Firms Get Relief as KRA Blocked from Freezing VAT Credits

A new ruling has handed Kenyan businesses a significant win in their long-running battles with the taxman, after the Tax Appeals Tribunal stopped the Kenya Revenue Authority (KRA) from imposing additional costs while tax disputes are still unresolved.

In its decision, the tribunal declared the use of Debit Adjustment Vouchers, commonly known as DAVs, unlawful when applied during an active objection process. The finding effectively shields companies from losing access to their VAT credits before a final determination is made.

DAVs are typically issued when KRA identifies inconsistencies between a taxpayer’s VAT claim and what a supplier has declared. Once issued, they reverse previously approved VAT credits, often without warning, leaving businesses scrambling to adjust.

The case that triggered the ruling involved Browns East Africa Plantations PLC, where KRA issued VAT assessments and at the same time, applied DAVs, wiping out more than Sh100 million in VAT credits before the company’s objection could be heard.

Tax experts say the tribunal’s position reaffirms a basic but critical rule in taxation, that enforcement should only begin after a tax liability is confirmed.

Under the Tax Procedures Act, once a taxpayer lodges a valid objection, the tax authority is required to pause enforcement until it makes a formal decision. However, businesses have argued that the continued use of DAVs undermines this protection by effectively locking away funds they rely on.

For many companies, especially those operating on thin margins, VAT credits are a crucial part of day-to-day cash flow.

The tribunal was clear that issuing DAVs in the middle of an objection process amounts to premature enforcement and has no legal basis. It also dismissed KRA’s argument that limitations within its iTax system justified the practice.

According to the tribunal, administrative systems must operate within the law, not the other way around, a position that could have far-reaching implications for Kenya’s digital tax systems.

Businesses are now expected to feel immediate relief. With DAVs halted during disputes, companies can retain access to their VAT credits while pursuing their cases, easing pressure on liquidity and allowing for better financial planning.

The ruling also changes how disputes between taxpayers and KRA are likely to play out. Previously, the threat of losing VAT credits pushed some businesses to settle quickly, even when they had valid grounds to contest assessments.

At the same time, the decision places new responsibility on KRA to align its systems and processes with legal requirements. Adjustments to the iTax platform and internal procedures are expected as the authority moves to comply with the ruling.

Analysts say the outcome could improve confidence in Kenya’s tax system by making it more predictable and transparent, an issue that has frequently been raised by investors and the private sector.

Even so, tax professionals caution that the ruling does not ease compliance obligations.

The decision ultimately strengthens taxpayer protections while reinforcing the need for proper compliance, striking a balance that many in the business community have been pushing for.