Why KRA will tax Kenyans for unexplained Bank Deposits

 

Kenya Revenue Authority (KRA) can tax unexplained bank deposits (including those via M-Pesa or other accounts) under Kenyan tax law because such funds are presumed to be taxable income unless the account holder proves otherwise with documentary evidence. 

This approach, known as "bank deposit analysis" or "banking analysis", has been upheld in multiple rulings by the Tax Appeals Tribunal and courts, most recently in early February 2026.

Legal Basis

1. Under Section 3 of the Income Tax Act, income includes "gains or profits" from business, employment, or other sources. Unexplained deposits are treated as prima facie (initially assumed) taxable income if they don't align with declared earnings or have no clear non-taxable explanation.

2. Section 56 of the Tax Procedures Act places the burden of proof on the taxpayer. Once KRA issues an assessment (e.g., based on bank data showing discrepancies like high deposits but low/nil returns), the assessment is presumed correct until rebutted with solid evidence.

KRA cross-references data from banks, mobile money platforms, eTIMS (electronic tax systems), withholding tax records, and other sources to flag inconsistencies. 

This intensified in 2025–2026 as part of a broader anti-evasion crackdown to boost revenue without new taxes.

How It Works in Practice

1. Detection: KRA audits or uses automated systems to spot mismatches — e.g., someone files low/zero income but has large inflows (deposits) into accounts. Recent examples include cases where taxpayers had millions in unexplained credits over years.

2. Presumption: All unexplained deposits are deemed income (e.g., business profits, undeclared side hustles, or other gains). 

KRA may apply an industry profit margin (e.g., 18.49% for hospitality in one case) or treat net deposits directly as taxable.

3. Assessment: Tax is calculated (e.g., income tax + possibly VAT/PAYE adjustments), and an additional demand is issued.

4. Rebuttal Requirement: To avoid tax, you must provide proof like:

a) Loan agreements (for borrowed funds).

Shareholder capital injection records.

b) Receipts/contracts showing transfers (e.g., agency collections, refunds, gifts from family if documented).

c) Ledgers, reconciliations, or source documents explaining origins.

Without this, KRA's position stands — as confirmed in rulings like those involving Virginia Wangari (Naivasha businesswoman, Sh52.6M deposits leading to Sh6.5M tax demand) and others (e.g., Kirin Pipes Ltd., Roniam Construction).

Recent Developments (as of February 2026)

A Tax Appeals Tribunal ruling (reported February 3–4, 2026, via Business Daily, NTV, and others) explicitly backed KRA's method, stating assessments enjoy a "presumption of correctness" until disproven by "probative documentary evidence."

This applies to both individuals and businesses, including M-Pesa wallets.

KRA clarified it's not automatic for every deposit — only unexplained ones (e.g., if your salary/side income is declared and matches flows, no issue). 

But in audits (especially nil/low returns with activity), unexplained portions get hit.

Part of wider enforcement: 

KRA flagged ~392,000 taxpayers in early 2026 for discrepancies, risking travel bans, asset freezes, or PIN deactivation if unresolved.

Why This Matters Now

Kenya's government is pushing revenue collection aggressively amid fiscal pressures (debt, deficits) without major new levies. 

Tech integration (bank data sharing, AI analytics) makes detection easier, ending "off-the-books" cash flows via digital channels.

Bottom line: 

Keep good records! If deposits exceed declared income without clear non-taxable proof, KRA can (and increasingly does) treat them as taxable. 

Consult a tax advisor or lawyer for specific cases, and check KRA's iTax portal or official statements for guidance. This isn't new law but reinforced enforcement via upheld rulings.