Imagine a company owed tens of millions of shillings by the State under a clear, enforceable court decree: an amount far exceeding its total tax liabilities. Yet, because those taxes remain unpaid, the Kenya Revenue Authority (KRA) freezes the business’s bank accounts and denies it a Tax Compliance Certificate (TCC).

Without a TCC, the firm cannot bid for new tenders. Without open accounts, it cannot receive payments from clients. It cannot pay its taxes because it cannot trade, and it cannot trade because it has not paid its taxes. The root cause of its default? The State’s own failure to pay its bills.

This isn’t an isolated grievance; it is a structural deadlock facing thousands of Kenyan suppliers. Business owners watch solvent enterprises starve while holding the Government’s verified promises to pay. The asset sits on one side of the ledger, frozen; the liability sits on the other, compounding with penalties and interest every month.

When a Republic acts simultaneously as a debtor and a bailiff to the same citizen, the system breaks.

At the heart of this crisis is a strict administrative separation between state spending and revenue collection. In public financial management, government ministries, departments, agencies (MDAs), and county governments owe suppliers for goods and services rendered. However, tax liabilities are owed directly to the National Treasury via KRA.

Because these public finance units operate in strict institutional silos, a supplier cannot simply present a government voucher or decree to offset a tax bill. The resulting dynamic punishes commercial solvency:

  • Accounting Silos: KRA must collect taxes for the Consolidated Fund regardless of whether a separate Ministry or County Government has defaulted on its payables.
  • Jurisdictional Conflicts: A debt owed by a County Government cannot easily be offset against a tax obligation enforced by the National Government without a formalized framework.
  • Compounding Penalties: While pending bills sit uncollected for months or years, statutory tax penalties and interest continue to accrue uninterrupted against the supplier.

Many of the legal instruments needed to solve this problem already exist in commercial contract law, but they must be institutionalized across public finance. Fixing this requires a clear, general mechanism, written directly into law, so that when the State owes a supplier and the supplier owes the State, the two debts are netted automatically as of right.

This is not a plea for tax waivers or discounts. The proposal is straightforward: pay the tax in full, using money the State already owes the business.

To operationalize a netting system, three key legislative and administrative reforms are essential:

  • Amendments to Public Finance Laws: Modifying the Public Finance Management (PFM) Act and the Tax Procedures Act to grant taxpayers a statutory right of set-off for verified public debts against tax exposures.
  • A Centralized Verification Clearinghouse: Creating an automated digital platform where verified government payables are registered, cross-matched, and converted into official tax offset certificates.
  • Provisional Tax Compliance Certificates: Mandating the immediate issuance of provisional TCCs to any business holding verified state debt that meets or exceeds its tax liabilities, instantly restoring its ability to trade and secure new work.

Allowing verified pending bills to offset tax liabilities would resolve billions in uncollectible liabilities on paper while breathing life back into the private sector. It requires no fresh liquidity from Treasury, only the administrative will to connect two ledgers that should never have been kept apart.