Tribunal draws line in the sand for KRA’s VAT claims
posted by : Admin DOQ : 2020-04-20 19:07:39
Around 2016/2017, the Kenya Revenue Authority (KRA) purportedly unearthed a fraudulent “missing traders scheme”, under which it is claimed that a number of businesses had been established to generate invoices and Electronic Tax Register (ETR) receipts that were sold to willing purchasers at a portion of the face value of the invoices/ receipts.
The purchasers would then use the invoices and ETR receipts to inflate their Cost of Sales and input Value Added Tax (VAT), thereby reduce their Corporate Tax and VAT liabilities.
In Shreeji Enterprises (K) Ltd versus Commissioner of Investigations & Enforcement at the tax appeals tribunal, the KRA submitted that Shreeji Enterprises was aware of a fraudulent scheme and had benefited from it, thereby occasioning loss of tax revenue to the Government. The KRA also alleged that the appellant had failed to provide some requested documents to prove transactions worth Sh4.8 billion, and therefore issued VAT and corporate tax assessments totalling Sh3.7 billion (VAT of Sh1 billion and corporate tax of Sh2.7 billion).
Shreeji Enterprises countered these assessments by providing acknowledgement of goods received from the 17 alleged “missing traders” (probably Goods Received Notes) together with invoices to which ETR receipts had been attached, which should have served as proof that the appellant had genuinely transacted with its suppliers.
Shreeji noted that the suppliers’ personal identification numbers (PINs) were properly recognised in iTax, meaning that the suppliers had been registered by the KRA.
The appellant’s VAT returns (through which the input VAT had been claimed) had not been rejected by the iTax system, meaning the KRA duly recognised the suppliers’ PINs. Additionally, since the ETR regime is administered by the KRA, and all ETR receipts are a product of its ETR system, the appellant argued that it was not required by law to carry out any further due diligence on the ETR receipts.
The KRA tendered no evidence at all to substantiate its claim that the appellant had dealt with “missing traders”. Neither did it produce any evidence that the appellant had merely purchased the invoices or ETR receipts that formed the basis of claiming input VAT.
In its judgment issued on March 25 this year, the Tax Appeals Tribunal (TAT) ruled that it is irrelevant for the person claiming input VAT whether the (output) VAT has or has not been paid to the public purse —and especially so if the claimant was (without knowing or having any means of knowing) participating in a carousel fraud.
Further, since the appellant had discharged its obligation of paying the input VAT (to its suppliers) and possessed adequate evidence of purchase, it was entitled to claim the input VAT. The only obligation placed on the appellant by law was to check that it had purchased from a VAT-registered supplier and that the supplier has a registered ETR.
More interestingly, the TAT stated that it cannot have been the intention of the legislature to put a taxpayer in a position where he is required to produce any document that the KRA requires. In requesting for documents, the KRA needs to be guided by reasonableness and the nature and circumstances of the taxpayer, so as not to request what a taxpayer does not have. And to crown it all, while it is generally the taxpayer’s obligation to prove that tax was paid or that an assessment is incorrect, where the KRA pleads that fraud was committed, the burden of proof (which is higher than the normal “balance of probability” standard that applies in a typical civil case) shifts from the taxpayer to the KRA.
Since the KRA was found not to have satisfactorily discharged the burden of proof relating to alleged fraud, the tribunal held that the disallowing of the appellant’s input VAT was erroneous. If VAT was not remitted to the KRA, it was upon t
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e taxman to pursue its VAT-registered suppliers for this tax, as opposed to demanding it from the appellant. The corporate tax assessments were also vacated by the tribunal.
Ernie Campbell & Co (K) Ltd versus Commissioner of Domestic Taxes is quite similar to the Shreeji Enterprises appeal. The KRA also claimed that Ernie Campbell & Co had used invoices purchased from “missing traders” to reduce its corporate tax and VAT liabilities.
In its judgement issued on March 27, the TAT ruled that the KRA did not prove the allegation of fraud. The appellant had submitted invoices from its suppliers to support its case, which KRA rejected. But the KRA had failed to identify any other document that the Ernie Campbell & Co could have provided in order to support its arguments.
These timely judgements confirm that a taxpayer is not required, by law, to ensure that his or her supplier remits the collected VAT to the government. A taxpayer is merely required to confirm, through interacting with the iTax system, that his or her supplier is VAT-registered.
It is equally important that in interacting with the KRA during an audit or investigation, the taxpayer calls for reasonability in the taxman’s request for documentation. The tribunal seems to be guiding the KRA officers that they should not expect every business to maintain specific types of documents. Based on a taxpayer’s circumstances, the KRA should be flexible to accommodate documents that are in the taxpayer’s possession, to evaluate whether or not a transaction indeed occurred.
Finally, the tribunal’s judgments remind taxpayers of their duty to prove that tax was paid or that an assessment issued by the KRA is erroneous. Where the KRA alleges that a taxpayer committed some fraud, the burden to prove this fraud shifts to it, at which point it is required to provide appropriate evidence to support the allegation.