Will KRA really tax bank deposits?

Unexplained deposits now presumed taxable unless taxpayers provide documentary proof.

News this month that the Kenya Revenue Authority will now treat unexplained bank and mobile money deposits as taxable income has thrown many Kenyans into panic, with some already asking friends who owe them soft loan refunds to repay by cash.

The move follows a Tax Appeals Tribunal ruling that money flowing into accounts is presumed taxable unless account holders provide evidence that deposits are not revenue.

The move aims to curb tax evasion by targeting undeclared income after an audit by KRA identified over 390,000 individuals and firms that have allegedly been evading tax by either filing nil returns or underdeclaring incomes, costing the taxman nearly Sh760 billion.

The tribunal's ruling placed the burden of proof on the taxpayer to prove, with documentation like bank statements, that deposits are loans, capital injections, inter-entity transfers, or reimbursements and not taxable income.

As such, the onus is on taxpayers to maintain clear, verifiable records of all transactions to avoid potential tax disputes because failing to adequately explain bank deposits may lead to the taxman issuing additional tax assessments, including corporate income tax.

As part of the surgical audit, KRA on January 23 suspended nil tax filings to allow it to comb through data and convert nil filers and non-filers into taxpayers.

This is after it emerged that some Kenyans were filing nil returns while third-party data showed that they generated income during the period under review, technically designating them as tax frauds.

KRA reactivated the 'Nil Returns' on iTax on Sunday, February 8, after the system validation and conversion of nil filers and non-filers into active taxpayers.

While the move eases concerns from taxpayers, KRA can still use bank deposits and mobile money data to assess income for businesses and individuals that file nil returns without proper records.

When online traders, consultants, freelancers, content creators, and many other self-employed individuals who generate income via non-mainstream channels get paid, usually via mobile money, digital wallets, or bank transfers, contracting entities are by law supposed to remit withholding tax to KRA.

Withholding tax applies to both individuals and corporations and is deducted from payments made to resident and non-resident persons.

Services like professional fees attract 5 per cent withholding tax for residents or 20 per cent for non-residents, royalties 5 per cent/20 per cent, dividends 5 per cent/10 per cent, interest 15 per cent, and contractual fees 3 per cent for residents.

Companies must run invoices through eTIMS (Electronic Tax Invoice Management System), effectively linking payments made to you with your data at KRA.

Whatever you declare as income must therefore align with what's been declared on eTIMS.

Should you now file nil returns, the system will be able to flag you for tax evasion as there will be disparities between what third parties said they paid you versus what you claimed you earned, which is zero.

This data-driven technology will now ensure KRA expands its tax net and nabs individuals who previously filed nil returns year in, year out.

But with this shift in tax environment comes the issue of data protection, which has emerged as a huge concern amongst many Kenyans as the new reality dawns on them.

While tabling its report on the Finance Bill, 2025, in June last year, the National Assembly Committee on Finance and National Planning rejected a proposal by the National Treasury that sought to grant KRA sweeping access to personal data, including trade secrets and confidential customer information.

The committee found clause 52 of the Bill, which proposed to expand KRA’s access to personal and proprietary information for purposes of tax compliance, in violation of Section 51 of the Data Protection Act, 2019, and failed to meet the constitutional threshold under Article 31(c) and (d), which safeguard the right to privacy.

Clause 52 of the Bill proposed to expand KRA’s access to personal and proprietary information for purposes of tax compliance.

Committee chairperson and Molo Member of Parliament Kimani Kuria told Parliament that there already exist sufficient provisions that allow KRA to access relevant data for tax administration purposes, but this must be subject to a court order.

“If you refer to the Tax Procedures Act, it clearly authorises KRA to require businesses to integrate with its systems.  Additionally, it allows for access to necessary taxpayer information through a court order,” Kuria explained.

Section 60 of the Tax Procedures Act of 2015 empowers the commissioner or an authorised officer to conduct searches and seize documents or data storage devices to facilitate investigations into tax compliance and enforcement.

Seized documents or devices must be returned within six months, unless they are needed for further proceedings.

“We believe the existing legal framework strikes the right balance between empowering tax enforcement and safeguarding the privacy of individuals and businesses. Therefore, we see no justification for granting KRA unrestricted access to sensitive personal and commercial data,” Kuria said.

He said the committee thoroughly scrutinised all legal provisions and, after robust public participation and consultations with key stakeholders, made a binding determination.

"In light of the existing legislative provisions and the valid concerns raised by Kenyans, the committee resolved to reject the amendment in its entirety."