Imagine lodging a tax refund claim, waiting patiently for years, finally being told your refund has been approved, only to discover that what you receive is not cash but a “digital credit” you will never use. That is the case of Nabo Africa Funds (Nabo Africa Funds v Commissioner of Domestic Taxes).
Background
Nabo Africa Funds is an umbrella collective investment scheme registered as a unit trust. Under Section 20 of the Income Tax Act (ITA), such unit trusts are exempt from income tax.
Between 2019 and 2020, tax was erroneously withheld at source on their income. To correct this error, Nabo lodged an income tax refund claim in June 2021 for KShs. 16.55 million. Three years later, in March 2024, the Kenya Revenue Authority (KRA) approved the refund. But instead of paying the money, KRA issued a Refund Adjustment Voucher (RAV) to offset current or future tax liabilities.
The Tribunal’s Decision
Unsurprisingly, Nabo challenged this outcome at the Tax Appeals Tribunal (TAT). Their argument was simple. The refund was rightly approved. However, as a tax-exempt entity, they had no liabilities against which to offset the voucher. Therefore, a cash refund was the only just outcome.
The Tribunal, while sympathetic, struck out the case. It reasoned that what Nabo was contesting was not the refund decision, which had already been granted in their favour, but the mode of payment. Under Section 52 of the TPA, only a refund decision can be appealed. In its own words, the TAT acknowledged that giving a voucher to a tax-exempt entity is “an exercise in futility”, but concluded that its hands were tied.
Where the Injustice Lies
Nabo had already won in substance as the KRA admitted the refund was due. But they lost in practice since the money remains inaccessible.
Refunds are meant to correct taxes paid in error. They restore liquidity to taxpayers and ensure fairness in the system. By replacing a refund with a voucher that cannot be used, the government essentially keeps money it has no right to hold. The result is not merely administrative inconvenience. It is a denial of rights enshrined in the Constitution under Article 201 on Fairness in Taxation and Article 47 on Fair Administrative Action.
Why Vouchers?
The Finance Act, 2023 amended the refund provision, allowing the KRA to automatically offset any unpaid refund after six months against a taxpayer’s existing or future tax liabilities. In practice, KRA relies on iTax to automatically generate RAVs, which for most taxpayers with recurring obligations serves as a convenient, though limited, form of relief. But for tax-exempt entities like Nabo, or loss-making firms with no immediate liabilities, it is a dead end.
The problem is compounded by KRA’s own admission that income tax refunds are subject to budgetary limits of about KShs. 150 million per quarter, with a maximum of KShs. 3 million per payment, processed on a first-in-first-out (FIFO) basis. In essence, the government rations the funds available for refunds, and vouchers have become a mechanism to manage the fiscal shortfall.
What This Says About Our Tax System
The Nabo case is more than a dispute over one refund. It exposes structural flaws in Kenya’s tax administration.
- Paper Refunds, No Cash. Approvals are issued, but the cash does not follow, making what is presented as a refund nothing more than an accounting entry.
- Cash Flow Strain. Investment vehicles, exporters, and businesses rely on liquidity to function. Holding back refunds ties up capital that could otherwise fuel productive activity in the economy.
- Accountability Gap. When withholding taxes are wrongly deducted, the burden of error ultimately falls on the taxpayer, while the party that created the mistake faces no real consequence.
- Eroding Confidence. If taxpayers believe that once money enters KRA’s hands it may never come out, compliance risks shifting from voluntary cooperation to bare-minimum enforcement.
What Options Exist?
Although the TAT threw out the case, Nabo and others in similar situations are not without options:
- Appeal at the High Court: They could appeal on a point of law regarding the legality of using vouchers as a mode of payment.
- Judicial Review: They could challenge the application of section 47(2)(b) to tax exempt taxpayers as unreasonable, disproportionate, and inconsistent with constitutional principles.
- Policy Reform:
- In the interim, Nabo and similar taxpayers could push for administrative reforms, such as a clear KRA policy requiring expedited cash refunds in cases where no offset is possible.
- Over the longer term, lobbying Parliament to amend the TPA remains essential. A statutory requirement for cash refunds where taxpayers have no current or future liabilities would close the legal grey area.
- Prevention at Source: Exempt entities can proactively share exemption certificates with withholding agents to prevent erroneous deductions in the first place.
Final Thoughts
The Nabo Africa Funds case is a cautionary tale. On paper, the taxpayer won. In reality, they walked away with nothing. This is more than a legal technicality. It is about whether taxpayers can trust that when the KRA takes money in error, it will give it back, not in a form that sits idle in a digital account, but in real cash they can use.
Because, for taxpayers like Nabo, a refund delivered only as a voucher is not money back, it is Monopoly money.
Content By:
Irene Masecko
Tax Associate
irene.masecko@ke.andersen.com