The Tax Appeals Tribunal has affirmed that the Kenya Revenue Authority (KRA) is entitled to treat all money flowing into a bank account as taxable income, unless the account holder can prove otherwise.
The decision, arising from a multi-million shilling dispute between the KRA and a management consultancy firm, establishes a guilty until proven innocent framework for unexplained bank credits. However, it also sets a high bar for how the KRA must handle evidence once a taxpayer provides an explanation.
The case centered on Konchor Kid Ltd, a consultancy firm that found itself in the KRA’s crosshairs over a tax demand totaling Ksh. 345.7 million. This assessment, covering Corporate Income Tax and VAT for the years 2022 and 2023, was based on an analysis of the company’s bank statements.
The KRA observed a massive discrepancy between the company’s declared turnover and the total volume of deposits in its accounts. Treating every credit as undeclared revenue, the KRA applied an estimated profit margin of 18% and demanded the back taxes.
Konchor Kid Ltd countered that the KRA had fundamentally misunderstood its business model. The firm argued it acted primarily as an agent, collecting funds on behalf of third-party clients and earning a modest commission of just 0.2%. Consequently, the vast majority of the funds passing through its accounts were not income belonging to the company, but client money.
To back this up, the firm provided:
- Audited accounts and general ledgers.
- Agency agreements and transaction analyses.
- Bank statements showing the flow of funds.
The KRA, however, dismissed this evidence, insisting that without a full list of every client’s KRA PIN and contact details, it could not verify the nature of the deposits.
The Tax Appeals Tribunal ultimately ruled in favor of the taxpayer, but its reasoning carried a dual message.
First, it confirmed that the burden of proof lies with the taxpayer. Under Kenyan law, if a bank statement shows credits that far exceed reported income, the KRA is legally allowed to assume that money is taxable revenue.
Second, it ruled that this burden is not static. Once a taxpayer provides a reasonable explanation backed by documentation, the “burden of proof” shifts back to the KRA. The taxman cannot simply ignore the evidence and confirm an assessment out of hand.
“By proceeding to confirm the assessments without analysing available evidence, KRA acted whimsically, unfairly, illegally and capriciously,” the Tribunal stated, nullifying the Ksh. 345.7 million demand.
This ruling serves as both a warning and a protection for Kenyan taxpayers:
- The KRA increasingly uses third-party data and bank statement analysis to find hidden wealth. If your bank deposits don’t match your tax returns, expect an inquiry.
- For businesses acting as intermediaries, such as agents, lawyers, or commission-based firms, maintaining clear ledgers that distinguish between client funds and business revenue is no longer optional; it is a legal necessity.
- While the KRA has the power to assume deposits are income, it must exercise best judgment. If a taxpayer provides proof, the KRA is legally obligated to engage with that evidence rather than dismissing it outright.