will have tax to pay.

4. Estimated Assessment

What happens if you fail to file your tax returns for a while, or if KRA audits your business and finds your record-keeping is messy? KRA won’t just let it slide.

The law allows the Commissioner to issue an estimated assessment. Using whatever historical data or industry benchmarks they have, they will estimate how much profit they ‘think’ you made and send you the bill.

Because these estimates are usually highly inflated, they almost always trigger an immediate, stressful dispute as you scramble to put your records straight and prove the actual figures.

5. Disagreements Over Deductions and Expenses

To calculate your corporate tax, you subtract your business expenses from your total revenue and pay tax on the net profit. But KRA is very strict about what counts as an ‘allowable deduction’.

If you deduct expenses that KRA deems personal, non-business-related, or lack proper documentation like eTIMS-compliant invoices, they will be disallowed. Disallowing your expenses automatically increases your taxable profit, resulting in a surprise tax bill.

How Are These Disputes Resolved?

If you find yourself facing an unfair tax assessment, do not panic. The law provides clear steps to resolve the issue:

a. Lodging an Objection

You must submit a formal objection on iTax within 30 days of receiving the KRA assessment. This deadline is extremely strict.

b. Alternative Dispute Resolution

Instead of fighting in court, you and KRA can sit down with a mediator in an Alternative Dispute Resolution (ADR) setting to resolve the issue amicably. This is usually within 90 days after leave to use the mechanism. ADR is faster, cheaper, and highly recommended.

c. Tax Appeals Tribunal

If ADR or the objection process fails, you can take your case to the independent Tax Appeals Tribunal (TAT).

Tax Records and Documents

Most tax disputes in Kenya do not arise because people are trying to cheat the system. They arise from simple misunderstandings, poor record-keeping, or mismatched system data.

The best shield against any tax dispute is bulletproof documentation.

a. Document every bank transfer – between banks and within the bank.

b. Keep your eTIMS invoices aligned.

c. When in doubt, consult a tax professional before clicking ‘submit’ on iTax when filing tax returns.

Other Articles to Read

a. How To Handle Tax Disputes With KRA – HERE

b. Tracking Expenses as A Commercial Landlord – HERE

E-Guide

Get this e-Guide on 8 Steps to Handle A Tax Dispute – HERE