The Tax Appeals Tribunal has directed the Kenya Revenue Authority (KRA) to reassess a KSh212.6 million Pay As You Earn (PAYE) tax bill issued to the Murang’a County Government after finding that the authority had not adequately addressed evidence challenging its calculations.
The tribunal ordered KRA to issue a fresh decision on the county’s tax objection within 60 days. However, the ruling did not cancel the tax assessment, leaving the authority to determine the amount, if any, that remains payable.
The dispute followed an audit of Murang’a County’s accounts for the 2022/2023 financial year.
In October 2025, KRA upheld a tax assessment of KSh233.7 million, inclusive of penalties and interest. The PAYE component stood at KSh172.8 million in principal tax, rising to KSh212.6 million after penalties and interest were added.
County disputes taxable payments
Murang’a County challenged the assessment, arguing that KRA had incorrectly classified several payments as taxable employment income.
The largest disputed item involved KSh93.3 million in allowances, including daily subsistence allowances. The county also argued that employees with valid tax exemption certificates should receive the applicable exemptions and that the use of pool vehicles did not amount to personal benefits.
KRA initially rejected the county’s objection in October 2025 after the county failed to submit requested documents within the stipulated deadline.
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During the subsequent appeal, however, the county presented additional records, which the tribunal admitted in July 2026.
The tribunal found the documents relevant to the disputed tax items and noted that KRA had not sufficiently explained why the evidence failed to challenge the original assessment.
As a result, the tribunal said the assumption that the initial assessment was correct could no longer be maintained without further examination.
It clarified that its decision did not fault KRA for upholding the assessment based on the information available at the time. It also did not determine the exact PAYE amount the county should pay.
KRA directed to recalculate tax liability
The tribunal instructed KRA to calculate PAYE separately for each employee instead of combining payments made to different workers.
The authority must also examine the county’s records on salary arrears and explain any discrepancies before treating arrears paid alongside current salaries as unexplained payroll differences.
KRA was further directed to recognise applicable tax exemptions for employees holding valid exemption certificates and determine whether daily subsistence allowances and other reimbursements fall within the provisions of the Income Tax Act. The relevant provision took effect in July 2022, covering most of the period under review.
The tribunal said determining the correct liability would require KRA to reconcile payroll records, imprest documents and fund records against individual employees and the relevant tax periods.
It also directed the authority not to impose PAYE on grants, transfers or other payments without identifying the employees who received the money and the legal provisions under which the payments qualify as employment income.
Tribunal declines to determine VAT dispute
Murang’a County also contested the VAT assessment, arguing that revenue collected from its own sources did not amount to consideration for taxable supplies.
However, the tribunal declined to determine the issue because the county had raised the argument in its written submissions rather than through the prescribed tax objection process.
The tribunal also struck out the county’s appeal against KSh21.18 million in withholding VAT, withholding income tax, withholding tax on rent and VAT.
It ruled that the county had not formally objected to those assessments before proceeding with the appeal.
