Background

Nabo Africa Funds (the taxpayer), an umbrella investment scheme registered as a collective investment scheme, specifically as a unit trust, under the Capital Markets Act, lodged an income tax refund claim with the KRA for the financial year 2019–2020, amounting to KES 16,549,291. The claim was based on income tax that was erroneously deducted at source. The KRA approved the claim in its entirety but issued a refund adjustment voucher (advance credit) instead of disbursing the amount in cash, allowing the taxpayer to offset the approved amount against pending and future tax liabilities. Dissatisfied with this decision of not receiving a cash refund, the taxpayer appealed to the Tribunal.

The taxpayer’s key arguments

The taxpayer argued that the KRA erred in both law and fact by allocating the income tax refund claim as an advance credit instead of disbursing it in cash. The taxpayer argued that being a registered unit trust, under the Capital Markets Act it was exempt from income tax pursuant to section 20(1)(a) of the Income Tax Act, meaning it did not have pending or future tax liabilities, effectively rendering the advance credit useless.

The taxpayer emphasised that, according to section 47(5) of the Tax Procedures Act (TPA), the KRA is supposed to first deal with a tax overpayment by offsetting a tax liability under a specific tax law, followed by offsetting a tax liability under any other tax law and, finally, refunding the reminder to the taxpayer in cash. Since the taxpayer is exempt from income tax, it argued that it was only right to get the refund in cash as it had no other tax liabilities.

The taxpayer further contended that the KRA’s refusal to disburse the refund in cash violated its constitutional right to fair administrative action, and thus the refund decision was both legally flawed and procedurally unjust, warranting its annulment and a cash refund.

The KRA’s key arguments

The KRA did not dispute that a refund claim was due to
the taxpayer, however, it stated that National Treasury’s funding allocation for income tax refunds is limited to
KES 150 million, paid on a quarterly basis. The KRA argued that cash payments are made on a first-in-first-out basis with a cap of KES 3 million per applicant and, due to these constraints, it issued a refund adjustment voucher instead of a cash refund.

To support its position, the KRA relied on the express provisions of the law, citing section 60(b)(ii) of the Finance Act, 2023, which amended section 47(2)(b) of the TPA. The amendment replaced the previous two-year timeline for processing tax refunds with a new requirement that refunds of overpaid taxes must be made within six months from the date the KRA confirms the claim’s validity. If the refund is not processed within this period, the overpaid amount is to be applied against any existing or future tax liabilities of the taxpayer. The KRA submitted that this application is therefore mandatory and without exception, emphasising that the amended provision does not guarantee a cash refund but permits the offsetting of the overpaid amount. It argued that issuing an advance credit, rather than a cash refund, was consistent with the law and did not violate the taxpayer’s right to fair administrative action. Moreover, it maintained that its approach, informed by budgetary constraints, was lawful and prudent.

The Tribunal’s analysis and determination

In its judgment, the Tribunal first considered whether the taxpayer was validly before it, noting that, it could only intervene if the appeal was based on an appealable decision properly made by the KRA, specifically, a “refund decision”. It then proceeded to examine whether the KRA unjustifiably allocated the taxpayer’s approved income tax refund as an advance credit instead of issuing a cash refund.

In its analysis, the Tribunal observed that the dispute centred on the interpretation and application of
section 3(1) of the TPA, which defines a “refund decision” as the determination referred to in section 47(3) of the TPA. Under section 47(3) of the TPA, the KRA is required to issue a written decision on a refund application within 90 days of receiving the refund application.

According to the Tribunal, a “refund decision” is limited to the KRA’s determination on whether to approve or reject a claim, and its communication of that outcome within the statutory 90-day period. It clarified that the subsequent implementation of an approved refund, including the method of disbursement, such as through offsetting mechanisms, falls outside the definition of a “refund decision”. As such, the manner in which an approved refund is effected does not amount to an appealable decision under the TPA.

In conclusion, the Tribunal held that the taxpayer’s case was not grounded on a valid, appealable decision as required by law. As a result, the appeal was deemed procedurally defective and could not be entertained. Having found the matter moot due to the absence of a justiciable decision, the Tribunal declined to address any remaining issues.

Comments

This case underscores how the KRA’s approach, driven by budgetary constraints and administrative considerations, allows it to effectively avoid disbursing cash refunds. Taxpayers, especially those exempt from income tax, find themselves in a complex legal dilemma and at a disadvantage as they are compelled to accept a tax credit that offers little practical value compared to a cash refund. The KRA’s fiscal policy stance, coupled with the statutory provisions, poses a serious risk of disenfranchising taxpayers who have no current or future tax obligations to offset tax credits of valid cash refunds.

While the TPA lays out clear procedures for processing and communicating refund claims, the judgment reveals that the actual implementation mechanism, specifically the issuance of advance credits, can effectively obstruct taxpayers’ ability to reclaim their erroneously deducted funds, particularly when they have no pending or future tax liabilities.

As we gear up for the incoming finance bill, legislators should strive to address these concerns by ensuring that the refund process is not only transparent and procedurally fair, but also practically accessible to all taxpayers Moreover, it should consider provisions that guarantee
cash refunds for eligible taxpayers who cannot use advance credits against tax liabilities.

The taxpayer still reserves the right to approach the High Court for recourse by way of an appeal or a judicial review application.