Tax Appeals Tribunal Affirms Use of Bank Deposit Analysis in Assessing Tax Liability
The Tax Appeals Tribunal (TAT) has once again reinforced the Kenya Revenue Authority's (KRA) powers to rely on bank deposit analysis when assessing a taxpayer's income, particularly where adequate records are not maintained or provided.
Case Background
In this case, the Appellant challenged KRA's additional assessments for income tax and VAT covering the years 2016–2020. KRA had flagged substantial bank deposits amounting to Kshs. 111 million over the review period, which had not been declared in tax returns.
The taxpayer argued that these were not sales proceeds, but funds received and paid out on behalf of creditors as part of her brokerage activities. Despite presenting financial statements and some schedules, the Appellant failed to provide critical supporting documents such as bank reconciliations, brokerage agreements, invoices, and ledgers.
Consequently, KRA applied the bank deposit analysis method, treating unexplained deposits as taxable income, and raised additional assessments of over Kshs. 55 million.
Tribunal's Key Findings
1. Burden of Proof Rests with the Taxpayer
Under Section 56(1) of the Tax Procedures Act, the taxpayer carries the responsibility of disproving the Commissioner's assessment. The Tribunal emphasized that competent and relevant evidence is required to displace the presumption of correctness.
2. Bank Deposit Analysis Is a Valid Method
The Tribunal reaffirmed that in the absence of adequate records, KRA is empowered to use alternative methods, including bank deposit analysis, to arrive at a fair assessment. This method has been recognized in both local and international case law.
3. Failure to Keep Proper Records Is Costly
Section 54A of the Income Tax Act and Section 23 of the Tax Procedures Act require taxpayers to maintain detailed business records for at least five years. The Appellant's inability to produce key source documents undermined her case.
4. VAT Registration Threshold Was Met
The Tribunal found that the taxpayer's turnover exceeded the statutory VAT threshold of Kshs. 5 million annually, and since her services were not exempt under the VAT Act, KRA was justified in imposing VAT obligations.
Key Takeaways for Businesses
- • Maintain proper records: Bank reconciliations, contracts, invoices, ledgers, and supporting documents must always be available to substantiate declared income.
- • Bank deposits matter: Any unexplained deposit can be deemed taxable income unless convincingly explained and supported with evidence.
- • VAT compliance is critical: Businesses that meet the turnover threshold must register and account for VAT, regardless of their perception of the nature of their services.
- • Timeliness in appeals: Appeals must be filed within the statutory timelines or risk being struck out.
Our Advice to Clients
- • Strengthen internal controls to ensure accurate and complete record-keeping.
- • Conduct periodic tax health checks to identify risks before they escalate into disputes.
- • Engage professionals early when responding to KRA investigations, objections, or assessments.
- • Ensure VAT and income tax compliance is up to date, with clear supporting documentation.
As your trusted advisors, we recommend proactive compliance as the most effective strategy to avoid costly assessments, penalties, and disputes with KRA.