One of the important changes introduced by the Finance Act, 2026 is the repeal of Section 23 of the Income Tax Act, which dealt with transactions designed to avoid tax liability.
Taxpayers should not interpret the repeal of Section 23 as the removal of Kenya's anti-tax-avoidance rules. Instead, a broader anti-avoidance framework has been introduced under Section 18A of the Tax Procedures Act (TPA).
What Was Former Section 23?
Former Section 23 of the Income Tax Act provided an anti-avoidance rule targeting transactions or arrangements designed to avoid tax liability. The Finance Act, 2026 has now repealed Section 23.
The important change is that anti-avoidance enforcement is being centralised under the Tax Procedures Act, rather than relying on separate anti-avoidance provisions under different tax laws.
What Does Section 18A Do?
Section 18A of the Tax Procedures Act gives the Commissioner powers to address tax avoidance schemes. Where a taxpayer enters into an arrangement primarily aimed at obtaining a tax benefit—such as reducing tax liability, delaying payment of tax, obtaining a tax refund, or obtaining another undue tax advantage—the Commissioner may challenge the arrangement.
Where the arrangement is determined to be a tax avoidance scheme, the taxpayer may be reassessed as though the arrangement had not been undertaken.
Tax Planning vs Tax Avoidance
Tax Planning
A business is allowed to arrange its affairs efficiently and take advantage of legitimate deductions, exemptions, incentives, and other provisions provided by law. Restructuring a genuine business transaction for legitimate commercial reasons—such as financing, operational efficiency, risk management, or business expansion—is tax planning.
Tax Avoidance
Where a complicated arrangement has little genuine commercial substance and its principal reason is to reduce tax liability, Section 18A becomes relevant. The Commissioner can examine the arrangement and, if it is determined to be a tax avoidance scheme, reassess the taxpayer as if the arrangement had not been undertaken.
Simply giving a transaction a particular legal form does not necessarily protect an arrangement whose underlying purpose is to obtain an undue tax advantage.
What Tax Benefits Can Be Targeted?
- Reducing tax liability
- Delaying payment of tax
- Obtaining tax refunds
- Obtaining other undue tax benefits
The framework uses broad definitions of “scheme” and “tax benefit,” allowing the Commissioner to consider a wide range of arrangements and information when identifying potential tax avoidance.
Taxpayer Safeguards
The new framework does not simply give the Commissioner unlimited discretion.
- Written reasons: Where the Commissioner makes a determination under Section 18A, written reasons must be provided within 30 days.
- Private rulings: Taxpayers can seek private rulings for complex transactions, helping businesses obtain greater certainty before implementing arrangements with significant tax implications.
What Does This Mean for Businesses?
The repeal of Section 23 does not mean businesses are free to structure transactions solely to avoid tax. Complex transactions should have:
- A genuine commercial purpose
- Proper documentation
- Economic substance
- A clear business rationale
- Proper accounting and tax treatment
Businesses should be able to explain why a transaction was undertaken, not merely the tax benefit arising from it. Where tax treatment is uncertain, taxpayers should consider professional tax advice and, where appropriate, a private ruling.
The Big Takeaway
Section 23 — Repealed
Section 18A TPA — Anti-Avoidance Framework
The law has moved from a specific anti-avoidance provision under the Income Tax Act to a broader, centralised anti-tax-avoidance framework under the Tax Procedures Act.
Tax planning is legitimate. Artificial arrangements created primarily to obtain undue tax advantages can be challenged.
Understand the law. Plan legitimately. Document your transactions. Stay compliant.
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