PwC Kenya has urged the Kenya Revenue Authority (KRA) to establish a special refund reserve to clear the growing backlog of unpaid tax refunds, warning that persistent delays are crippling business cash flows and damaging investor confidence in the country’s tax system.
The audit and consultancy firm says the ongoing crisis has reached alarming levels, with many taxpayers, especially exporters and large corporations, struggling to access funds that are rightfully theirs.
Despite clear legal timelines requiring KRA to process refund claims within 120 days, many companies continue to face prolonged delays, repeated reapplications, and little communication from the tax authority.
According to PwC, the failure to release refunds on time has created serious liquidity challenges, forcing firms to borrow heavily to sustain operations, pay suppliers, and meet payroll obligations.
“The disconnect between legal provisions and actual practice not only frustrates taxpayers but also erodes confidence in Kenya’s tax system. Refund processing remains one of the most contentious areas in tax administration,” Brian Kanyi, PwC’s senior manager for tax services, said in the firm’s latest policy update.
Data from KRA shows that as of October 2023, businesses were owed a total of Ksh 16.34 billion in pending tax refunds, Ksh 2.75 billion in income tax and Ksh 13.58 billion in VAT refunds. PwC notes that the figure has likely grown since then, citing cases where refund applications remain unresolved years after filing.
To resolve the problem, PwC is proposing the creation of a dedicated “refund reserve” within the KRA, a special fund that would be ring-fenced to ensure that a portion of Treasury remittances or tax collections is set aside exclusively for refund payments.
The idea, according to PwC, is to make refund payouts predictable, consistent, and insulated from shifting government budget priorities.
“There is a significant amount of refunds owed to taxpayers. However, the budgetary allocation for refunds does not match the outstanding amounts. Setting aside a percentage of tax collections for a dedicated refund reserve could be a practical solution,” Edna Gitachu, Partner and Director of Tax Services at PwC Kenya, said.
The situation has grown so severe that businesses are increasingly relying on tax offsets to stay afloat. By June 2025, firms used approximately Sh49.7 billion worth of verified tax refund claims to settle other tax liabilities owed to KRA—double the amount recorded the previous year. While this mechanism helps reduce outstanding tax obligations, it does not address the underlying cash flow problem.
PwC warns that the delays and administrative hurdles have turned refund processing into a costly and time-consuming ordeal.
Many applications are rejected over small technical errors on iTax, missing documentation, or inconsistencies in system entries. Others are left pending without any explanation. Non-resident taxpayers, too, are locked out of the process because they lack iTax registration profiles, even when they can prove they have overpaid taxes.
“When compliant taxpayers have to wait years to recover legitimate refunds, it sends the wrong message to investors. A refund reserve would improve liquidity for businesses and enhance trust in the tax system,” \Nicholas Kahiro, Associate Director of Tax Services at PwC, said.
KRA, however, has defended its processes, attributing the delays to limited budget allocations and the need to verify claims thoroughly to prevent fraud. But PwC argues that such issues can be addressed through administrative and technological reforms rather than by holding taxpayers’ money indefinitely.
The firm recommends several reforms, including automated escalation for overdue refunds, penalties for delayed processing, and allowing non-resident taxpayers to claim refunds through authorised agents. PwC also wants the expansion of the “green channel”, a fast-track system for pre-approved exporters, to include other compliant taxpayers.
“Eligibility should be determined case by case, not just by industry,” the firm said.
PwC’s warning comes as Kenya’s business community faces another major policy shake-up under the Finance Act 2025, which reintroduces a five-year limit on carrying forward tax losses.
The change replaces the indefinite carry-forward period that had been in place since 2021, meaning companies can now only deduct losses within the year they occur and the following five years.
The firm cautions that this amendment, which lacks a transitional clause, could expose businesses with accumulated losses before July 2025 to sudden and substantial tax liabilities.
“The absence of transitional provisions exposes businesses to significant risk. Without clarity, companies might face unexpected tax bills that disrupt financial planning and long-term investment decisions,” Brian Kanyi said.
PwC warns that if the government fails to act quickly, the combined impact of delayed refunds and restrictive loss carry-forward rules could weaken Kenya’s competitiveness and discourage both local and foreign investment.
The firm said that a refund reserve would not only relieve immediate pressure on businesses but also restore predictability and fairness in tax administration, two qualities essential to attracting long-term investment.
Leave a comment