The recent High Court backing of the Kenya Revenue Authority’s (KRA) approach to use bank deposits to assess business income represents a turning point in the country’s fight against tax evasion and nil filings. The ruling gives the tax authority clearer legal cover to treat unexplained deposits in business accounts as presumptive income if taxpayers cannot adequately document their source. This marks a significant shift in how businesses will be held accountable for their tax obligations and carries implications for the Kenyan economy.
In a landmark decision, the High Court affirmed that where businesses file nil returns without proper books and records, the taxman can use alternative information available to assess tax liabilities. The court’s ruling emphasizes that the Commissioner is not bound by the figures filed on iTax and can reasonably infer income from bank transactions when records are missing or inadequate. This aligns with the principle under the Tax Procedures Act that the Commissioner may assess a taxpayer’s liability using any information available, including bank deposits.
The legal environment that enabled this ruling did not emerge overnight. On September 2 2025, the Tax Appeals Tribunal ruled in a case involving a pipe manufacturing company that unexplained bank deposits could rightly be treated as income unless the taxpayer could provide credible evidence to show otherwise. In that instance, the company failed to convincingly demonstrate that deposits were loans or capital injections, and the tribunal upheld KRA’s assessment.
The High Court decision reinforces this stance by shifting the burden of proof more clearly onto businesses. Where once KRA had to demonstrate that a deposit represented taxable income, the ruling effectively presumes that unexplained deposits are profits until proven otherwise. Businesses must therefore produce bank reconciliations, source documents, ledgers, contracts or similar supporting records to show that funds are non-taxable, such as shareholder capital injections, loans or agency collections.
For many businesses, especially small and medium enterprises, this creates a more demanding compliance landscape. Many smaller businesses have traditionally relied on informal record keeping or basic cash books that do not reconcile systematically with bank statements. Without robust documentation, such enterprises risk unexpected tax assessments where deposits are treated as unexplained income.
Proponents of the ruling argue that it will help close the tax gap and promote fairness. With over 390,000 taxpayers identified as having filed nil returns in 2024 yet showing transactional activity, KRA’s enforcement strategy aims to ensure that those earning income but not reporting it are brought into the tax net. This could ultimately broaden the tax base and allow the government to collect more revenue from businesses that have previously evaded taxes.
However, critics warn that the shift places a heavy administrative burden on businesses that may lack sophisticated accounting systems. Larger corporations typically have the capacity to produce detailed documentation, but smaller traders may struggle to maintain compliant records. Tax professionals have pointed out that tax compliance costs could rise as businesses invest in better bookkeeping, accounting software and professional help to counter possible assessments.
The ruling also raises questions about financial privacy. While KRA maintains it does not have unlimited access to personal data, the reliance on bank and mobile money analyses highlights a closer scrutiny of business transactions than in the past. This approach expands KRA’s enforcement toolkit beyond traditional audits and declarations to include data analytics from financial institutions, mobile money platforms and other electronic records.
Ultimately businesses that maintain clear, documented financial records will be better positioned to withstand scrutiny, whereas those that rely on informal systems risk facing costly assessments years after transactions occur. As enforcement tightens, businesses must prioritise investment in proper accounting systems and regular reconciliation of bank deposits with declared income.
