VAT: Tax Tuesday — for SMEs, MSMEs & finance teams
1️. Why this ruling matters now
Last year’s High Court decision clarified a longstanding headache for VAT-registered businesses: what order VAT credits should be applied when a taxpayer has excess input VAT and also holds Withholding VAT (WH-VAT) credits. The Court confirmed that excess input VAT carried forward must be used first to offset output VAT before any WH-VAT credits are applied. Practically, that means more businesses may now be entitled to cash refunds instead of indefinite credit balances as had been the norm.
For many SMEs this is not just technical tax talk — it’s a potential cash-flow win. Firms that invest heavily (on imports, capital equipment, or large input purchases) often carry input VAT that sits on their ledgers for months. If WH-VAT credits were used first, taxpayers could find themselves unable to recover cash even when they were theoretically “in credit.”
2️. Case brief: Commissioner of Domestic Taxes v Kenya General Industries Ltd (HCCOMMITA/E177/2024)
The matter addressed how Section 17(5) of the VAT Act should operate where a taxpayer has excess input VAT and also WH-VAT credits. The High Court held that:
Carried-forward input VAT must be aggregated with current input VAT and deducted from output VAT first; and
KRA’s practice of issuing Credit Adjustment Vouchers (CAVs) into periods already in a credit position — effectively using WH-VAT in preference to input VAT — was unlawful to the extent it prevented taxpayers from accessing refunds. The court ordered reversal of improper CAVs and recognized taxpayers’ rights to refunds where appropriate.
3️. Before vs. Now — the practical shift
Before this judgment, practice and the logic of the iTax system sometimes resulted in WH-VAT credits being used ahead of input VAT, or CAVs being posted into already-credit positions — trapping taxpayers in non-cash credit positions. After the decision, the legal sequence is clearer: input VAT first → output VAT → WH-VAT credits, and taxpayers can press for CAV reversal or refunds if the reverse occurred in prior periods.
4️. What does this mean for SMEs & MSMEs (real, immediate effects)
-Liquidity improvement for some taxpayers: SMEs with significant input VAT (i.e. importers, manufacturers, construction firms) should re-check VAT ledgers — cash refunds may now be claimable.
-Audit & claim opportunity: If KRA previously posted CAVs or auto-used WH-VAT credits that left you in credit. You may have grounds to request a reversal and a refund from them.
-Stronger position in disputes: The High Court decision gives taxpayers legal leverage when contesting KRA’s offsetting practice. Use it in objections and appeal correspondence.
-Administrative work: Expect KRA to require clear reconciliations, from your VAT filings, invoices, and WH-VAT certificates must be clear and ready in order to pursue refunds.
-System checks: Reconcile your iTax VAT ledger now (not later). Identify periods where WH-VAT credits were applied in preference to input VAT and document the amounts and supporting invoices.
5️. What Aura & Co CPA recommends & How we support you
a) Run a VAT Ledger Sweep — and We Reconcile It for You
-Pull your iTax VAT ledger and compare carried-forward input VAT, current period input VAT, output VAT and WH-VAT credits.
-How we help: We conduct a full VAT audit and reconciliation to identify errors, quantify true credits, and highlight refund opportunities.
b) Gather Documentary Proof — and We Validate & Organize It
-Collect invoices, import documents, and WH-VAT certificates that support your VAT position.
-How we help: We review, validate, and align all documentation with iTax entries to ensure your claim is fully defensible.
c) Request Reversal of Improper CAVs — and We Prepare the Objection for You
-If KRA issued CAVs (Credit Adjustment Vouchers) in the wrong order or in credit periods, submit an objection referencing the High Court ruling.
-How we help: We prepare the objection or administrative request, citing the correct legal basis, and manage the engagement with KRA.
d) File Precise Refund Claims — and We Prepare the Full Dossier
-If you remain in a net credit position, file a detailed refund claim under Section 47 of the TPA.
-How we help: We prepare the refund claim, supporting schedules, reconciliations, and submit a complete application to KRA on your behalf.
e) Build Strong VAT Governance — We Design the Systems and Controls.
-Implement monthly reconciliations, track WH-VAT certificates properly, and monitor import VAT.
-How we help: We help implement internal controls, VAT processes, and reporting tools that ensure compliance, transparency, and faster refunds going forward.
Read also about Top 5 Missed Tax Deductions for Kenyan SMEs
6️. A short caution (legal posture)
While the High Court’s decision is persuasive and provides strong precedent, taxpayers must follow formal objection and refund procedures — and be ready for procedural pushback. Not all cases are identical; how the decision applies will depend on the facts, the exact iTax postings, and the documentary trail. Use the ruling as a strategic tool — not an automatic win.
Tax Tuesday Tip
If you haven’t already: pull your last 12 months’ VAT ledger today. Look for periods where WH-VAT credits were applied while you had input VAT carry-forwards. If you find such instances, compile the invoices and WH-VAT certificates — you may have a refund claim.