[2024] KETAT 736 (KLR)

County Government of Kakamega v Commissioner of Legal Services and Board Coordination (Appeal E051 of 2023) [2024] KETAT 736 (KLR) (17 May 2024) (Judgment)

Neutral citation: [2024] KETAT 736 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E051 of 2023

E.N Wafula, Chair, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich & T Vikiru, Members

May 17, 2024

Between

County Government of Kakamega

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is the County Government established under Articles 6(1) and 176(1) of the Constitution of Kenya 2010 with its headquarters in Kakamega Town.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue.

3. The Respondent vide a letter dated 18th October 2022 informed the Appellant of reconciliation of disbursements against expenditure that it had conducted for the financial year 2020/2021 with a finding of a total tax liability of Ksh 95,017,305. 69.

4. The Appellant replied to the letter of finding through a letter dated 15th November 2022 objecting to the tax demand. The Respondent subsequently issued its objection decision through a letter dated 12th January 2023.

5. Being aggrieved by the Objection decision, the Appellant filed the Notice of Appeal dated 8th February 2023.

6. The parties subsequently filed a Partial Consent on 22nd November 2023 that was endorsed by the Tribunal on the 18th December, 2023.

The Appeal 7. The Appellant in its Memorandum of Appeal dated 21st February 2023 and filed on 22nd February 2023 raised the following grounds of Appeal:-i.That the Respondent erred in law and in fact by failing to consider all the payments made by the Appellant in respect to Withholding taxes for the financial year under review in its assessment of the Appellant's purported tax liability.ii.That the Respondent erred in law and in fact by factoring gratuity and remittances to pension schemes and funds in its tax demand to the Appellant for the financial year under review.iii.That the Respondent erred in fact and in law by assessing and determining that taxes were payable for car benefit without laying a legal and factual basis for such assessment.iv.That the Respondent erred in law and in fact by basing its assessment of penalties and interest on erroneous figures.

Appellant’s Case 8. The Appellant’s case is supported by its Statement of Facts dated 21st February 2023 and filed on 22nd February 2023 and its written submissions dated 6th November 2023 and filed on 7th November 2023.

9. The Appellant submitted on the various tax heads as follows;a.Withholding VAT, Rent, Income Tax and VAT

10. The Appellant averred that in computing the tax arrears on withholding taxes, the Respondent failed, neglected and/or refused to consider all the payments made by the Appellant under the agency agreement which amounted to a total of Kshs. 208,976,189. 65 as per the Appellant's iTax ledger. That the Appellant through Central Bank Accounts paid withholding as summarized below:-

11. The Appellant further averred that the Respondent only considered three Central Bank of Kenya (CBK) accounts in its assessment of the Appellant's liability thus arriving at the figure of Kshs.154,863,299. 34 which was an understatement of the amounts paid by the Appellant. That the Respondent only considered the following accounts-a.The Central Bank of Kenya recurrent account;b.The Central Bank of Kenya development account; andc.The Central Bank of Kenya Devolution Support Program (KDSP)whose payments were understated.

12. The Appellant averred that the Respondent also failed, neglected and/or refused to consider payments made to it by the Appellant through commercial banks thus understating the amounts received from the Appellant.

13. The Appellant also averred that the Respondent erroneously included in its assessment, non-qualifying transactions that would not be in the mandate of the Appellant to withhold tax including, inter alia, water bills paid to the Appellant's water and sanitation service providers.

14. The Appellant further averred that the Respondent was misguided in assessing for and demanding for VAT of Kshs. 6,540,440. 70 as the same was not made for supplies in the course of or in furtherance of a business but the same is generated in the course of offering services to the public.b.Gratuity and Pension Contribution of Kshs.13,298,013. 68

15. The Appellant submitted that the objection decision indicated that an amount of Kshs. 13,298,013. 00 as tax payable on gratuity. The Appellant explained that PAYE on gratuity will be part of the amount payable upon exit of employees from active service. The Appellant added that the taxing of gratuity and pension contributions at the point of deduction and when the gratuity and pension falls due will result in double taxation.c.PAYE on Car Benefit of Kshs.1,345,252. 10

16. The Appellant averred that the legal and factual basis of assessment of tax under this head is unknown and unsubstantiated thus making the assessment legally untenable as it lays no basis for such assessment and should not be allowed to stand.

17. The Appellant averred that the Respondent failed, neglected and/or refused to properly interrogate and inspect all the documents and materials availed to it and similarly failed to apply the correct principles thus arriving at wrong findings on alleged tax liability on the part of the Appellant and manifestly understating the tax payments made by the Appellant and in other instances, making lawfully untenable assessments.

Appellant’s Prayers 18. The Appellant prayed as follows;a.That this Appeal be allowed.b.That the Objection decision of the Respondent dated 12th January, 2023 be set aside and/or varied.c.That the costs of this Appeal be awarded to the Appellant.

Respondent’s Case 19. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated 21st March 2023 and filed on the same date.ii.The Respondent’s written submissions dated 28th November 2023 and filed on 30th November, 2023.

20. The Respondent stated that on 18th October 2022, it issued a tax demand of a principal amount of Kshs.95,017,305. 69. That the Appellant lodged an objection to the assessment on 16th November 2022 challenging the assessment in its entirety.

21. That it reviewed the objection and on 12th January 2023, the Objection decision was issued fully rejecting the notice of objection and confirming the assessment of Kshs.95,017,305. 69.

22. It was the Respondent’s case that the Appellant had alleged that the County activities were tax exempt. That to this end the Respondent requested for the provision of documents that showed the vatable county activities including leased/rentals of assets, Bukura ATC, hire fees and advertisements.

23. That furthermore, the Income Tax Act under the First Schedule at Paragraph 8 only exempts the income of the County Government and does not exclude the County Government from its tax obligations under other tax laws.

24. That the Appellant failed to provide documents hence tax was charged as shown below;County Own Generated Receipts

Vat Penalty Interest Total

1 Interest/dividend - - - - -

2 Single Business permit 156,361,409 - - - -

3 Cess on Agricultural produce 55,524,187 - - - -

4 26,844. 034. 27

5 Liquor 22,880,000 ,

6 Other Local receipts 22,227,655 ,

7 Leased/Rentals of assets 3,683. 90 5 552,585. 75 27,629. 29 110,517. 5 90,732. 19

8 Market fees 34,536. 434 - - -

9 Bus park 40,909,6 54 - - - -

10 Health Services 156,639,063 、 - -

11 NHIF 135,491,017. 18 - - 、

12 Slaughter fee 3,681,896 - - -

13 Farm input 378,747,061 - - - -

14 Hiring of Bukura ATC 2,143,908 321,586. 20 16,079. 311 64,317. 24 401,982. 75

15 Plan approval 25,105. 473 - -

16 Hire fees 550,200 82,530. 00 4,126. 50 16,506. 00 103,162. 50

17 Advertisement 37,224,925 5,583,738. 75 279,186. 94 1,116,747. 75 6,979,673. 44

18 Veterinary 8,642,175

1,111,192,996 6,540. 440. 70 327,022. 04 1,308,088. 14 8,175,550. 88

25. That further, withholding VAT was analysed as per the Appellant's financial statements. That this approach covered the transactions that occurred outside of IFMIS and misstated transactions. The Respondent averred that it also enabled the separation of funds transferred to sub entities of the Government. That the payments were extracted from CBK statements and the variance was subjected to a penalty of 5% and interest of 1% as shown below;Tax Head Principal Payments Variance Penalty Interest Total

Whit 72,998,833. 51 46,866,96. 38 26,131,867. 14 1,306,593. 36 5,226,373. 43 32,664,833.

Wht(rent) 6,108,014. 80 180,142. 00 5,927,872. 8 296,393. 64 1,185,574. 56 7,409,841. 00

Vat 6,540,440. 70 - 6540,440. 70 327,022. 04 1,308,088. 14 8,175,550. 88

Total 85,647,289. 01 47,047,108. 38 33,600,180. 64 1,930,009. 03 7,720,036. 13 48,250,225. 1

26. The Respondent alleged that the Kshs 6,540,440. 70 VAT charged on advertisement fees is exempt under Paragraph 9 of Part 11 of the VAT Act (Exempt Supplies).

27. The Respondent averred that the Appellant failed to provide a breakdown of what these Vatable services constituted. That further, the Appellant did not adequately demonstrate how and under what circumstances these services qualified for exemption. The Respondent placed reliance on Section 62 of the VAT Act.

28. Regarding gratuity and remittances to pension schemes, the Respondent averred that it relied on Section 5(4)(g)(a) as read together with Section 22A(1)(c) of the Income Tax Act.

29. That data from the Appellant showed several monthly contributions above the tax free Kshs.20,000 per month. These excess amounts were not charged to tax. It was these excess that was taxed as shown below;

30. On the issue of car benefits, the Respondent stated that ownership documents (logbook) on the vehicles in question and work tickets showing their work operations were requested. That the Appellant provided the work tickets but failed to adduce the logbooks. That particularly, it was difficult for it to ascertain the vehicle model of 37CG066A since the Appellant alleged that it was a breakdown tractor with no economic value during the period under review. That in the absence of these documents, it was deemed a benefit to the user. That hence it was brought to charge as shown below;

31. The Respondent stated that it acted in accordance with Section 31(1) of the Tax Procedures Act (TPA). That the variances noted were based on the information that was available to the Respondent.

32. That further, Section 56(1) of the TPA places the burden of proof on the Appellant. That the Appellant was required to provide relevant evidence that gave answers to the variances noted in the assessment. That the Appellant failed to provide:a.A breakdown of vatable county services, leased/rental of assets, advertisement, hire fees;b.Motor vehicle log books.

33. The Respondent posited that in the objection process, the Appellant had more than enough time to provide such evidence. That the Appellant failed to provide the evidence hence the Respondent could only disallow the objection and confirmed the assessment.

34. The Respondent stated that the Appellant failed to adequately address the issues raised in the assessment by providing evidence to that effect. That by falling to discharge the burden of proof, the Respondent had to disallow the objection.

Respondent’s prayers. 35. The Respondent prayed that the Tribunal finds that:i.The Objection decision dated 12th January, 2023 was proper and in conformity with the law.ii.This Appeal be dismissed with costs to the Respondent.

Issues For Determination 36. The Tribunal notes that subsequent to the filing of this Appeal at the Tribunal, the parties filed a Partial Consent wherein VAT and WHT on employee car benefits was settled. Consequently, the parties referred to the Tribunal for determination the issues regarding PAYE on gratuity, WHVAT and Withholding rental income.

37. In consideration of the Consent filed, parties pleadings and submissions, the Tribunal was of the view that the only outstanding issues for its determination are:-a.Whether the Respondent erred in its decision to confirm the assessments on PAYE on gratuity.b.Whether the Respondent erred in its decision to confirm the assessments for WHVAT and WH Rental Income.

Analysis And Findings 38. Having established the issues for its determination, the Tribunal will proceed to analyze each of them as here below.

a. Whether the Respondent erred in its decision to confirm the assessments for PAYE on gratuity. 39. The Appellant submitted that the objection decision indicated that an amount of Kshs. 13,298,013. 00 as tax payable on gratuity. The Appellant explained that PAYE on gratuity will be part of the amount payable upon exit of employees from active service.

40. That the taxing of gratuity and pension contributions at the point of deduction and when the gratuity and pension falls due will result in double taxation.

41. The Respondent on the other hand stated that it relied on Section 5(4)(g)(a) as read together with Section 22A(1)(c) of the Income Tax Act. That data from the Appellant showed several monthly contributions above the tax free Kshs.20,000 per month. That these excess amounts were not charged to tax. That it was these excess that was taxed by the Respondent.

42. The Tribunal notes that Section 22A(1) of the ITA provides as follows regarding deductions in respect of contributions to registered pension or provident funds;“Notwithstanding section 16(2)(d) and (e), the deduction in respect of contributions of an employee in a year shall be limited to the lesser of—(a)the sum of the contributions made by the employee to registered funds in the year; or(b)thirty per cent of the employee’s pensionable income in the year; or(c)two hundred and forty thousand shillings (or, where contributions are made to registered funds of the employer in respect of a part year of service of the member, twenty thousand five hundred shillings per month of service).”

43. It follows therefore that the limits stipulated in the provisions of Section 22A of the ITA make reference to the contributions made to any pension or registered fund. As observed the limits referred to therein are in the sum of either Kshs. 240,000. 00 per member per year of service or Kshs. 20,000. 00 per month of service. If such amounts are beyond the statutory limit indicated under Section 22 of ITA then they ought to be subjected to taxation.

44. The Tribunal noted that the Respondent in the objection decision, observed that there were contributions that were above the limits set in law when it stated in part as follows;“We noted that the county members contribute to the county pension fund (CPF) as provident funds therefore, the tax treatment is to allow Kshs 240,000 p.a as tax free thereby any amount higher of shall be a benefit subject to a 30%. Tax in line with Section 5(4) (g) (a) read together with Section 22A (1) (c) of ITA….”

45. The Appellant does not dispute this position but stated in its pleadings that this will be taxed when respective employees are exiting the scheme on attainment of retirement age/early retirement or upon maturity.

46. The Tribunal affirms its position that the Appellant has the responsibility of deducting and forwarding tax due from the excess segment to the Respondent as was held in TAT Appeal No 1187 Of 2022; Kenya Tea Development Agency Staff Provident Fund Vs. Commissioner Of Legal Service And Board Coordination where it held as follows at paragraph 96;“The Tribunal having established that the Appellant held valid Tax Exemption Certificates for both the SPF and the SRBS in so far as income generated from dividends and interest extents, the Tribunal held the position that income from the unregistered segment ought to subjected to tax and therefore finds that the Respondent was justified in so far as assessment of Income Tax on the unregistered segments extents.”

47. The Tribunal therefore finds that the Respondent did not err in its decision to confirm assessment of PAYE on gratuity.

b. Whether the Respondent erred in its decision to confirm the assessments for WHVAT and WH Rental Income. 48. It was the Appellant’s case that the Respondent failed, neglected and/or refused to consider payments made to it by the Appellant through commercial banks thus understating the amounts received from the Appellant.

49. That the Respondent erroneously included in their assessment, non-qualifying transactions that would not be in the mandate of the Appellant to withhold tax including, inter alia, water bills paid to the Appellant's water and sanitation service providers.

50. The Respondent on its part submitted that it requested for the provision of documents that showed the vatable County activities including leased/rentals of assets, Bukura ATC, hire fees and advertisements.

51. That withholding VAT was analysed as per the Appellant's financial statements. That this approach covered the transactions that occurred outside of IFMIS and misstated transactions. The Respondent averred that it also enabled the separation of funds transferred to sub entities of the Government. That the payments were extracted from CBK statements and the variance was subjected to a penalty of 5% and interest of 1%

52. The Tribunal notes from the objection decision that the Respondent had made request for information which it asserted that the Appellant failed for provide leading to the confirmation of the assessments. In particular the Respondent stated in part as follows;“You averred that the County activities are VAT exempt by law therefore we requested a breakdown of vatable County activities i.e., Leased/Rental of assets, Bukura ATC, hire fees and Advertisement as assessed by the Commissioner.We note that this was not availed and cited that there is no VAT provision that allows for exemption of goods/services except Income tax law First Schedule paragraph 8. …”

53. The Appellant did not address these specific issues in its pleadings. Further, although the Appellant in its pleadings stated that the Respondent erroneously included in its assessment non-qualifying transactions that would not be in the mandate of the Appellant to withhold tax, it did not provide any evidence in support.

54. It is the Tribunal’s position that a taxpayer served with an assessment is enjoined to provide the necessary documents and information that suggest that such an assessment was not correct. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act squarely place the burden of proof upon a taxpayer to discredit any tax assessment or decision.

55. Section 56(1) of the Tax Procedures Act reads as follows:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

56. Further, Section 30 of the tax Appeals Act provides as follows:-“In any proceeding before the Tribunal the Appellant has the burden of proving-where an appeal relates to an assessment, that the assessment is excessive; or in any other case, that the tax decision should not have been made or should have been made differently.”

57. The objection decision was clear as to the Appellant’s default in providing verifiable information that prompted the Respondent to charge and confirm tax assessment on the variances noted.

58. It is the Tribunal’s position that the Appellant had the duty to discharge the Respondent’s assertions. Its failure to provide information with evidence to displace these assertions implies that they have been sufficiently proved as was held in the case of Alfred Kioko Muteti vs. Timothy Miheso & Another [2015] eKLR where the court held that:-“…a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough”. In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence....”

59. Consequently, the Tribunal finds that the Respondent did not err in its decision to confirm the assessments for WHVAT and WH rental income.

Final Decision 60. The upshot of the foregoing analysis is that the Appeal is partially merited and accordingly, the Tribunal proceeds to make the following Orders: -i.The Appeal be and is hereby partially allowed in terms of the Consent filed on 2nd November 2023. ii.The Respondent’s confirmed assessments for WHVAT and WH rental income be and are hereby upheld.iii.The Respondent’s confirmed assessment for PAYE on gratuity be and is hereby upheldiv.Each party to bear its own costs.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MAY, 2024. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. ODHIAMBO CYNTHIA B. MAYAKA - MEMBER MEMBERABRAHAM K. KIPROTICH TIMOTHY B. VIKIRU - MEMBER MEMBER