Is tax offset subject to an application for refund?
Standard Chartered Bank Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E402 of 2024) [2025] KETAT 170 (KLR) (14 March 2025) (Judgment).
An offset of tax liability from overpayment only follows from an application for refund under Section 47 of the Tax Procedures Act.
Standard Chartered Bank sought to use the overpaid tax in 2019 to offset part of its instalment tax for 2020. However, KRA did not apply the overpaid tax to set off the 2020 liability, noting that an offset under Section 47 of TPA could only be made after an application for refund had been made.
Although the Tribunal found the appeal before it incompetent, it noted in the judgment that no request for offset can be made without first making the application for refund.
WHAT DOES SECTION 47 OF THE TAX PROCEDURES ACT STATE?
Under Section 47(1), a taxpayer who has overpaid a tax may apply to the Commissioner to:
- Offset the overpaid tax against the taxpayer’s outstanding tax debts and future tax liabilities; or
- For a refund of the overpaid tax within five years, or six months in the case of value added tax (VAT), after the date on which the tax was overpaid.
The application for either a refund or an offset should be ascertained and determined within 90 days, except in the case where the application is subjected to audit, in which case the application should be ascertained and determined within 120 days.
A reading of Section 47(1) infers that overpaid tax may be utilized to offset tax debts or future tax liabilities, or may be refunded to the taxpayer. The applications for an offset or refund can be made separately, save in the case of an application for refund, then the overpaid tax is to be used in the order below:
- To pay any tax owing by the taxpayer under the specific tax law;
- In payment of tax owing by the taxpayer under any other tax law; and
- The remainder shall be refunded to the taxpayer.
There is no express provision under Section 47 requiring an application for offset to be preceded by an application for refund of the overpaid tax.
It should, however, be observed that the Tribunal in the Standard Chartered case with cause of action that arose in 2020, which was before the amendments to Section 47 by the Finance Act 2022 that expanded the provisions of Section 47 from just refunds to offsets and refunds.
