What it Means as Treasury Blocks KRA from Using Tax Refunds to Offset Dues

Kenya’s National Treasury has prohibited the Kenya Revenue Authority (KRA) from allowing taxpayers to offset their tax liabilities using refunds of overpaid taxes, dealing a significant blow to businesses and individuals grappling with cash flow challenges.

The decision overrides provisions in the Finance Act 2025, raising concerns about its impact on Kenya’s economy, particularly for businesses already navigating a tough financial environment.

The Finance Act 2025 introduced amendments to Section 47 of the Tax Procedures Act, specifically adding sub-section 1(a), which permitted taxpayers to use overpaid taxes to offset various liabilities, including Value Added Tax (VAT) on imported goods.

Effective from July 1, 2025, this provision was designed to ease the financial burden on businesses by allowing them to balance their tax obligations with refunds owed by the KRA.

The measure was seen as a lifeline for companies struggling with liquidity, especially in an economy marked by suppressed revenues and stringent tax compliance requirements.

However, the National Treasury has intervened, advising the KRA against modifying its online portal, iTax, to facilitate these offsets. The Treasury’s rationale hinges on concerns about revenue performance, arguing that allowing taxpayers to offset dues with refunds could undermine the government’s fiscal targets. This stance has created a rift with the National Assembly, which had supported the amendment to bolster business cash flow.

Mbadi’s Position

The Treasury’s directive clarifies that offsets under Section 47(1)(a) should only apply to taxes directly borne by the taxpayer, excluding liabilities such as Withholding VAT and Withholding Income Taxes, which are collected on behalf of third parties.

The John Mbadi-led Treasury argues that withholding taxes are an administrative obligation of the withholding agent, with the actual liability resting on the payer (e.g., employees for Pay As You Earn or suppliers for VAT).

Allowing refunds to offset these taxes, the Treasury contends, could jeopardize revenue collection, particularly for VAT on imports, which is administered under the East African Community Customs Management Act 2004.

Also Read: Cabinet Approves 2025 Finance Bill Amid Push for Fiscal Discipline

The Treasury’s concerns are underscored by the significant use of tax offsets in recent years. In the financial year 2024/25, taxpayers utilized Ksh.49.7 billion in VAT offsets, a sharp increase from Ksh.24.9 billion the previous year.

This doubling of offsets shows the growing reliance of businesses on these mechanisms to manage cash flow in a challenging economic climate. However, the Treasury’s decision to block offsets means businesses must now pay taxes like VAT and Withholding Tax in cash, even when they are owed substantial refunds by the KRA.

Private Sector Backlash and Economic Implications

The Treasury’s move has drawn sharp criticism from tax practitioners and the private sector. The Institute of Certified Public Accountants of Kenya (ICPAK) has formally protested to the KRA, arguing that the decision contradicts the explicit provisions of the Tax Procedures Act.

ICPAK emphasized that Section 47(1)(a) clearly permits taxpayers to offset overpaid taxes against any tax debt, including future liabilities and input VAT on imports. The selective application of this law, they argue, undermines the legislative intent and places an undue burden on taxpayers.

Businesses, already reeling from delayed tax refunds and stringent KRA audits, now face heightened cash flow pressures.

Posts on X reflect the frustration, with users noting that the government’s failure to promptly pay refunds forces businesses to pay taxes in cash despite being owed millions.

One user remarked, “Treasury has quietly blocked KRA from letting Kenyans offset their tax refunds against what they owe. Translation: even if govt owes you millions in VAT refunds, you must still pay your taxes in cash.”

This sentiment underscores the perception that the government is prioritizing revenue collection over supporting business liquidity.

Delayed tax refunds have long been a pain point for Kenyan businesses, with the KRA often citing audit delays and insufficient Treasury funding as reasons for non-payment. In 2021, for instance, the KRA processed only Ksh.6.6 billion out of Ksh.12.4 billion in withholding VAT refund applications due to ongoing audits.

The suspension of offsets exacerbates this issue, potentially crippling businesses that rely on refunds as working capital, especially in sectors like manufacturing and exports.

Revenue vs. Economic Growth

The Treasury’s decision comes at a time when the KRA is under immense pressure to meet ambitious revenue targets, set at Ksh.2.91 trillion for the 2024/25 financial year. The taxman has increasingly leaned on technology-driven compliance measures, such as the electronic Tax Invoice Management System (eTIMS) and data analytics, to pursue tax cheats and expand the tax base.

However, the focus on revenue mobilization appears to conflict with policies aimed at supporting economic recovery, particularly for businesses hit by a weak economy and global slowdown.

Critics argue that the Treasury’s stance overlooks the broader economic fallout byy denying businesses the ability to offset tax dues, with the government risking stifling investment and growth, as firms are forced to divert scarce cash reserves to meet tax obligations.

This could lead to reduced economic activity, job losses, and further strain on an already fragile economy.

The Parliamentary Budget Office has previously advocated for improved tax administration and dispute resolution to unlock revenue without overburdening taxpayers, but the Treasury’s latest move suggests a prioritization of short-term fiscal goals over long-term economic stability.