[2023] KETAT 126 (KLR)

Bluejay Limited v Commissioner of Domestic Taxes (Tribunal Appeal 255 of 2022) [2023] KETAT 126 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 126 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 255 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

March 17, 2023

Between

Bluejay Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a company incorporated and registered in Kenya. It is a registered bookmaker with Betting, Licensing and Control Board and deals with betting and gaming on an online platform and uses Betway as its trade name.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, in the Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. Through a letter dated 29th December 2020, the Respondent informed the Appellant of the introduction of the Digital Service Tax (DST) under the Finance Act, 2020.

4. In the said letter the Respondent indicated that the DST was to be levied on income accrued in or derived from Kenya through a digital market place. The Appellant was identified as a provider of digital services subject to the DST.

5. In a letter dated 11th January, 2021, the Appellant informed the Respondent that the betting services should not be subjected to DST since the income earned by the Appellant had been subjected to withholding tax.

6. On 19th February, 2021 the Respondent wrote to the Appellant setting out what was the misconceived interpretation of Regulation 4 of the DST Regulations 2020 and informing the Appellant that the DST was applicable on stakes.

7. The Appellant wrote to the Respondent on 22nd February 2021 and 5th April 2021 setting out the correct interpretation of the application of the DST in the Betting and Gaming industry.

8. The Respondent issued a tax assessment notice - DST dated 14th October, 2021 for Kshs. 254,248,700. 00 for additional tax relating to the period January 2021 to June, 2021.

9. The Appellant objected to the additional assessment vide a letter dated 12th November, 2021 and the Respondent issued an objection decision on 31st January, 2022 confirming the additional assessments of 14th October, 2021.

10. The Appellant being dissatisfied with the Respondent’s decision filed a Notice of Appeal dated 28th February, 2022.

The Appeal 11. The Appeal is set out in the Memorandum of Appeal dated 11th March 2022 and filed on the same date raising the following grounds:i.The Respondent erred in law and in fact by exceeding its statutory powers in issuing an objection decision dated 31st January 2022 with respect to Digital Service Act for the tax period 1st January 2021 to 30th June 2021 by disregarding and dismissing our valid grounds of objection under Section 51 (11) of the TPA, 2015. ii.The Respondent erred in law and fact in determining that the gross transaction value is the stake that is placed by the punter. In doing so, the Respondent erred in fact by failing to appreciate the unique trade that is in the gaming industry.iii.The Respondent erred in fact by failing to find that the income subject to digital service tax in the betting and gaming industry is the gross gaming revenue and not the stakes.iv.The Respondent erred in law and fact by failing to apply the correct interpretation of Regulation 4 of the Income Tax (DST) Regulations, 2020. In doing so, the Respondent failed to tax the actual income derived or accrued by the Appellant as required by the Income Tax Act.

Appellant’s Case 12. The Appellant’s case is set on:a.The Statement of Facts dated 11th March 2022 and filed on the same dayb.The written submissions dated 31st August 2022 and filed on 2nd September 2022.

13. The Appellant raised three issues for determination in support of its case as hereunder:

a. What is taxable income under the Income Tax Act 14. The Finance Act, 2020 amended the Income Tax Act to introduce Section 12E which provides that DST shall be applicable on income from the provision of services which are derived from or accrued in Kenya through a digital marketplace.

15. That Section 3(2) of the Income Tax Act provides for imposition of taxes in specific income(s).

16. The Appellant argued that, as per the holding in the case of Stanley Waweru & 3 Others v The National Assembly and 2 Others (Petition E005 of 2021), by dint of Section 3 as read with Section 15(1) of the Income Tax Act, Income Tax is only chargeable on gains or profit. Section 3(2) of the Income Tax Act as the operative Section provides a basis upon which an income tax is levied on income in gain or profit.

17. That pursuant to the above authority and in the circumstances, it is only gains or profits under Section 3(2) of the Income Tax Act which can be subject to DST. Given that the Income Tax Act does not define “income”, the Appellant relies on the rule of strict interpretation of taxation statutes, being Section 3(2) of the Income Tax Act which is the rule by which courts are required to interpret and apply tax laws, the charging provision.

18. The Appellant also cited the case of Mark Obuya & Others vs. Commissioner of Domestic Taxes [2014] eKLR where it was held that “The manner in which the tax is defined, administered and collected is a matter for Parliament to define and it is not for the court to interfere merely because the legislature would have adopted a better or different definition of the tax or provided an alternative method of administration or collection”. That the law under Section 3(2) is clear.

19. The rule of strict administration of statutes demands that taxing legislation ought to be strictly construed and that if the language of the statute is clear, words must be understood in their plain and ordinary meaning. This means that there is no room for intendment in the interpretation of the tax laws. This position, the Appellant argues, was accepted in the case of Mount Kenya Bottlers Ltd & 3 Others vs. A.G & 3 Others [2019].

20. The Appellant also submitted that the definition of the term “income” to determine the tax base for DST as intended by Section 12E of the Income Tax Act would be as defined by the Cambridge Dictionary to mean “money that is earned from doing work or received from investments” or “a company’s profit in a particular period of time” or in the Merriam-Webstar dictionary as “a gain or recurrent benefit usually measured in money that derives from capital or labour”

21. The Appellant stated that the only reasonable and clear interpretation of “income” as guided by the Act for the purposes of the DST would be gains or profit actually earned by the Appellant from its betting and gaming activities.

b. Whether the Tribunal should find that the Gross Gaming Revenue as the Income subject to the DST. 22. That the Respondent argued that DST is chargeable on the Gross Transaction Value which means the total value of the stake placed by the punters and not the income received by the tax payer. Is the stake /wager placed by the punter in a betting game considered revenue or income for the Bookmaker? The Appellant thinks not and urges the Tribunal to reject the Respondent’s interpretation.

23. That Regulation 4 of the Income Tax (Digital Service Tax) Regulations, 2020 provides that:“Digital service tax shall apply to the income of a resident or non- resident person derived from or accrued in Kenya from the provision of services through a digital marketplace”.

24. That the clear intention behind the drafting of the DST Regulation is to tax income arising from provision of services. The Appellant on this relies on the case of Mount Kenya Bottlers Ltd vs. A.G And 3 Others.

25. The Appellant argued that having established that income tax is only chargeable on gains or profits, the Respondent misinterpreted the definition of “Gross Transaction Value” in the Finance Act 2020 to mean stakes.

26. The Appellant explained the process used by the industry for better understanding as follows:a.The stakes placed by the Punters are not deemed to be income of the Bookmaker until the outcome of the bets are fully determined. This is referred to as “settled wagers” of which the Punter may win (winning bets) or loose (loosing bets). The Appellant avers that the Bookmaker has no control of the digital market place (betting platform). The table below elaborates the process.Gaming Statistics Filed With The Regulator (bclb)for The Period Under ReviewPeriodSettled wagersLosing BetsWinning BetsWinningsPayoutsGGRJan-212. 423,468,423260,741,1242,162,727,299141,739,4302,304,466,729119,001,694Feb-212,332,174,542264,233,8722,067,940,670142,351,1042,210,291,774121,882,768March -212,826,075,942318,369,8882,507,706,054203,716,4042,711,422,458114,653,484April-212,768,697,013320,098,8872,448,598,126210,888,7172,659,486,843109,210,170May-213,337,843,964311,422,0493,064,421,915190,110,6933,254,532,608121,311,356June-213,135,873,698261,533,2832,874,340,415160,981,6963,035,322,111100,551,58716,862,133,5821,736,399,10315,125,734,4791,049,788,04416,175,522,523686,611,059b.In the event the Punter loses, the Bookmaker receives income, equivalent to the loosing bets amounting to Kshs. 1,736,399,103. 00 which the Appellant is in agreement that it is this income that is subject to DST.c.In the event that the Punter wins, he collects the amount staked (winning bets) for Kshs. 15,125,734,479. 00. d.Alongside the winning bets, the Punter is paid winnings amounting to Kshs. 1,049,788,044. 00 thereby making the total payment made to the Punters Kshs. 16,175,522,523. 00 also referred to as “Payout”. These winnings made part of the contributions made by the Bookmaker in the digital marketplace, which should be taken into consideration when determining the income received. The Appellant does not receive any income.e.The table below outlines the summary of the distribution of the income from the digital marketplace during the period under review.Final Outcome /distribution Of Gaming RevenueTotal RevenueBookmakerPunterSettled wagersLosing betsWinning BetsWithdrawn16,862,133,5821,736,399,10315,125. 734,479WHT SecWinningsWinningsWinnings351,049,788,044(1,049,788,044)1,049,788,04417,911,921,626GGR 686,611,059Payout 16,175,522,523Digital Market PlaceSubject to 1. 5% DSTWinnings are exempted from DST Sec 35 ITAf.The Appellant holds that it is unfair to ask the Bookmaker to pay tax on both the winning stakes and loosing stakes as demanded by the Respondent in their objection decision as no income was received by the Bookmaker in the case of winning bets.

27. The Appellant also relied on the International Financial Reporting Standards (IFRS) and stated that the same provides for the relevant standards to be relied upon in recognizing an entity’s revenue. It added that revenue is an important metric that is used to determine the outcome that a person makes in the ordinary course of their business activities in exchange for the provision of goods or services.

28. In the circumstance, a benefit will only accrue to the Appellant when the Punter loses. It’s not the case that once a customer stakes funds, this amount is deemed to be revenue for the Appellant. This is why the betting and gaming industry uses the term “Gross Gaming Revenue” to determine their revenue as the consideration received once a number of Punters have lost over a certain period of time. The Gross Gaming Revenue is therefore the actual income earned by the Appellant for which DST should be applicable.

29. The Appellant also considered the application of DST in other jurisdictions including United Kingdom, France and Italy and stated that the common aspect from the said jurisdictions is that DST is collected on revenue. The Appellant submitted therefore that the tax base for the DST is the income earned by the Appellant as consideration for its services and not any other amount as purported by the Respondent.

C. Whether the Tribunal should vacate the objection decision of 31st January 2022 30. The Appellant also submitted that without prejudice to the above submissions, that in the event that the Tribunal was to consider the argument by the Respondent that DST is imposed on the Gross Transaction Value which should be equated to stakes, it submitted that guidance ought to be provided by the primary statute being the Income Tax Act.

31. Where there appears to be inconsistency between the subsidiary law and the substantive Act, the High Court has held in Evans Kidero & 4 Others vs. Ferdinand Ndung’u Waititu & 4 Others [2014] and Stephen Kipkemoi Rutto Vs. Kenya School Of Law & Anor That The Substantive Act Supersedes The Regulations by virtue of the hierarchy of norms.

32. The Appellant also relied on the holding in W.E.C Lines Kenya Ltd vs. Commissioner of Domestic Taxes where the Court said “it is trite law that a subsidiary legislation, the Regulations in the instant case, cannot override the respective primary legislation, the VAT Act, 2013”.

33. Pursuant to the provisions of Section 12E of the Income Tax Act as the superseding law, DST is subject to the portion of the payment received by the Appellant as its “income/revenue”. The Courts have also determined that where there is any ambiguity in a taxing statute Act such ambiguity must be resolved in favour of the tax payer.

34. The Appellant also submitted that in its objection letter dated 12th November, 2021, it presented computation of tax liability for the period under review to demonstrate that the amount of DST demanded by the Respondent was in excess of the tax liability leading to an overpayment of Kshs. 214,890,059. 00 as indicated in the statement of facts.

35. That as DST is an advance tax, it means that by the year end the tax is already considered in the tax computation. By applying the DST tax as per the interpretation of the Respondent, on the basis of the stakes as opposed to the Gross Gaming Revenue, the tax payer shall be overpaying its tax obligations adversely affecting its liquidity and culminating in a need for a refund as provided for under Section 47(5) of the TPA.

36. The Appellant also submitted that Article 40 of the Constitution makes provision for the protection of the right to property and urges the Tribunal to also provide the same.

37. The Appellant also relied on the case of Unilever Ltd vs. The Commissioner of Income Tax to state that before the Commissioner can make the taxpayer shoulder a higher tax liability than he has in his returns, there should be evidence of tax fraud. No evidence has been produced by the Respondent to prove instance(s) of fraud.

38. The Appellant also stated that the principles of Public Finance call for the promotion of an equitable Society through fair, just and reasonable share of the tax burden. That it was on this basis that the Constitutional Court found the application of Minimum Tax unconstitutional as it forced the tax payer who made a loss to pay out of pocket. That the Appellant will be placed in the same position should the court not set aside the objection decision.

39. The Appellant also stated that the action of the Respondent was executed in bad faith, un-procedurally, unfairly and contrary to the rule of law. The Appellant argued that this is because despite engaging and providing documents to support the Appellant’s case, the Respondent disregarded the same and went on to issue additional assessments and an objection decision.

Appellant’s Prayers 40. The Appellant prayed for:a.The Appeal be allowed.b.The objection decision dated 31st January, 2022 with respect to Digital Service Tax period 1st January, 2021 to 30th June, 2021 be set aside in its entirety.c.That the Respondent’s assessment dated 14th October 2021 with respect to Digital Service Tax for Ksh. 254,248,700. 00 for the period 1st January, 2021 to 30th June, 2021 be set aside.d.That the Appellant’s objection dated 12th November 2021 be upheld.e.That costs of the appeal be awarded to the Appellant.

Respondent’s Case 41. The Respondent’s case is set on:-a.The Statement of Facts dated 8th April, 2022 and filed on the same dateb.The written submissions dated 8th November, 2022 and filed on the same date.

42. The Respondent raised only one issue for determination as stated here below:Whether the assessment of 14th October, 2021 and the subsequent objection decision dated 31st January, 2022 was proper and lawful.

43. The Respondent submitted that it is not in dispute that the Appellant provides digital services and therefore the gross transaction value will be the payment received as consideration for the services in line with the provision of Section 12E of the Income Tax Act and Regulation 4 and 6(1) (a) of the Income Tax (DST) Regulations, 2020 which in this case is the staked amount.

44. That under Section 12E of the Income Tax Act provides that notwithstanding any other provision of this Act, DST shall be payable by a non-resident person whose income from the provision of services is derived from or accrues in Kenya through a business carried out over the internet or an electronic network including through a digital marketplace.

45. That under Section 12E (2), a person subject to digital service tax shall submit a return and pay the tax due to the Commissioner on or before the twentieth day of the month following the end of the month in which the digital service was offered.

46. That Regulation 4 is to the effect that DST shall apply to the income of a resident or non-resident person derived from or accrued in Kenya from the provisions of services through a digital market place.

47. That Regulation 6(1) provides that DST shall be imposed on the gross transaction value of the digital service which shall be in the case of the provision of digital services, the payment received as consideration for the services.

48. That the Finance Act, 2020 in the Third Schedule, Paragraph 12 specified that the tax rate in respect of DST under Section 12E shall be 1. 5% of the gross transaction value.

49. The Respondent submitted that the gross transaction value of the stakes that were placed by the punters is liable to be taxed at 1. 5%.

50. The Respondent also submitted that the Appellant was liable to declare digital service from January 2021 to June 2021.

51. The Respondent states that the Appellant submitted the summary of the total sales, payouts and DST declared for the period January to February hence the assessment for the period is based on data provided by the Appellant.

52. That the Appellant declared DST on gross gaming revenue for the period January 2021 to June 2021 as opposed to gross stakes contrary to the DST guidelines of 2020.

53. The Respondent reiterated that the gross transaction value is the total amounts/stakes received by the Appellant and this was subjected to DST to compute the tax due and consequently confirmed the assessment.

54. The Respondent submitted that the objection decision was issued on merit upon review of the grounds of objection presented by the Appellant and urges the Tribunal to uphold the same. It also relied on the decision made in R v KRA Ex-Parte Bata Shoe Company (Kenya) Ltd [2014] eKLR.

55. The Respondent further submitted that the Appellant has failed to demonstrate how the Respondent was wrong in his confirmed assessments and on this issue relied on the decision in Joycott General Contractors vs. KRA (TAT 28 of 2018).

Respondent’s Prayers 56. The Respondent prayed that:a.The Appeal be dismissed with costsb.The objection decision dated 31st January 2022 be upheld.

Issues For Determination 57. The Tribunal upon considering all that has been presented by the parties was of the view that there is only one issue arising for determination namely:Whether the Assessment of The Respondent Of 14th October 2021 and The Consequent Decision Dated 31st January 2022 Was Proper and Lawful

Analysis And Findings 58. The DST (Digital Service Tax) is a creation of the provisions of Section 12E of the Income Tax Act which states that: -(1)Notwithstanding any other provision of this Act, a tax to be known as digital service shall be payable by a non-resident person whose income from the provision of services is derived from or accrues in Kenya through a business carried out over the internet or an electronic network including through a digital marketplace”.

59. The Regulations governing the implementation of the DST are laid out in Regulation 4 of the Income Tax (DST) Regulations, 2020 and the same state as follows:“Digital service tax shall apply to the income of a resident or non- resident person derived from or accrued in Kenya from the provision of services through a digital marketplace”.

60. Notwithstanding the fact that the parties did not raise this issue, the law on the liability of DST is clearly laid out in Section 12E of the Income Tax Act and only applies to non-resident persons. The Appellant is a company registered in Kenya and therefore cannot be liable for DST. On this, the Tribunal has taken into consideration the holding in the celebrated case of Cape Brandy Syndicate v Inland Revenue Commissioner [1920]1 KB 64 where it was stated that:“in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used…………If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be”.

61. A similar holding was made in the case of Keroche Industries Ltd v KRA & 5 Others where it was stated:“… it does not matter that the Respondents say and think they are owed over a billion Kenya Shillings - what matters is whether the amount is lawfully due and whether the law allows its recovery”.“It is not a question of impression or perception of what is owed, instead it is what if anything, is owed under the relevant law and whether its assessment and recovery is permitted by the applicable law. If rightly due, the huge amount notwithstanding the court must uphold the right of recovery regardless of its consequences to the applicant and if not due under the law it must not hesitate to disallow it to among other things to uphold both the law and integrity of the rule of law”. 62. The Respondent’s actions and decisions in levying the DST on the Appellant were founded on illegalities and cannot be supported in law. On this the Tribunal has taken into consideration the holding in the case of Macfoy v United Africa Co. Ltd [1961] 3 All E.R 1169 as quoted in the case of Omega Enterprises (Kenya) Limited v Kenya Tourist Development Corporation Limited & 2 others [1998] eKLR where Lord Denning delivering the opinion of the Privy Council at page 1172(1) said:“If an act is void, then it is in law a nullity. It is not only bad, but incurably bad. There is no need for an order of the court to set it aside. It is automatically null and void without more ado, though it is sometimes convenient to have the Court declare it to be so. And every proceeding which is founded on it is also bad and incurable bad. You cannot put something on nothing and expect it to stay there. It will collapse.”

63. The Tribunal has also considered and noted the major variance in the provisions of the substantive law, Section 12E Income Tax Act, and the complementary subsidiary legislation, Regulation 4 of the Income Tax (DST) Regulations 2020 as can be seen hereabove. The primary law only imposes the tax on the non-residents whereas the regulations impose the same on both residents and non-residents. Its trite law that a subsidiary legislation cannot override the respective primary legislation. In regard to this, the Tribunal reiterates its holding in the case of W.E.C Lines Kenya Ltd vs. Commissioner of Domestic Taxes [TAT 137/18] where one of the issues for determination was whether a subsidiary legislation can supersede the provisions of the primary legislation and on paragraph 47 thereof the Tribunal held as follows:“A subsidiary legislation cannot repeal or contradict express provisions of an Act from which they derive their authority”.

64. The substantive law clearly imposes no DST on the resident persons and the Respondent therefore had no basis to assess the same against the Appellant and consequently issue an objection decision.

Final Decision 65. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 31st January, 2022 be and is hereby set asidec.Each party to bear its own costs.

66. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH 2023. .............................................ERIC N. WAFULA CHAIRMANCYNTHIA B. MAYAKA GRACE MUKUHA MEMBER MEMBER.............................................JEPHTHAH NJAGI ABRAHAM K. KIPROTICH MEMBER MEMBER