KRA Can Now Tax Unexplained Bank Deposits

Kenyans with unexplained money flowing into their bank accounts and mobile money wallets now face the prospect of paying tax on these deposits after the Tax Appeals Tribunal handed the Kenya Revenue Authority fresh powers to treat undocumented cash as taxable income.

In a landmark ruling that signals a major shift in how the taxman pursues revenue, the tribunal has determined that the burden of proof lies squarely with account holders to demonstrate that their deposits are not income. The decision effectively reverses the traditional approach where KRA had to prove that money was taxable before demanding payment.

The ruling emerged from a dispute between KRA and Virginia Wangari, a Naivasha hotel businesswoman, whom the authority assessed for Sh6.5 million in taxes after discovering Sh52.6 million in unexplained bank and M-Pesa deposits between 2018 and 2022. After adjusting for supported non-income items, KRA treated net deposits of Sh50.9 million as taxable income and applied an industry profit margin of 18.49 percent for the hospitality sector.

Wangari challenged the assessment, arguing that KRA had wrongly assumed all deposits were income, ignored her explanations, applied an arbitrary margin, and subjected her to double taxation. However, the tribunal dismissed her appeal, holding that tax assessments by the Commissioner enjoy a presumption of correctness until rebutted by documentary evidence.

The tribunal emphasized that taxpayers must produce bank reconciliations, source documents, ledgers, or contracts to show that funds were capital injections, loans, or agency collections. General explanations without supporting documentation, the panel ruled, do not displace tax liability.

Tax experts say the ruling represents a significant escalation in KRA’s enforcement powers and places millions of Kenyans at risk of unexpected tax bills if they cannot adequately document the sources of their income. The decision comes at a time when President William Ruto’s administration has intensified its crackdown on tax evasion to boost revenue collection without imposing new taxes following the deadly anti-tax protests of 2024 that claimed over 50 lives.

The ruling builds on another controversial case involving Kirin Pipes Limited, where the tribunal upheld a Sh21.6 million tax assessment after the company failed to prove that deposits into its accounts between 2019 and 2022 were loans or shareholder capital rather than undeclared sales revenue. KRA had initially assessed the pipe manufacturer for Sh34.3 million in income tax and Sh22.6 million in VAT after its banking analysis revealed unexplained deposits.

In that case, Kirin Pipes argued that shareholders had injected Sh29.4 million in additional capital, secured a Sh31.6 million loan from Nanchang Municipal Engineering Development, and received Sh24.6 million from shareholders to fund operations. The company also claimed some deposits were advance payments from clients that were later invoiced and declared for tax purposes.

However, the tribunal found that the company had provided uncertified bank statements and vague SWIFT confirmation slips without corroborating documents such as board resolutions, updated CR12 records showing revised shareholding, or evidence of loan repayment. The loan agreement itself was deemed problematic as it was interest-free, open-ended, and had no repayment timeline.

Samuel Mwaura, Tax Partner at Grant Thornton Kenya, warns that the rulings signal a new era of aggressive tax enforcement. He predicts an increase in litigation as the authority disallows expenses not supported by electronic tax invoices, even when they represent genuine business costs.

The legal backing for KRA’s approach comes from Section 3 of the Income Tax Act, which broadly defines income to include business profits, employment earnings, rent, dividends, interest, pensions, and other gains or benefits unless specifically exempted. This means any unexplained deposits, when not backed by proper documentation such as loan agreements or shareholder capital records, fall within the definition of taxable income.

KRA has clarified that the ruling does not give it blanket powers to tax every deposit made into personal or business accounts. The authority maintains that properly documented funds, such as loan proceeds, shareholder capital, or transfers supported by verifiable records, are not subject to taxation. However, the onus is on taxpayers to provide this documentation when challenged.

The enforcement push is part of a broader strategy by KRA to leverage technology and data analytics to identify tax evaders. From January 2026, the authority launched an automated digital system that validates income and expenses declared in tax returns against electronic tax invoices, withholding tax records, and import declarations from customs systems.

This new validation system, integrated into the iTax platform, flags mismatches in income declarations, VAT claims, and withholding tax data in real time. All declared income and expenses must now be supported by valid electronic tax invoices correctly transmitted with the buyer’s PIN, subject to exceptions provided under the Tax Procedures Act.

The digital crackdown extends beyond bank deposits to target the entire spectrum of business operations. KRA’s enforcement unit has been using various databases to pursue suspected tax cheats, including bank statements, import records, motor vehicle registration details, Kenya Power records, water bills, and data from the Kenya Civil Aviation Authority, which reveals individuals who own assets such as aircraft.

Car registration details are being used to identify individuals driving high-end vehicles but remitting little in taxes, while Kenya Power meter registrations help the taxman identify landlords who have been slapped with huge tax demands. The authority has also sought details of suppliers and contractors hired by county governments to tighten the noose on individuals and firms evading tax.

The banking analysis method, treating unexplained deposits as income, is increasingly becoming KRA’s weapon of choice during audits. The tribunal has cited earlier rulings holding that all bank deposits are taxable unless the account holder explains, with evidence, why they should not be taxed.

For businesses, the implications are profound. Companies that rely on informal suppliers who cannot issue electronic tax invoices face a dilemma. Unless expenses are documented electronically, KRA will assume the money remains in the business’s pocket and treat it as profit subject to tax.

Consider a small agribusiness that buys fertilizer and seeds from a rural supplier who has no PIN and cannot issue an electronic tax invoice. If the business paid Sh400,000 for these inputs, KRA will automatically treat that amount as profit, even though it was spent on genuine business expenses. Similarly, if a business spent Sh1 million in total but only Sh300,000 has electronic documentation, the remaining Sh700,000 will inflate profits, increasing the company’s tax bill and squeezing cash flow.

Self-employed professionals, including consultants, advisors, trainers, and freelancers, are among the most exposed under the new regime. KRA is now cross-referencing withholding tax records submitted by clients against annual income tax returns. When a client pays a consultant, they are required to deduct withholding tax at source and remit it directly to KRA. If a consultant files a nil return, under-declares income, or omits consultancy fees already subjected to withholding tax, the system automatically flags the account, triggering audits, penalties, and enforcement actions that may include bank account freezes or asset seizures.

Tax practitioners advise businesses and individuals to maintain meticulous records of all transactions, including bank reconciliations, source documents, ledgers, contracts, and board resolutions. They recommend setting aside between 25 and 30 percent of earnings for tax obligations to ease cash flow pressure and engaging certified tax professionals to reduce exposure to compliance risks.

The tribunal rulings come as KRA faces mounting pressure to meet revenue targets amid persistent shortfalls. Official data shows the authority collected Sh2.257 trillion in the year through June 2025, missing its revised target by Sh47.3 billion. This marked the third consecutive annual shortfall, exacerbating fiscal pressure at a time when public debt has surpassed Sh11.5 trillion.

The expanded enforcement coincides with major restructuring at KRA’s Times Tower headquarters, including recruitment for senior positions such as Deputy Commissioners, as the authority seeks to improve collection, particularly from the informal economy where compliance remains low.

However, the aggressive push has not been without controversy. Banks initially blocked KRA’s attempt to integrate its system with that of 38 lenders amid fears that the taxman could access sensitive personal information such as cash flows in accounts without adequate safeguards. Bankers expressed concern that KRA could use the integration to access customer information unlawfully, exposing banks to lawsuits and penalties from the data protection watchdog.

The plan to access sensitive personal data, including details of properties owned and bank accounts as well as cash transfers on mobile phones without a court warrant, was initially included in the Finance Bill 2024 but was scuppered by the withdrawal of the bill following the anti-tax protests.

Despite these concerns, KRA has forged ahead with its enforcement agenda, determined to widen the tax base and boost revenue collection through technology and data analytics. The authority maintains that its approach is justified under existing law and that taxpayers who maintain proper records have nothing to fear.

For ordinary Kenyans, the message is clear. Every deposit into a bank account or mobile money wallet must now be accounted for with proper documentation. Failure to do so could result in an unexpected tax bill that presumes the money is income unless proven otherwise. In this new era of digital tax enforcement, the burden of proof has shifted decisively from the taxman to the taxpayer.