Can KRA Issue Tax Assessments Based on a Taxpayer’s Bank Records?
This article briefly explores whether the Kenya Revenue Authority (KRA) can issue tax assessments based solely on bank statements and discusses the burden of proof in such cases.
In the recent case of Avery Lounge Limited vs. Commissioner of Domestic Taxes (Tax Appeal No. E523 of 2023), the appellant argued that KRA erred by basing its tax assessment exclusively on the credit entries in its bank statements, ignoring debit entries that reflected director drawings, business expenses, purchases, and reversals.
The appellant claimed that taxable profit should be determined after deducting allowable expenses under Section 15 of the Income Tax Act, which were visible in the bank statement’s debit entries.
KRA, however, justified its assessment under Section 59 and 29 of the Tax Procedures Act, which allows it to obtain records from a taxpayer’s bank and suppliers if the taxpayer fails to provide these records. KRA also asserted that it was justified to estimate tax assessments based on available information when no supporting documentation was provided by the taxpayer, who had failed to submit any documents supporting its objection.
The Tax Appeals Tribunal (TAT) ruled in favor of KRA, emphasizing that the burden of proof in tax proceedings lies with the taxpayer to demonstrate that a tax decision is incorrect. The TAT noted that if KRA issues a tax assessment based on bank statements alone, the taxpayer must refute the assessment by submitting additional documentation.
Rule 5 of the Tax Appeals Tribunal (Procedure) Rules mandates that a taxpayer must reference documentary or other evidence in their statement of facts when filing an appeal. In this case, the taxpayer relied solely on its bank statement and a summary of a bank analysis, which was insufficient to meet the burden of proof required in tax disputes.
Is this Decision important to your Business?
YES ! This decision reemphasizes the need to:-
- Have proper business records : Maintain detailed records of your transactions including purchases, paid invoices, ledgers, expenses, etc.
- Seek professional advice: When disputing a hefty tax assessment always seek the services of a professional. They will assist you with filing a valid objection that meets the criteria outlined in the Tax Procedures Act and the Tax Appeals Tribunal Act.
- Documentary Evidence: Always attach documentary evidence when objecting to a tax assessment. In the absence of documentary evidence when objecting to a tax assessment, the commissioner is justified in making an estimation based on third-party records i.e. Bank statements and suppliers documents.
Conclusion
As a business entity, it is crucial to maintain thorough records of all transactions, especially expenses and allowable deductions. Proper documentation will support you if you need to contest a tax assessment issued by the Commissioner. Without adequate records, the Commissioner under Section 29 of the Tax Procedures Act has the right to make a tax assessment based on available information.
