In an intensifying standoff, the Kenya Revenue Authority (KRA) is locked in a tax dispute with legal practitioners, accusing some law firms of income under-declaration. 

KRA alleges that certain legal practitioners exploit withholding tax credits on interest income, manipulating their tax liabilities. This centers on the 15 percent withholding tax on interest, deducted by banks. 

The controversy emerges as kra contends that some law firms claim these credits without declaring the corresponding interest earned, triggering discontent within the legal community. 

Exacerbating tensions, kra issued audit notices challenging perpetual VAT credit status within law firms. These assessments have stirred discontent among legal practitioners, drawing strong criticism from the Law Society of Kenya (LSK). 

LSK President Eric Theuri has decried what the organization terms as arbitrary tax assessments by the taxman against its members. Theuri has emphasized the urgent need for a reconfiguration of the tax system, proposing a mechanism where tax credits, when paid by a law firm on behalf of a client, are accurately attributed to the client.

“There is no way I can transfer a tax credit that is not mine to the client,” said Mr Theuri.

“What other people are doing is that they are paying over and above the credits that have been utilised,” said Mr Theuri, noting that this is why the accounts are continuously in extra credit. 

Mr. Theuri clarified that instead of kra taking into account the additional credit, they are assessing the advocate for extra income and under declaration, which he deemed as incorrect.

LSK President Eric Theuri has strongly criticized the existing tax credit system, urging a significant change in kra itax system. The Law Society of Kenya (LSK) advocates for a reconfiguration to ensure that tax credits, when paid by law firms on behalf of clients, are accurately and directly attributed to the respective clients. 

Delving into the ongoing tax dispute, kra commissioner Rispah Simiyu has defended the assessments, citing a necessity to recover underpaid taxes from law firms. 

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Simiyu asserts that these assessments were prompted by a lack of evidence from law firms, specifically regarding interest income earned from client account deposits and its subsequent distribution to clients.

With these assessments causing significant concern, LSK has urged its extensive membership, exceeding 20,000, to officially file complaints if they feel harassed by kra’s actions. 

President William Ruto’s government, with an immense pressure to meet IMF targets, faces intensified scrutiny to reduce the country’s debt vulnerabilities and achieve a targeted debt to Gross Domestic Product (GDP) ratio of 55 percent by 2029. 

This economic pressure has led to heightened focus on lawyers and high-net-worth individuals, identified in Treasury reports as taxpayers who haven’t been contributing their fair share of taxes.

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