[2025] KETAT 196 (KLR)

Africa Gas and Oil Company Limited v Commissioner of Domestic Taxes (Tax Appeal E504 of 2024) [2025] KETAT 196 (KLR) (Commercial and Tax) (14 March 2025) (Judgment)

Neutral citation: [2025] KETAT 196 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E504 of 2024

E.N Wafula, Chair, Cynthia B. Mayaka, G Ogaga, RO Oluoch & AK Kiprotich, Members

March 14, 2025

Between

Africa Gas And Oil Company Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in Kenya that owns and operates a liquefied petroleum gas (LPG) terminal which handles the wholesale importation and exportation of LPG within the East African region.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya and the Kenya Revenue Authority is mandated with the administration and enforcement of various revenue laws .

3. On 15th January, 2024, the Appellant made an application for refund of VAT amounting to Kshs. 94,766,757. 00 for the period May 2022, being excess input tax arising from zero-rated supplies.

4. On 12th February, 2024, the Appellant made a further application for refund of VAT amounting to Kshs. 1,415,018. 00 for the period May 2023, which was similarly excess input tax arising from zero-rated supplies.

5. On 15th April, 2024, the Respondent issued two refund rejection orders, rejecting the Appellant's refund applications for both May 2022 and May 2023. The reason indicated in the rejection orders was that in both periods, LPG was taxable at 8%.

6. The Appellant being dissatisfied with the decision lodged its Notice of Appeal on 15th May, 2024.

The Appeal 7. The Appeal is set out in the Memorandum of Appeal dated 29th May, 2024 and filed on the same date raising the following grounds:i.That the Respondent erred in law and in fact in failing to consider that the Appellant made zero-rated supplies in May 2022 and May 2023. ii.That in declining to allow the refunds claimed by the Appellant, the Respondent violated Section 17(5) of the VAT Act (2013), which entitles a taxpayer to a refund of excess input tax arising from the making of zero-rated supplies.iii.That the Respondent erred in law and in fact by failing to issue fair, lawful and reasonable refund decisions, violating the Appellant's right to fair administrative action under Article 47 of the Constitution.

Appellant’s Case 8. The Appellant’s case is premised on :i.Its Statement of Facts dated and filed on 29th May, 2024. ii.Its written submissions dated 24th January, 2024 and filed on 27th January, 2024.

9. That on 15th January, 2024, the Appellant made an application for refund of VAT amounting to Kshs. 94,766,757. 00 for the period May 2022, being excess input tax arising from zero-rated supplies.

10. That thereafter, it made a further application for refund of VAT amounting to Kshs. 1,415,018. 00 for the period May 2023, which was similarly excess input tax arising from zero-rated supplies.

11. That subsequently, on 15th March, 2024, vide an email, the Respondent requested for invoices relating to the application for refund for the period May 2023.

12. That the Appellant sent the requested documents on the same date and provided further documentation as per the Respondent's additional requests for information and clarification. The Appellant stated that it attached this correspondence to its Appeal documents.

13. That notably, the Respondent did not request for any information on the refund application for May 2022 and therefore issued its decision on the basis of the application lodged on iTax together with the supporting documentation uploaded on iTax.

14. The Appellant averred that the zero-rated supplies referred to in its refund application as well as in the invoices provided related to the exportation of goods and the transportation of the same to the Appellant's customers within the East African region.

15. That on 15th April, 2024, the Respondent issued two refund rejection orders, rejecting the Appellant's refund applications for both May 2022 and May 2023. That the reason indicated in the rejection orders was that in both periods, LPG was taxable at 8%.

16. That on 15th April, 2024, the Respondent further sent an email to the Appellant relating to the refund application for the period May 2023 indicating that “the claim has been rejected because in the above period, LPG taxable rate was reduced from 16% to 8% and not zero rated as per Finance Act of July 2022. ”

17. That whereas the Respondent’s position is correct in terms of local sales before 30th June, 2022 where LPG was standard-rated and between 1st July, 2022 and 30th June, 2023 where the rate had been reduced to 8%, the Respondent failed to consider that the Appellant actually made zero-rated supplies during the two periods, to wit, the exportation of taxable goods.

18. That the following provisions of the Value Added Tax Act (2013) are instructive as to the zero-rating of certain supplies:i)Section 5(2) (a) “(2) The rate of tax shall be-(a)in the case of a zero-rated supply, zero percent; or...”ii)Section 7(1)“Where a registered person supplies goods or services and the supply is zero rated, no tax shall be charged on the supply, but it shall, in all other respects, be treated as a taxable supply.”iii)Second Schedule, Part A“Where the following supplies, excluding hotel accommodation, restaurant or entertainment services where applicable, take place in the course of a registered person's business, they shall be zero rated in accordance with the provisions of Section 7- 1. The exportation of goods.20. The transportation of goods originating from Kenya to a place outside Kenya.”

19. That the Appellant exported goods to its customers in Uganda, Rwanda and Ethiopia. That these constituted zero-rated supplies of goods in the course of business by virtue of Paragraph 1 of Part A of the Second Schedule to the VAT Act (2013).

20. The Appellant submitted that it provided all the invoices issued in May 2022 and May 2023 which constituted zero-rated supplies made during the two periods. That it annexed these invoices as well as schedules summarizing the contents of the invoices to its pleadings.

21. That the Appellant duly exported the LPG sold to its customers outside Kenya and annexed the Customs entries for the exported consignments to its pleadings.

22. The Appellant stated that the Respondent's conclusion that the Appellant's supplies were either standard-rated or taxable at 8% was therefore erroneous and it is clear that it did not consider the nature of the supplies at all.

23. That the Respondent violated the provisions of Section 17(5) of the VAT Act which provides that where the amount of input tax deducted by a person registered for VAT in respect of a tax period exceeds the amount of output tax due for the period, and such excess input tax arises from making zero-rated supplies, then the excess shall be paid to the registered person by the Commissioner.

24. That there was excess input tax for the two periods, which is clear from the Appellant's VAT returns. That further, in view of the fact that the excess arose from zero-rated supplies made by the Appellant, the Respondent ought to have refunded the amounts to the Appellant in line with Section 17(5) of the VAT Act (2013).

25. The Appellant argued that the Respondent's rejection of its refund claims was without justifiable reason and based on a failure to understand the zero-rated nature of the supplies made by the Appellant, which led to an unreasonable rejection of the refund claims.

26. That it is plainly clear from the Value Added Tax Act, 2023, that the exportation of goods is zero-rated. That as such, the Respondent's conclusion that the Appellant did not make any zero-rated supplies is erroneous and misguided and as such, the refund decisions were unfair and unjustified.

27. That Section 17(5) of the VAT Act is in line with the understated provision of the OECD International VAT/GST Guidelines:“1. 9. The application of the destination principle in VAT achieves neutrality in international trade. Under the destination principle, exports are not subject to tax with refund of input taxes (that is, "free of VAT" or “zero-rated ") and imports are taxed on the same basis and at the same rates as domestic supplies. Accordingly, the total tax paid in relation to a supply is determined by the rules applicable in the jurisdiction of its consumption and all revenue accrues to the jurisdiction where the supply to the final consumer occurs.”

28. That both requirements for seeking a refund under Section 17(5) of the VAT Act (2013) as outlined below were met and the Respondent ought to have allowed the application for refund. The requirements are as follows:i.Was there excess input tax after the deduction of output tax? That in this case, the input tax for May 2022 exceeded the output tax by Kshs. 94,766,757. 00 and in May 2023, the excess input tax was Kshs. 1,415,018. 00. ii.Did the excess input tax arise from the taxpayer making zero-rated supplies? That the Appellant indeed made zero-rated supplies, to wit, the exportation of goods. That this is plainly clear from the invoices and export entries.

29. The Appellant relied on the following cases to support its arguments:i.Tata Chemicals Magadi Limited v Commissioner of Domestic Taxes (Large Taxpayers) (Petition 476 of 2013) [2014]KEHC 7797 (KLR) where the Court stated the following:“The duty imposed on the respondent to process and pay VAT refunds is, for purposes of this petition, to be found in the applicable Value Added Tax Act (Repealed). The petitioner exports to foreign markets hence its business falls under the Fifth Schedule to the Act. The export of its goods is zero rated hence the petitioner charges 0% VAT on the goods its supplies. Under section 11(2) of the Act, it is provided that where, by reason of making zero rated supplies, there is no output tax to accord the supplier a set-off, the Commissioner shall refund to the affected supplier the input tax incurred by such a supplier. A supplier, like the petitioner, who incurs input tax is entitled to excess input tax under section 11(2)(a) of the Act. This, as I stated earlier, is why the petitioner is continuously in a credit position.”ii.TP Kenya Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal 1389 of 2022) [2024] KETAT 277 (KLR), where this Honorable Tribunal stated the following on the requirements to be fulfilled to qualify for a VAT refund:“49. From the foregoing, it is clear that in order to qualify for a VAT tax refund, the tax payer has to demonstrate that its input tax that may be deducted for a certain tax period exceeds the amount of output tax due for the said period, the excess arises from inter alia making zero rated taxable supplies, and the taxpayer lodges the said claim for refund of the excess tax within twenty-four months from the date the tax becomes due and payable. These are the only requirements to be fulfilled by a taxpayer to warrant a VAT tax refund.”iii.Ericsson Kenya Limited v Attorney General and Others Nairobi Petition No. 506 of 2013 (2013) eKLR, where the Court considered the responsibility of the Commissioner when considering refund applications, in light of the Constitution stating as follows:“(49)Whether the respondents acted in accordance with Article 47 of the Constitution is a question of fact which calls for an examination of the circumstances under which the petitioner's refund claims were dealt with. The Court is not concerned with whether the petitioner is entitled to the amount but whether the process afforded was one that complied with the dictates of Article 47 of the Constitution. In considering the circumstances, it is important to recall that the fact that a taxpayer has lodged a refund claim in accordance with the VAT Act and regulations does not discharge the respondents from the responsibility of examining the claim and confirming that it meets the requirements of the law. The Commissioner, when processing the claim, is not merely a conveyor belt performing a perfunctory exercise. He is required to examine and verify the claim and where irregularities, fraud or other deficiencies are discovered draw the petitioner's attention to them. The Commissioner is also entitled to call for further information. if necessary, to satisfy himself that the claim meets the legal threshold for payment.”

30. That applying the above decisions, the Respondent ought to have communicated any issues or deficiencies identified during the review process to the Appellant, and called for any information necessary to verify the Appellant's claim. That instead, the Respondent simply concluded that the Appellant's claim was unjustified since the local sale of LPG was subject to VAT at either the standard rate or at 8% during the periods in question. That therefore, the Respondent did not consider the fact that the Appellant had in fact made exports of LPG, which were zero-rated under the VAT Act.

31. The Appellant argued that the Respondent's actions were therefore in violation of the Appellant's right to fair administrative action, and resulted in an unfair and unjustified decision, declining to allow the Appellant's refunds, which it is duly entitled to.

32. That the totality of the foregoing is that the Respondent's rejection of the Appellant's refund claims was without justifiable reason and based on a failure to understand the zero-rated nature of the supplies made by the Appellant, which led to an unreasonable rejection of the refund claims.

Appellant’s Prayers 33. On the basis of the arguments above the Appellant prayed for the following:i.That the Appeal be and is hereby allowed.ii.That the Respondent's refund decisions issued on 15th April 2024 be and are hereby set aside.iii.That the costs of the Appeal be awarded to the Appellant.iv.Any other or further remedies that the Tribunal deems just and reasonable.

Respondent’s Case 34. The Respondent’s case is premised on the following:i.Its Statement of Facts dated and filed on 28th June, 2024. ii.Its written submissions dated 13th December, 2024 and filed on 12th February, 2025.

35. That the genesis of the dispute is that the Appellant filed an application for VAT Refund on the iTax system for the period May 2022 dated 15th January, 2024, and for May 2023 made on 12th February, 2024 on the basis of excess input tax resulting from zero rated supplies.

36. That the Respondent analyzed the refund claims to check the validity of the claim, and to confirm whether the Appellant had made any zero-rated sales in the period under claim as provided by Section 17(5) of VAT Act 2013, which analysis showed that the Appellant had declared local zero rated sales under part D1 of its Value Added Tax monthly return for both claim periods.

37. That during the analysis, the Respondent vide an email dated 15th March, 2024, requested the Appellant to provide a detailed schedule of local zero-rated sales as declared in its VAT3 return for the period May 2023.

38. That the Appellant provided a schedule of the lumped up local zero-rated sales for VAT refund claim for the period May 2023 with attached invoices from which the Respondent noted that the Appellant made a wrong classification of the LPG sales because in May 2022 and May 2023 the local sale of LPG was taxable at the rate of 8%.

39. That in light of the above, the Respondent rejected the Appellant's claims on 15th April, 2024 on the basis that the local sale of LPG was not zero rated in May 2022 and May 2023 as per the Finance Act 2022.

40. The Respondent refuted the contentions advanced by the Appellant in its Memorandum of Appeal and Statement of Facts and averred that contrary to the Appellant's contention in Ground 1 of the Appeal, the Respondent pleads that it lawfully rejected the Appellant's refund claim as the Appellant was not able to demonstrate that it did not make any zero-rated supplies during the period claimed.

41. That the Respondent charged VAT on the supplies on the basis of Section 5 of the Value Added Tax Act which provides for the charge of Value Added Tax on a taxable supply, the importation of taxable goods and on a supply of imported taxable services at the rate of 0% in the case of a zero-rated supply or 16% in any other case.

42. That in the instant case, the Appellant's principal activity is the importation and sale of liquefied petroleum gas (LPG) which prior to the Finance Act, 2022 was Vatable at 16%.

43. That Section 24 of the Finance Act 2022 amended Section 5 of the Value Added Tax Act with regards to the supply of LPG as follows;“Section 5 of the Value Added Tax Act, 2013 is amended-(a)in subsection 2 by inserting the following new paragraph immediately after paragraph(aa)-(ab)in the case of the supply of liquefied petroleum gas including propane, eight percent;”

44. That from the foregoing, the Respondent pleaded that the Second Schedule of the Value Added Tax Act which provides for zero-rated supplies was amended to include liquified petroleum gas by Section 38 of the Finance Act 2023.

45. That the Appellant's supplies being LPG therefore became a zero-rated supply on 1st July, 2024 thus the Appellant was not proper in law in declaring their sales as local zero-rated sales under Part D1 of Value Added Tax monthly return for both claim periods of May 2022 and May 2023.

46. The Respondent averred that the tax legislation empowers it to use the information available to it to assess a taxpayer's tax position. That in so doing, the Respondent is allowed to embrace a range of methods and techniques for determining and verifying a taxpayer's income.

47. The Respondent relied on Section 24 of the Tax Procedures Act, which requires the Appellant to submit a tax return in the approved form and manner prescribed by the Respondent. The Section states as follows:“(2)The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

48. That in the instant case, the Appellant alleged that it provided exportation services of LPG but failed to provide invoices and the relevant export entry numbers and exit information required which necessitated the Respondent to use the information available to it in making the decision.

49. That in response to Ground 2 of the Appeal, the Respondent averred that it did not act contrary to Section 17(5) of the VAT Act as the basis of the Respondent's decision is that the Appellant did not make any zero-rated supplies warranting a refund.

50. The Respondent maintained that the Appellant lies in contravention of Section 30 of the Tax Appeals Tribunal Act and Section 56 (1) of the Tax Procedures Act which places the burden of proof in tax matters on the Appellant. Section 56 (1) of the Tax Procedures Act provides that;“The burden shall be on the taxpayer to prove that a tax decision is wrong/incorrect.”

51. It is the Respondent's case that the Appellant's contention as laid out in its Memorandum of Appeal and Statement of Facts, unless where in agreement by the Respondent, are unfounded in law and not supported by evidence.

52. The Respondent relied on the following cases:i.Solinic East Africa Limited v Commissioner of Domestic Taxes (Tax Appeal 950 of 2022)[2023] KETAT 958 (KLR) where the Tribunal took into account the amendment effected under Section 27 (xxv) of the Finance Act 2021 alongside its tax implication to VAT,ii.Prima Rosa Flowers Limited versus Commissioner of Domestic Taxes [2019]e KLR where the High Court relied on the case of Mulherin versus Commissioner of Taxation [2013] FCAFA 115 in which the Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that the assessment was excessive by adducing positive evidence, which demonstrates the taxable income on which ought to have been levied.iii.Ushindi Exporters Limited versus Commissioner of Investigation and Enforcement (Tax Appeals Tribunal No 7 of 2015) where the Tribunal held that the burden of proving that the tax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the Tax Appeals Tribunal Act.

53. The Respondent submitted that the Appellant was granted a chance to avail documents in support of the application of refund and was furnished with reasons why the application was rejected.

54. That the Appellant's refund application was properly rejected. The Respondent further submitted that the Appellant failed to provide proof in support of its application. That therefore, the Appellant has thus not demonstrated that the Appeal is merited.

Respondent’s Prayers 55. The Respondent prayed as follows;i.That the Respondent's VAT claim rejection order dated 15th March, 2024 for taxes amounting to Kshs. 92,766,757. 00 for May 2022 and Kshs. 1,415,018. 00 for May 2023 was proper in law and be upheld.ii.That the Appeal be dismissed as the same lacks merit.iii.That costs be awarded to the Respondent.

Issues For Determination 56. The Tribunal upon considering the parties’ pleadings and the written submissions by the parties has determined that the issue crystallizing for its determination is:Whether the Appellant’s is entitled to a VAT refund.

Analysis And Findings 57. The Appellant in the matter applied for VAT refunds to the Respondent on the basis of its position of offering zero rated exports of LPG (liquid petroleum gas) to its East African clients.

58. The Respondent rejected the refund claims vide refund rejection orders dated 15th April 2024 on the basis that the Appellant’s supplies were vatable at 8% and not zero (0) percent.

59. The Tribunal notes, from the Appellant’s pleadings, that the refund application acknowledgment receipt dated 15th January, 2024, from iTax, depicts the refund type made by the Appellant to be “Excess input tax resulting from zero rated supplies” while the refund claim reason is stated to be “Excess input tax resulting from zero rated supplies”.

60. The Tribunal further notes that the refund application acknowledgment receipt dated 12th February, 2024, from iTax, depicts the refund type made by the Appellant to be “Excess input tax resulting from zero rated supplies” while the refund claim reason is stated to be “Excess input tax resulting from zero rated supplies”.

61. Section 17(1) of the VAT Act states clearly the compliance requirements to enable the Appellant make a refund claim and the same states as follows:“Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies”

62. Additionally, the Appellant has to supply the documents to the Respondent for a smooth completion of the claim process. This is well laid down in Section 17(3) of the VAT Act which states as follows;“The documentation for the purposes of subsection (2) shall bei.An original tax invoice issued for the supply or a certified copyii.A customs entry duly certified by the proper officer and a receipt for the payment of taxiii.A customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auctioniv.A credit in the case of input tax deducted under section 16(2)v.A debit note in the case of input tax deducted under section 16(5) orvi.in the case of a participant in the Open Tender System for the importation of petroleum products that have been cleared through non-bonded facility, the custom entry showing the name and PIN of the winner of the tender and the name of the oil marketing company participating in the tender…”

63. Further, Section 17(5) provides as follows regarding refund of excess input tax:“Where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess shall be carried forward as input tax deductible in the next tax period:Provided that any such excess shall be paid to the registered person by the Commissioner where—(a)such excess arises from making zero rated supplies;…”

64. The Appellant provided the following documents to support its excess input tax refund claims:i.The two refund acknowledgement orders from iTax demonstrating that it was making a claim based on zero rated supplies.ii.Invoices relating to the refund applications.iii.Email correspondences between itself and the Respondent whereby it submitted invoices for transit customers, invoices for local supplies as requested by the Respondent and supporting invoices for inputs highlighted by the Respondent.iv.Tax invoices for its clients in Addis Ababa, Kampala and Kigali for May 2022 and May 2023,v.Schedules of deliveries to clients in East Africa for May 2022 and May 2023. vi.Corresponding Customs entries depicting the Appellant as the exporter and the consignees in various East African Countries.vii.Its VAT return for May 2022 depicting the excess input VAT.viii.A schedule of general rated sales and output tax on sales for May 2022. ix.A schedule of purchases and input tax on purchases for May 2022. x.A computation of excess input tax due for May 2022. xi.Its VAT return for May 2023 depicting the excess input VAT.xii.A schedule of general rated sales and output tax on sales for May 2023. xiii.A schedule of purchases and input tax on purchases for May 2023. xiv.A computation of excess input tax due for May 2023.

65. The Tribunal confirms from the above submitted documents by the Appellant to the Respondent that it fulfilled the requirements of Section 17 of the VAT Act as far as support for input tax is concerned.

66. Once the Appellant satisfies these requirements, the Respondent ought to make the refund accordingly.

67. The Tribunal therefore finds that the Respondent’s claims that the Appellant neither provided documents as per Section 17 of the VAT Act nor supported its claims for excess VAT input tax to be unfounded as the Appellant has provided the copies of these documents to the Tribunal and further demonstrated that it provided the same to the Respondent.

68. The Respondent was therefore not right in rejecting the Appellant’s applications for the VAT refunds as the Appellant provided the documentation required by law to support its claims.

Final Decisions 69. The Tribunal on the basis of the foregoing analysis finds that the Appeal is merited and accordingly makes the following Orders:a.The Appeal be and is hereby allowedb.The Respondent’s VAT claim rejection Orders dated 15th March, 2024 be and are hereby set aside.c.The Respondent to process the Appellant’s VAT refund claim within Ninety (90) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

70. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 14TH DAY OF MARCH, 2025ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGLORIA A. OGAGA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBER