Financial experts and business leaders want the Kenya Revenue Authority (KRA) to set up a special fund to speed up tax refunds and boost cash flows for the corporate sector.
The taxman has been on the spot over delays in tax refunds and new policy shifts that businesses say deny them operational funds and weaken investment confidence.
Despite clear legal timelines requiring KRA to process tax refund applications within 120 days, many firms continue to face prolonged waiting periods, unclear communication and procedural hurdles.
The delays, experts warn, are straining the liquidity of compliant taxpayers, particularly exporters and large corporations and undermining faith in the country’s tax administration system.
Data for October 2023 which is the latest update from KRA, shows businesses were owed Sh16.34 billion, which includes Sh2.75 billion in income tax and Sh13.58 billion in VAT refunds.
According to audit and consultancy firm PwC Kenya, taxpayers are increasingly frustrated by cases of system errors, unlawful reapplication requests and refund disputes that drag on even after favourable court rulings.
In some cases, businesses that have won refund cases are still being asked to reapply, a move tax professionals say is contrary to the law.
“The disconnect between legal provisions and actual practice not only frustrates taxpayers but also erodes confidence in Kenya’s tax system. Refund processing remains one of the most contentious areas in tax administration,” PwC senior manager for tax services Brian Kanyi, the firm’s monthly policy update.
The issue has become so severe that experts and business leaders are now calling for the creation of a special fund or ‘refund reserve’ within the KRA to fast-track payments and restore predictability in the refund process.
In the period to June 2025, the situation was so dire forcing firms to use approximately Sh49.7 billion in verified tax refund claims to offset other tax liabilities owed to the KRA, double the amount from the previous year.
This mechanism allows businesses with pending refunds to settle current tax obligations without cash changing hands, indicating ongoing cash flow challenges for taxpayers due to delayed refunds.
The new proposal would ring-fence a portion of Treasury remittances specifically for settling outstanding refunds.
“There is a significant amount of refunds owed to taxpayers. However, the budgetary allocation for refunds does not match the outstanding amounts. Setting aside a percentage of tax collections for a dedicated refund reserve could be a practical solution,” said Partner and Director of Tax Services at PwC Kenya Edna Gitachu.
The call for reform comes amid growing concerns over the KRA’s administrative bottlenecks.
Businesses report that refund applications are often dismissed on technicalities such as minor iTax errors or missing documentation, while others are left pending without explanation.
Some non-resident taxpayers have also been unable to claim refunds because they lack iTax registration profiles, despite having overpaid taxes.
Tax experts say such inefficiencies distort cash flow, especially for exporters and firms operating in refund-heavy sectors like manufacturing and logistics. The delays force companies to rely more on short-term borrowing, raising financing costs and eroding competitiveness.
“When compliant taxpayers have to wait years to recover legitimate refunds, it sends the wrong message to investors. A refund reserve would improve liquidity for businesses and enhance trust in the tax system,” said Associate Director of Tax Services at PwC, Nicholas Kahiro.
The KRA has defended its processes, citing budget constraints and the need for verification to prevent fraudulent claims.
However, the PwC experts note that these challenges could be addressed through administrative reforms including automated escalation of overdue refunds, allowing non-resident claims through authorized agents and imposing penalties on delayed processing.
They also recommend expanding the “green channel” a fast-track system currently used for pre-approved exporters to include other compliant taxpayers.
“Eligibility should be determined case by case, not just by industry,” PwC added in the policy update.
The refund crisis is unfolding alongside another major policy change under the Finance Act 2025, which reintroduced a five-year limit on the carry-forward of tax losses.
The move overturns the indefinite carry-forward period introduced in 2021 and has created new uncertainty for businesses with accumulated losses.
Under the amendment to Section 15 of the Income Tax Act, companies can now only deduct losses within the year they occur and the five succeeding years.
The experts says the law, however, lacks a transitional clause, leaving unclear whether the limit applies retrospectively to losses accumulated before July 2025.
Tax professionals say this ambiguity could trigger sudden tax liabilities for capital-intensive sectors such as energy, infrastructure, and manufacturing, which typically incur large start-up losses over long investment cycles.
“The absence of transitional provisions exposes businesses to significant risk, without clarity, companies might face unexpected tax bills that disrupt financial planning and long-term investment decisions,” said senior manager of tax services at PwC Brian Kanyi.
The analysts warn that the combination of refund bottlenecks and restrictive tax loss rules could dampen Kenya’s investment climate at a time when the government is seeking to expand the tax base and attract foreign capital.
