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19 August 2026 Kenya Tax Appeals Tribunal allows utilization of overpaid tax against outstanding tax liabilities
On 27July 2026, the Tax Appeals Tribunal (TAT) issued a significant ruling concerning the utilization of excess value-added tax (VAT) credits and the circumstances under which the Kenya Revenue Authority (KRA) may proceed with enforcement action. In Easton Petroleum Ltd v Kenya Revenue Authority (TATC/E610/2026), the TAT held that the existence of excess input VAT does not, by itself, prevent a taxpayer from seeking utilization of available tax credits under Section 47 of the Tax Procedures Act (TPA). The TAT further emphasized that if a taxpayer has properly lodged a set-off application and has sufficient available tax credits to settle an outstanding tax liability, the KRA should fairly consider and determine that application before resorting to enforcement measures. The decision reinforces the statutory framework established under the TPA and may provide useful support for taxpayers that have accumulated tax credits and are simultaneously facing collection action for outstanding tax liabilities.
On 14 May 2026, the taxpayer applied to the KRA for the VAT liability to be offset against the available VAT credit under Section 47 of the TPA. The KRA declined the request, taking the position that the credit represented excess input VAT governed by Section 17(5) of the VAT Act, which generally requires excess credits to be carried forward to subsequent tax periods. The KRA subsequently issued agency notices against the taxpayer's bank accounts to recover the outstanding liability.
The key issue was whether the KRA was justified in declining a taxpayer's request to offset available tax credits against an admitted liability and proceeding with enforcement action despite the existence of sufficient credits. The TAT also considered whether excess VAT credits could be applied to outstanding tax liabilities, and whether the KRA's refusal to process the set-off, issue a Tax Compliance Certificate and lift agency notices was reasonable. The taxpayer argued that it had an undisputed VAT credit that exceeded its admitted tax liability and had properly invoked the statutory set-off mechanism under the TPA by applying for the utilization of the credit against the outstanding liability. The taxpayer further contended that the KRA's failure to process the application within the prescribed timeframe, while simultaneously enforcing collection through agency notices, was unreasonable and caused significant operational challenges, and that the KRA should have determined the utilization application before pursuing enforcement action. The KRA asserted that the taxpayer's credit constituted excess input VAT governed by section 17(5) of the VAT Act, which is ordinarily carried forward to subsequent tax periods rather than refunded or offset, and that any utilization of those credits must be undertaken in accordance with the relevant provisions of the TPA. The KRA further maintained that the agency notices were lawfully issued to recover admitted tax liabilities and that the taxpayer's application was merely an attempt to delay tax collection. In its analysis, the TAT reasoned that the TPA allows taxpayers to apply available tax credits against outstanding tax liabilities and that the KRA had not disputed the existence of the taxpayer's VAT credit balance. In addition, Section 17(5) does not expressly prohibit consideration of a valid set-off application under the TPA, thereby rejecting the KRA's position that excess input VAT could only be carried forward. Finally, when a taxpayer has an admitted liability and sufficient available tax credits to settle that liability, the KRA should determine the set-off request before initiating recovery measures such as agency notices. Having found that the VAT credit exceeded the outstanding liability, the Tribunal ordered the KRA to:
This decision reinforces the principle that taxpayers that have accumulated input VAT credits or other tax credits at the same time as outstanding tax liabilities may seek to apply those available tax credits to settle existing tax liabilities through the mechanisms provided under the Tax Procedures Act. The decision also suggests that the KRA should consider and determine valid set-off applications before commencing enforcement action where sufficient tax credits exist to extinguish the liability. Accordingly, taxpayers should consider proactively reconciling and monitoring their VAT credit positions, maintaining adequate supporting documentation, and formally lodging well-supported set-off applications that clearly identify the available credit, liability to be settled, amount proposed for offset and statutory basis of the request. Furthermore, taxpayers that have Tax Compliance Certificates that have been denied due to outstanding tax liabilities may consider relying on this decision, subject to their specific facts and supporting documentation, when seeking to utilize sufficient and undisputed tax credits to regularize their compliance position. This decision underscores the importance of proactively managing tax credit positions and engaging with the KRA through the statutory mechanisms available under the Tax Procedures Act. Although the ruling does not establish an automatic right to offset tax credits against liabilities, it reinforces the expectation that valid set-off applications should be fairly considered before enforcement action is undertaken.
Document ID: 2026-1780 | ||||||
