Tax tribunal orders KRA to redo Murang’a County’s KSh212.6m PAYE bill

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The Kenya Revenue Authority (KRA) has been told to go back to its books on a KSh212.55m PAYE demand against the Murang’a County Government, after the Tax Appeals Tribunal found that the county had produced evidence the taxman never examined.

In a judgment delivered on October 14 and now published by Kenya Law, the tribunal set aside KRA’s objection decision on the PAYE assessment and ordered the authority to issue a fresh decision within 60 days. It did not cancel the bill; it left KRA to work out what the county actually owes.

How the bill grew

KRA audited the county’s tax affairs for the 2022/23 financial year and issued PAYE, withholding VAT, withholding income tax, withholding rent tax and VAT assessments on August 5, 2025. When it rejected the county’s objection on October 29, 2025, it confirmed taxes of KSh233.73m, citing the county’s failure to supply documents it had asked for.

The PAYE part was KSh172.81m in principal tax, which came to KSh212.55m with penalties and interest. The biggest disputed item was KSh93.32m in PAYE on allowances, mostly daily subsistence allowance (DSA), which the county said were reimbursements for official travel rather than pay.

The county also disputed KSh26.01m charged on gratuity, which it said was administered and taxed through LAPFUND; KSh18.55m on payroll variances it blamed on salary arrears being lumped in with current pay; KSh9.63m on car benefits for pool vehicles; and KSh5.32m on salaries of employees with disabilities who held KRA exemption certificates. Smaller sums related to MCA allowances, grants under the NARIGP programme, airtime and casual workers.

What the tribunal found

The tribunal said KRA “cannot be faulted” for confirming the assessment on what it had at the time, since the county had missed its deadline to provide records. But documents admitted during the appeal changed the picture.

“Having examined the documents, the Tribunal finds that they are competent and relevant evidence directed at each contested head of the PAYE assessment,” the judgment says. KRA’s submissions did not engage with them, so its assessment could no longer be presumed correct.

The tribunal still declined to fix the figure itself. “The documents do not, however, permit the Tribunal to determine the correct liability,” it said, describing the job as “a computational exercise within the Commissioner’s audit function”.

It gave KRA directions for the recalculation:

• PAYE must be worked out employee by employee, not on payments added up across many workers.
• Salary arrears paid with current pay cannot be treated as a variance unless KRA explains why the county’s computation is wrong.
• Staff with valid disability exemption certificates must get the exemption.
• KRA must decide whether DSA and other reimbursements fall under section 5(4)(fa) of the Income Tax Act, which applies from July 27, 2022 and covers most of the period.
• No PAYE can be charged on grants or transfers unless KRA identifies the employees who received them.

What the county still owes

The county did not win on everything. The tribunal struck out its appeal on KSh21.18m in withholding taxes and VAT because it had objected only to PAYE, so those assessments stand. It also refused to rule on the county’s argument that market fees, stall rent and other own-source revenue should not attract VAT, as that point was raised for the first time in written submissions.

The KSh56.23m the county paid KRA on June 11, 2026 will count as a payment on account. Its requests for a tax compliance certificate and an injunction against enforcement were declined, and each side will bear its own costs.

Employers checking how allowances and pay are taxed can compare current rates in our PAYE bands and housing levy table; those with arrears can look at how KRA payment plans work.