[2024] KETAT 29 (KLR)

Jennt Africa Limited v Commissioner Domestic Taxes (Tax Appeal 1196 of 2022) [2024] KETAT 29 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 29 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1196 of 2022

E.N Wafula, Chair, E Ng'ang'a, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich & B Gitari, Members

January 26, 2024

Between

Jennt Africa Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act of the laws of Kenya. The Appellant operates a fuel station and is a Rubis brand dealer whose business is to purchase petroleum products from Rubis, conduct marketing and sell petroleum products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. 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 Rubis-branded petroleum products distributed by the Appellant include unleaded premium petroleum, low-sulphur diesel, illuminating kerosene, among other products. These products are distributed through a service station based in Ongata Rongai.

4. In Kenya, the sale of petroleum and petroleum products is governed by the Petroleum Act 2019,Legal Notice No. 196 of 2010 and Legal Notice No. 26 of 2012.

5. Further, the pricing of petroleum products in Kenya is stipulated and regulated by the Energy &Petroleum Regulatory Authority (EPRA) which determines the maximum wholesale and retail prices of all petroleum products. EPRA publishes the maximum retail and wholesale prices on the sale of petroleum products and as such determines the profit margins earned and the prices published by EPRA every month are inclusive of VAT.

6. Based on a letter dated 20 December 2021, the Respondent issued the Appellant with preliminary audit findings advising the Appellant to amend the VTDP application to increase the principal tax declared from Kshs. 617,902. 00 to Kshs. 15,699,764. 00 for the period between September 2018 and December 2018 as well as for the period between January 2020 and June 2020.

7. From the period July 2020 to December 2020, the Respondent revised the principal tax from Kshs. 377,249. 00 to Kshs. 9,128,249. 00 to account for the undeclared fuel sales.

8. On 6th June 2022, the Respondent issued iTax assessment orders relating to the period July 2020 to December 2020 confirming its position. The Appellant then filed an iTax objection on 5th July 2022.

9. The Appellant objected to the assessment vide a letter dated 16th August 2022.

10. The Respondent issued its objection decision dated 1st September 2022 for both the VTDP period as well as the subsequent period between July 2020 and December 2020 confirming the VAT assessment of Kshs. 29,068,139.

11. Being aggrieved by the Respondent’s decision, the Appellant subsequently filed a Notice of Appeal dated 29th September 2022

The Appeal 12. The Appeal is premised on the following grounds as stated in the Appellant’s Amended Memorandum of Appeal dated 13th October and filed on 14th October 2022:a.That the Respondent erred in law and in fact in failing to recognize that petroleum products are subject to price controls and the gross margins and Value Added Tax (VAT) payable are predetermined by law by the Energy and Petroleum Regulatory Authority;b.That the Respondent has erred in law and fact by failing to appreciate the peculiar realities of the Appellant's business by assessing VAT amount that was higher than the gross margin realized from the Appellant's business;c.That the Respondent erred in law and fact by failing to appreciate that the impugned input VAT was rightfully claimed by the Appellant pursuant to its VTDP declarations;d.That the Respondent erred in law by failing to appreciate that the filing of monthly VAT returns is not a prerequisite for claiming input VAT;

Appellant’s Case 13. The Appellant’s case is supported by the following documents:a.The Appellant’s Statement of Facts dated 13th October and and filed on the 14th November 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 9th May 2023 and filed on 10th May 2023 and authorities attached hereto.

14. That the Respondent wrote to the Appellant through a letter dated 25th January 2021 inviting it to take advantage of the Voluntary Tax Disclosure Program (VTDP) by declaring any undisclosed tax liabilities relating to the VTDP period which ran from July 2015 to June 2020.

15. The Appellant reviewed its sales and noted that it had not declared VAT amounting to Kshs. 617,903. 00 relating to the period September 2018 to December 2018 as well as the period January 2020 to June 2020

16. That to ensure full compliance, the Appellant also commissioned a review of the months outside the VTDP period and noted further under-declaration of VAT. The Appellant proceeded to make a voluntary disclosure of Kshs. 377,249. 00.

17. That the Respondent responded to the Appellant’s voluntary tax disclosure application through a letter dated 20 December 2021 indicating that the Appellant was not eligible to take a deduction of input VAT for the periods as it was time-barred.

18. That based on the aforementioned letter dated 20th December 2021, the Respondent issued the Appellant with preliminary audit findings advising the Appellant to amend the VTDP application to September 2018 and December 2018 as well as for the period between January 2020 and June input VAT on time-barred periods.

19. That for the period July 2020 to December 2020 which is outside the VTDP, the Respondent revised sales.

20. That subsequently, on 6th June 2022, the Respondent issued iTax assessment orders relating to the Appellant filed an iTax objection on 5 July 2022.

21. The Respondent further issued an assessment for the VTDP period through a letter dated 27th July 2022.

22. The Appellant also objected to the assessment for this period through a letter and iTax objections dated 16th August 2022.

23. The Respondent then proceeded to issue a combined objection decision dated 1st September 2022 for both the VTDP period as well as the subsequent period between July 2020 and December 2020reiterating its position and assessment of VAT of Ksh. 29,068,139. 00.

24. Being aggrieved by the Respondent's objection decision, the Appellant filed a Notice of Appeal dated 29th September 2022.

25. The Appellant submitted that pursuant to the Petroleum Act 2019, Legal Notice No. 196 of 2010 and Legal Notice No. 26 of 2012, the price for petroleum products is determined and regulated by EPRA. EPRA issues notices every month determining various issues including the margins across the supply chain, storage and distribution costs, levies due and the VAT due per liter of fuel. The aggregate of these costs becomes the maximum price per liter of fuel that is issued by EPRA in the exercise of its statutory powers described above.

26. The Appellant submitted the structure of the EPRA breakdown of the determination of the maximum fuel prices is as follows:Particulars Cost

Landed cost of fuel (a) XX

Storage and distribution costs (b) XX

Oil marketing companies' margins (c)

i) Importers margin x

ii) Retail investment margin x

iii) Retail operating margin (the Appellant's marqin) X

Taxes and levies exclusive of VAT (d) XX

VAT (e) XX

Retail price of fuel (a+b+c+d+e) XXX

27. The Appellant submitted that as a retail operator who purchases fuel products from Rubis, therefore, has a predetermined retail operating margin less other costs charged by Rubis. The Appellant, therefore, noted that based on the foregoing and holding all factors constant, its profits/margins are predetermined by law and that it does not have the power to vary the same.

28. That despite the foregoing, the Appellant submitted that the Respondent at Paragraphs 9 to 12 of its Statement of Facts dated 16 November 2022, alleged that its VAT assessment in excess of the Appellant's gross profit margin was justified as it was not uncommon for companies to sell at below gross margin as a business strategy.

29. As noted above and for the benefit of this Honorable Tribunal, the Appellant reiterated that its business is subject to Government price controls that determine the final pump price as well as the margins for the various players in the supply chain including the dealers such as the Appellant. The Appellant, therefore, requested this Honorable Tribunal to take judicial notice of this fact as against the allegations by the Respondent.

30. The Appellant submitted that the Respondent's assessment and subsequent objection decision are based on the misunderstanding of the Appellant's business and should be set aside.

31. The Appellant submitted that the Respondent cannot then on its volition issue an assessment applying VAT on the gross sales value without regard to the specific circumstances of the Appellant's business and specific all that the maximum prices and VAT on the products are predetermined by EPRA. The Appellant further noted that it is the case that its gross margin is also predetermined and the assessment as issued wiped out its entire gross margin making its business untenable.

32. For illustration purposes, for the benefit of this Honorable Tribunal, the Appellant observed that in October 2020, the purchase price of a liter of super petrol as purchased by the Appellant thus the selling price was Kshs 97. 62 exclusive of VAT. That the breakdown below shows the input VAT and output VAT arising from this transaction as well as the Appellant's gross margins as provided by EPRA as well as the VAT payable:Purchase Sales

Price before VAT 93. 93 97. 62

VAT @8% 7. 51 7. 81

Price after VAT 101. 45 105. 43

Gross mark-up before overheads and opex 3. 93

VAT due (Input VAT - Output VAT) (7. 81-7. 51) 0. 31

VAT Due (8% of Gross mark-up) (8%*3. 93 0. 31

33. The Appellant observed from the above that the output VAT is Kshs 7. 81 and the input VAT is Kshs 7. 51. That effectively, if the input VAT is offset from the output VAT, the Appellant should remit VAT of Kshs 0. 31.

34. The Appellant submitted that on the understanding that its revenue from the sale of a litre of super petrol, in this case, is the gross margin of Kshs 3. 93, it applied VAT of 8% on the gross margin arriving at the VAT payable of Kshs 0. 31. The Appellant in this case and based on the unique nature of its business opted not to take a deduction of the input VAT charged to it. In this case and based on the illustration above, the Appellant noted that there was no revenue leakage as it paid the VAT due on the supplies made every month by applying VAT on its gross margin as determined by EPRA for each month. The Appellant submitted that this is an undisputed fact and its VAT compliance on this basis has been acknowledged by the Respondent.

35. That on its part, the Respondent through its assessment purported to charge VAT based on the pump price charged by the Appellant to its customers and further disallowed the input VAT and demanded the VAT from the Appellant in this case. Based on the example provided above, the Respondent picked the amount of Kshs 97. 62 and applied VAT at 8% to arrive at the VAT due of Kshs 7. 81 and issued an assessment on this basis after disallowing the input VAT due.

36. The Appellant submitted that considering the gross margin before taking a deduction of other direct costs and operational expenses is Kshs 3. 93, the Kshs 7. 81 assessed by the Respondent will be almost double the company's gross margin. In essence, the Respondent's approach in its assessment and objection decision therefore makes the Appellant's business untenable and it is the fact that the Appellant is not able to settle the taxes assessed from its business.

37. The Appellant reiterated that there was in fact not revenue leakage for the Respondent based on the fact that assuming the Appellant applied the approach taken by the Respondent and considering the input VAT, the VAT payable should have been the same as where the Appellant charged the VAT on its gross margin as provided by EPRA. The Appellant submitted that its basis for accounting for VAT was the EPRA monthly publications which clearly stipulated its gross margin and the fact that its approach resulted in no revenue loss, the Respondent should not be allowed to recompute the VAT to apply a higher VAT that is even beyond the gross margin that the Appellant is allowed by law.

38. The Appellant submitted that the above is a practical example of the actual circumstances for October 2020 and can be confirmed through a review of the purchase invoices as well as the EPRA notice for the month. The Appellant further submitted that the Respondent in its objection decision noted that the sample month computation provided was a business peculiarity and not reflective of the actual realities of the business which is very far from the truth as demonstrated above.

39. The Appellant therefore provided further sample months of November 2018 and May 2020 which were also in the period in dispute and which also point to the same facts. To demonstrate this, the Appellant attached the following documents for reference:a.ERC's publication on the maximum price of petroleum products for November 2018,March 2020 and October 2020. b.Sample purchase invoices indicating the unit price for various petroleum products for November 2018, March 2020 and October 2020.

40. The Appellant stated that the imposition of the additional VAT assessments where there is no revenue leakage and which is actually more than the gross margin is unjust, unfair, unreasonable, and in violation of the Appellant's right to falr administrative action and legitimate expectation. That the matters complained of herein concern the right to fair administrative action as protected under Articles 47 of the Kenyan Constitution and the Fair Administrative Actions Act.

41. The Appellant relied on the decision of the Court in Kenya Flower Council vs Meru County Government [2019] eKLR where it was held as follows:“..the Constitution is alive to the fact that the burden of taxation should be shared fairly,as the national and county government raise revenue through imposition of taxes and charges. This is to avoid double taxation or creating a heavier burden of taxation on concerned taxpayers. Therefore, there is absolute necessity of a mechanism that does not produce unnecessary duplication of taxes and one that averts creation of unduly heavy burden of taxation on a particular category of taxpayers."

42. The Appellant stated that the Respondent's assessment and subsequent objection decision should be set aside as they result in the imposition of an unduly heavy tax burden on the Appellant in a situation where there was no revenue loss on the part of the Respondent and where the Appellant complied with the law based on the actual circumstances of their regulated business. The Appellant further submitted that the Appellant's business cannot in any way withstand the assessment by the Respondent as its gross margin are determined by EPRA and the assessment in the entire periodParticulars Sept 2018-Dec 2018 Jan 2020-Dec 2020

Gross Profit 4,710,721 14,580,944

KRA's Assessment 7,064,797 21,177,136

Variance (2,354,076) (6,596,192)

43. That in the alternative and without prejudice to the foregoing, the Appellant noted that input VAT deduction is provided for under Section 17 of the VAT Act. Section 17(1) of the VAT Act provides that:“Subject to the provisions of this section 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 taxablesupplies."

44. That output tax refers to the VAT charged on the sale of taxable goods or services, while input tax refers to the VAT charged on taxable purchases of goods and services for business purposes. That the tax payable is the difference between the output tax and the input tax.

45. That in the alternative and without prejudice to the foregoing the Appellant submitted that Section 17 does not deal with or mention the filing or otherwise of VAT returns. The Appellant relied on the case of Rabai Operation and Maintenance Limited v Commissioner of Domestic Taxes, TAT No. 7 of 2017 to support the position that filling out a VAT return is not a output VAT as required by Section 11 of the VAT Act. The taxpayer however was unable to file returns because it had not been set up on the ITMS system due to a system technical problem.

46. The Appellant submitted that in the present case, since Section 17 of the VAT Act does not provide for return filing as a prerequisite for claiming input VAT, the Appellant through its VTDP computations and declarations manually ascertained the VAT payable by deducting input VAT relating to its purchases and it was justified in doing so.

47. The Appellant's position is further reaffirmed in Skyline Tower Investment V Commissioner of Domestic Taxes, TAT No. 256 of 2018, where the Tribunal held that the requirements for filing VAT monthly returns were not a condition for deduction of input VAT. The Tribunal further provided that in the absence of any other clear, certain and unambiguous legal provisions requiring a taxpayer to file a VAT return to claim an input tax deduction, the taxpayer is entitled to deduct input tax for the period under review.

48. The Appellant submitted that the Finance Act 2022 amended the VAT Act and the TPA as follows:“Section 17 of the Value Added Tax Act, 2013 is amended in subsection (1), by inserting the words "in a return for the period" Immediately after the words "deducted by the registered person";Section 31 of the Tax Procedures Act, 2015 Is amended by inserting the following provision to subsection-Provided that in the case of value added tax, the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

49. That following the amendment, Section 17(1) of the VAT Act read 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, in a return for the period 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.”

50. That the amendment to the VAT Act by the Finance Act 2022 is a clear testament that indeed a return was not a requirement for deduction of input VAT as Section 17(1) did not require such. This position has indeed been buttressed by Courts as provided above.

51. The Appellant highlighted that the amendment to Section 17 of the VAT Act by the Finance Act 2022 reveals that there has always been uncertainty, ambiguity and lack of clarity as to the nexus between returns and input VAT deduction.

52. The Appellant submitted that there should not be any ambiguity in the interpretation of tax legislation as it is aptly stated in the case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] as applied in T.M. Bell v Commissioner of Income Tax [1960]EALR 224 where Roland J,stated,“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 it to be implied. One can only look fairly at the language 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."

53. In the High Court ruling of Republic vs. Commissioner of Domestic Taxes Large Tax Payer's Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR('Barclays case')Judge Majanja referred to the dicturn of Lord Simonds in Ruissell v Scott [1948] 2 ALL ER 5 where he stated,“My Lords, there is a maxim of income tax law which, though it may sometimes be overstressed yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him"

54. The Appellant submitted that the above court decisions expounded on the rule that a taxpayer only ought to be taxed on clear words of a statute. To remedy an ambiguous legislation, there should be an amendment of the legislation through Parliament as stated in the case of Adamson v Attorney General (1933) AC 257 where it was held that,“The Section is one that imposes a tax upon the subject, and it is well settled that in such cases it is incumbent on the Crown to establish that its claim comes within the very words used and if there is any doubt or ambiguity this defect-if it be in the view of the Crown a defect can only be remedied by legislation”

55. The Appellant therefore prays to this Honorable Tribunal to find that the Respondent is bound to exercise its powers within the confines of Section 17 (1) of the VAT Act and allow the Appellant to claim input VAT.

Appellant’s Prayers 56. That the Appellant prayed for orders, that:a.The Appeal be allowed with costs to the Appellantb.The Objection decision of the Respondent demanding a total payment of Kshs, 29,068,139. 00 be set in its entirety; andc.And other orders that the Honorable Tribunal may deem fit.

Respondent’s Case 57. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 16th November 2022. ii.The Respondent’s written submissions dated on 23rd May 2023 and filed on 24th May, 2023.

58. Vide a letter dated 25th January, 2021, the Respondent wrote to the Appellant asking it to take advantage of the Voluntary Tax Disclosure Programme (VTDP) by declaring any undisclosed tax liabilities relating to the period July 2015and June 2020.

59. That accordingly, the Appellant reviewed its sales and noted that it had not declared VAT amounting to Kshs 617,903. 00 relating to the period September 2018 to December 2018 and January 2020 to June 2020. It therefore elected to declare this under VTDP.

60. That the Appellant also commissioned a review of the periods subsequent to the VTDP and noted VAT under-declaration. The Appellant proceeded to make a voluntary disclosure of Kshs 377,249. 00 for the period July 2020-December 2020.

61. That the Appellant made a voluntary disclosure application for payment of the underpaid VAT totalling to Kshs 995,152. 00.

62. That in response to the Appellant's application, the Respondent on 20th December 2021 indicated that the Appellant was not eligible to take deduction of input VAT as it was time barred and as such recomputed the VAT due as Kshs.15,699,764. 00 for the period under VTDP and Kshs.9,128,249. 00 for the period outside VTDP.

63. That accordingly, preliminary audit findings was issued requiring the Appellant to amend its application and account for the correct taxes for the periods in question.

64. That this culminated in an assessment dated 6th June, 2022, objection dated 5th July 2022 and objection decision dated 1st September 2022.

65. That the Appellant was dissatisfied with the objection thereby lodging the current Appeal.

66. That in regard to response to grounds 1 & 2 of the Memorandum of Appeal the Respondent reiterated that the assessment was justified and based on the Appellant’s actual turnover and business turnover and business circumstances.

67. The Respondent further contended that the less-than GP margin is a one-off scenario and was arrived at because of an adjustment that has been occasioned by applicability of law, specifically on allowability of input taxes.

68. That nevertheless, it is not uncommon for companies to sell at below gross margin in some instances as a business strategy.

69. That in regard to the grounds 3 and 4 of the Memorandum of Appeal, the Respondent contended that claiming of input VAT must be in accordance with Section 17 of the VAT Act. The Appellant did not claim input VAT within the statutory six months nor did it file returns. These are prerequisites which must be present for the allowing of input VAT. The time barred input VAT claims were disallowed in line with Section 17(2) of the VAT Act and thus VAT was charged based on the actual sales, without taking into account the time barred input taxes incurred on purchases.

70. The Respondent further contended that Section 44 of the VAT Act states that every person shall submit a return in the prescribed form and manner in respect of each tax period.

71. The Respondent submitted that the Finance Act, through an amendment to the Tax Procedures Act, introduced a Voluntary Disclosure Programme vide Section 37(D) thereof as follows:“The Tax Procedures Act, 2015, is amended by inserting the following new section immediately after section 37C- 37D.(1)There is established a programme to be known as the Voluntary Tax Disclosure Programme which shall be for a period of three years with effect from the 1st January, 2021. (2)For purpose of this section, "voluntary tax disclosure programme" méans a programme where a person discloses the person's tax liabilities to the Commissioner for the purpose of being granted relief of penalties and interest on the tax disclosed.(3)A person with a taxliability may apply to the Commissioner for relief in the prescribed form with re.spect to tax liabilities that accrued within a period of five years prior to the 1st July, 2020. (4)A person granted relief under this section-(a)shall not be prosecuted with respect to the tax liability disclosed under this section;and(i)where the disclosure is made and tax liability paid in the first yearof the programme,a full remission of the interest and penalty;(ii)where the disclosure is made and tax liability paid in the second year of(iii)where the disclosure is made and tax liability paid in the final year of the programme, remission of twenty-five per cent of the interest and penalty(5)An application under subsection (3) shall be voluntary and disclose all material facts.(6)Where the Commissioner is satisfied with the facts disclosed in the application under subsection (3), the Commissioner shall grant the relief applied for:Provided that the relief shall not result in the payment of a refund to the person.(7)Where the Commissioner grants relief under subsection (6), the Commissioner shall enter into an agreement with the person setting out the terms of payment of the tax liability and the period within which the payment shall be made which shall not exceed one year from the date of the agreement.(8)Where a person fails to meet the terms of the agreement under subsection (7) , that a person shall be liable to pay the full interest and penalty the full interest and penalty that had been remitted under the agreement(9)A person granted relief under this section shall not seek any other remedy including the right to appeal with respect to the taxes, penalties and interest remitted by the Commissioner.(10)Where, before the expiry of the agreement between the Commissioner establishes that the person failed to disclose a material fact in respect of the relief granted under this section, the Commissioner may-(a)withdraw any relief granted;(c)commence prosecution under section 80. (11)A person aggrieved by a decision of the Commissioner under subsection (10) may appeal against the decision.(12)This section shall not apply to a person if the person-(a)is under audit, investigation or is a party to ongoing litigation in respect of the tax liability or any matter relating to the tax liability; or(b)has been notified of a pending audit or investigation by the Commissioner.(13)the disclosure of tax liability under this section shall be confidential”

72. That by dint of this provision, it is clear that the Voluntary Tax Disclosure Programme (VTDP) was intended to ensure that a taxpayer presents a full disclosure of its tax affairs and in exchange thereof, a remission of penalties and interest would be granted by the Commissioner.

73. The Respondent submitted that it is not bound by the facts presented by a taxpayer and where it establishes that there was a non-disclosure of material facts relating to the taxpayer's tax affairs, the Respondent is at liberty to not only withdraw the relief on penalties and interests but equally to asses and collect any tax shortfall therefrom as per Section 37D(10) of the TPA.

74. That the VTDP applies with respect to tax liabilities that accrued within a period of five years prior to the 1st July, 2020 (section 37D(3) of the TPA). That however, the Appellant equally made a voluntary tax disclosure for period outside the VTDP programme and accounted on a self-assessment basis taxes VAT for the period July 2020- December 2020 amounting to Kshs. 377,249. 00.

75. That tax audit findings was issued to the Appellant finally resulting into an assessment dated 6th June, 2022 for the period outside the VTDP programme( being July, 2020-December, 2020) and another dated 27th July, 2022 for the period covered by the VTDP programme.

76. That upon considering the Appellant's objection, the same was fully rejected vide an objection decision issued on 1st September 2022. Flowing from the facts and the basis of the assessment as highlighted above, the issues that are for consideration before the Tribunal are as follows:a.Whether the Respondent was right in disallowing input VAT with respect to the period September 2018-December, 2020b.Whether the Respondent was right in finding that the Appellant had undeclared its sales for the period July 2020-December 2020.

77. The Respondent submitted that as summarized in the background facts leading to the assessment, the period September 2018-December 2020 relates to the period covered under the VTDP programme (being September 2018-June 2020) and that outside the VTDP programme (being July 2020-December 2020) when the supply occurred.

78. That the Appellant claimed the input VAT arising from the supply covered by these periods vide its VTDP returns all lodged and approved on 23rd December, 2021.

79. That is it the Appellant's action to claim input VAT for the periods September 2018-December 2020 while filing the returns on 23rd December, 2021 that prompted the Respondent to disallow the input VAT claims and issue assessment, now subject to dispute before the Tribunal.

80. That Section 17(2) of the VAT Act provides as follows:“If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

81. That the text of the law is that in claiming input VAT, time starts to run from the time the supply or importation occurred.

82. That it was also not in dispute that this timeline does not depend on when a person files its VAT returns. The input VAT claim may or may not be made while filing the returns. That for example:“Taxpayer X makes a supply in the month of December, 2017. By law,they are required to file their returns on/ before 20th of the following month (being January 2018) but must claim their input tax within 6 months from the period of supply (not later than 30th June,2018)Where say taxpayer X files its returns on February, 2018, the returns would be late and a penalty would be charged. However, if the taxpayer claims the input VAT at the point of filing returns, the same would be allowed since it would still be within 6 months.Where say Taxpayer X files its returns on the period January, 2019, (with respect to a supply made on December, 2017) and claims the input VAT while filing the returns,both the returns and the VAT claims would be late. A penalty would be charged for the late filing of the VAT returns and the input VAT claimed would automatically be disallowed as the claim would have been lodged beyond the 6 months from the period of supply.”

83. That the bottom line in above authorities is that a taxpayer must demonstrate that the claim was lodged within 6 months from the time of supply whether or not it was through the returns lodged.

84. That the burden to be discharged by the Appellant therefore is that if the claim was made while filing the return, the same was within the 6 months window. That alternatively, if the same was not lodged while filing the returns, a demonstration that the claims were nevertheless made within the 6 months from the date of supply.

85. The Respondent reviewed the declaration made by the Appellant, it was established that the Appellant had not declared the correct sales thereby leading to the adjustments being made by the Respondent. That in the sales declared by the Appellant, it indicated that its sales prices from petroleum products are predetermined by EPRA and thus the basis of their sales turnover were the prices fixed by EPRA.

86. That to the contrary, the Respondent based the Appellant's sales on the pump prices charged by the Appellant to its customers. This position is not disputed by the Appellant. at paragraph 35 of its written submissions, the basis of the Respondent's position has been reiterated as follows:“on its part the respondent through its assessment purported to charge VAT based on the pump prices charged by the appellant to its customers and further disallowed the input VAT....."

87. The Appellant does not dispute that the sales prices to its customers were different from the predetermined prices imposed by EPRA. This is a factual matter that is not contested in determining the correct sales value for the Appellant's business, question before the Tribunal is whether the Appellant can be allowed to cling on the prices imposed by EPRA when data for the actual sales prices made to its customers which ought to determine its turnover exists.

88. The Respondent submitted that the Appellant's turnover is based on the actual sales made, which are the prices charged by the Appellant to its customers. The Appellant's income and margins are determined solely by what the customers pays for purchase of its petroleum products. If the Appellant were to use the prices as determined by EPRA which is not the case, the Respondent indeed would have no basis to make any adjustments on sales made. However, the circumstances are different for the present case.

89. The Appellant contested the use of the prices charged to its customers to determine the sales made on the premise that it would be unfair as it swells its gross margins occasioning higher taxes payable. Further, the Appellant alleged that there is no VAT loss occasioned in any case for failure to use the prices imposed to its customers.

90. In response, the Respondent submited that the taxes are charged on taxpayer's true reflection of its business affairs and it matters not that use of correct gross margin results in higher taxes payable. That in any case, the use of correct turnover margin ensures that every person shares its fair burden of taxes as required by law. Gross business margin ought not to be understated in order to avoid tax liability that which is due and payable.

91. The Appellant relied in the case of Partington vs. Attorney General (quoted with approval by Hon. John Mativo. J in Law Society of Kenya v Kenya Revenue Authority & another [2017) eKLR) where the House of Lords held that:-“As I understand the principle of all fiscal legislation it is this: if the 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 law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be”

92. That based on the above it was therefore clear that the Appellant's submissions to the effect that there was no revenue leakage was incorrect since the difference in turnover margin is a clear demonstration that the variance ought to be subjected to VAT.

Respondent’s Prayers 93. The Respondent prayed to this Tribunal for Orders that:-a.That the Respondent’s objection decision be upheld andb.The Appeal be dismissed with costs

Issues For Determination 94. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that there is a single issue that calls for its determination;Whether the Respondent assessment was justified

Analysis And Findings 95. The Tribunal having determined the issue falling for its determination proceeds to analyse it as hereunder.

96. The dispute in this case relates to the computation of VAT on the petroleum products sold by the Appellant during the period under review.

97. The differing position of the parties in question forming the crux of this case is that whereas the Appellant contended that the claims were made within the timelines, the Respondent on the other hand reiterated that the input VAT claims were time barred by the dint of Section 17 of the VAT Act 2013.

98. The Appellant submitted that it is of the view that the right of deduction of input tax is an integral part of the VAT scheme as a taxable person who makes a transaction in respect of which VAT is deductible may deduct the VAT in respect of goods and services acquired by him provided that such goods and services have a direct and immediate link with the output transaction in respect of which VAT is deductible.

99. Further the Appellant claimed that a reading of Section 17(1) of the VAT Act which deals with, "Credit for input tax against output tax", shows that the 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 occurred, be deducted by the registered person from the tax payable by the person on supplies by him in that tax period, which under Section 2 of VAT Act means one calendar month or such other period as may be prescribed in the Regulations, to the extent that the taxable supply was acquired to make taxable supplies. That however, under the proviso, input tax shall be allowable for a deduction within 6 months after the end of the tax period in which the supply occurred.

100. The Appellant argued that the plain and unambiguous language of Section 17 of the VAT Act is clear that the only conditions provided for a taxpayer to qualify for input VAT are:a.That the input tax was incurred on a taxable supply made to or on importation made by a taxpayer at the end of the tax period,b.That the input tax is deducted by a registered person on taxable supplies made by him; andc.That the input tax is to be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred.

101. The Appellant submitted that the input VAT claimed in the periods subject to the dispute was within the six months period as it mainly related to the invoices issued by Rubis for the petroleum products i.e. the input VAT claimed in the December 2020 return mainly relates to the invoices issued by Rubis in the previous month and any case does not go beyond the six months period.

102. The Appellant further submitted that its self-assessments that are the subject of dispute were made pursuant to the VTDP declarations. VTDP was introduced to enable taxpayers self-declare on tax liabilities during the set period and settle the principal taxes arising. Taxpayers taking advantage of the VTDP were required to the file returns for each tax head affected and to remit the same to the Respondent’s iTax platform.

103. The Appellant submitted that the VTDP provisions provided for the fact that a taxpayer was required to disclose its tax liabilities and obtain relief for the penalties and interest paid. The provisions did not provide for the filing of returns for past periods but only required an applicant that the relevant provisions of Section 37D of the Tax Procedures Act, 2015 which introduced VTDP provided as follows:“There is established a programme to be known as the Voluntary Tax Disclosure Programme which shall be for a period of three years with effect from the 1st January, 2021. (2)For purpose of this section, "voluntary tax disclosure programme" means a programme where a person discloses the person's tax liabilities to the Commissioner for the purpose of being granted reliet of penalties and interest on the tax disclosed.(3)A person with a tax liability may apply to the Commissioner for rellef in the prescribed form with respect to tax liabilities that accrued within a period of five years prior to the 1st July,2020. (4)A person granted relief under this section-(a)shall not be prosecuted with respect to the tax liability disclosed under this section”

104. The Appellant claimed that it relied on the above provisions and made a computation for the VAT due for the relevant period and subsequently made a VTDP application to the Respondent. The VTDP application was approved by the Respondent and the Appellant proceeded to pay the VAT due under the VTDP as per the attached VTDP approval notices.

105. The Appellant therefore contended that it should not be denied its right to claim the input VAT under the VTDP and further based on the VTDP provisions specifically under Section 37D (4)(a)a taxpayer who is granted a VTDP relief is not to be prosecuted based on the tax liability declared under VTDP. The Appellant submitted that based on this provision alone, the Respondent's objection decision cannot stand.

106. The Appellant averred that where the Respondent insists on the position that input tax must have been claimed, it should have allowed the Appellant to claim input VAT since the input VAT was all claimed within six months of each specific period and further that it was pursuant to the VTDP declarations filed which were based on the Respondent's directions.

107. The Appellant averred that where the input VAT claim is allowed, the VAT payable would be similar to the actual VAT paid by the Appellant and there would be no further tax payable hence the Respondent's objection decision should be set aside on this basis.

108. The Respondent stated that for the period within and outside the VTDP programme, the Appellant claimed input VAT pursuant to Section 17 of the VAT Act and upon review of the taxes disclosed by the Appellant under the VTDP programme, in line with Section 37D(10) of the TPA, the Respondent established that the facts disclosed by the Appellant were not accurate as the Appellant had claimed input VAT outside the 6 months period stipulated under Section 17 of the VAT Act. That consequently, the input VAT was disallowed thereby resulting into a tax liability of Kshs. 15,699,764. 00.

109. The Respondent averred that for the period outside the VTDP programme, the Respondent established that the Appellant had not only claimed VAT outside the timelines but had equally undeclared sale thereby resulting into a tax liability of Kshs.9,128,249. 00.

110. The Respondent submitted that as summarized in the background facts leading to the assessment, the period September 2018-December 2020 relates to the period covered under the VTDP programme (being September 2018-June 2020) and that outside the VTDP programme (being July 2020-December 2020) when the supply occurred.

111. The Appellant claimed the input VAT arising from the supply covered by these periods vide its VTDP returns all lodged and approved on 23rd December, 2021.

112. The Tribunal is guided by Section 17(2) of the VAT Act provides as follows:“If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

113. The Tribunal notes that the text of the law is that in claiming input VAT, time starts to run from the time the supply or importation occurred. This position was confirmed by the court in the case of Highlands Mineral Water Limited v Commissioner of Domestic Taxes ML HC ITA No. E026 OF 2020[2021]eKLR where it was affirmed:“The straightforward interpretation of section 17(2) is that the 6-month period of claiming input VAT begins to run when the supply or importation occurred and not necessarily when the return is filed. Meaning, if a taxpayer files a VAT return say,7 months after when the supply or importation occurred, then the input tax claimed on that return cannot be allowed".

114. A similar determination was made in the case of Gracan Construction Limited-v-Commissioner of Domestic Taxes(HCCOMMITA/E162/2021) as follows:“The court did not find any fault in the Commissioner disallowing input VAT claims relating to purchases made outside the 6-month window period from the date of supply provided in section 17(2) of the VAT Act notwithstanding that a return was filed late. 17. In this case, the Appellant sought to be allowed to claim input VAT for purchases made after six months from the date of supply. I find that the Commissioner rightly rejected these claims as they fell outside the six months' statutory period from the date of supply”

115. The Tribunal finds that it is thereby a wrong interpretation by the Appellant to the effect that the court in Highlands Mineral Water Limited case allowed a taxpayer to claim input VAT outside the 6 months from the time of supply or importation.

116. Turning to the facts of this case, the Respondent submitted that all the claims made by the Appellant were correctly disallowed as they were outside the timelines permitted by the law. The input VAT claims were for the periods September 2018-December, 2020 but were lodged vide the Appellant's VTDP returns dated 23rd December, 2021.

117. The Tribunal finds that when the Finance Act, through an amendment to the Tax Procedures Act introduced a Voluntary Disclosure Programme vide Section 37(D) thereof, the only reliefs that were enjoyed by taxpayers were in relation to waiver of penalties and interests. There was no relief arising from failure to claim input VAT within the 6months period from the time the supply or importation occurred and such statutory timelines were not elongated. From the facts of this case, the Tribunal finds none of these claims were lodged within the timelines.

118. The Tribunal therefore finds that the burden is to be discharged by the Appellant that if the claim was made while filing the return, the same was within the 6 months window, the Appellant must prove. In the alternatively, if the same was not lodged while filing the returns, a demonstration that the claims were nevertheless made within the 6 months from the date of supply.

119. From the upshot of the foregoing the Tribunal finds that the Appellant used a different and incorrect sales margin which resulted to underdeclared VAT and that was the basis of the assessment. The Tribunal therefore finds that the Respondent assessment was justified.

Final Decision 120. In view of the foregoing, the Tribunal finds that the Appeal lacks merit and accordingly makes the following Orders;a.That the Appeal be and is hereby dismissed.b.That the Objection decision dated 1st September 2022 be and is hereby upheld.b)Each Party to bear its own costs.

121. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANEUNICE NG’ANG’A - MEMBERDR RODNEY O. OLUOCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADDETTE GITARI - MEMBER