[2023] KEHC 18859 (KLR)

Kenafric Bakery Limited v Commissioner, Domestic Taxes (Income Tax Appeal E070 of 2020) [2023] KEHC 18859 (KLR) (Commercial and Tax) (23 June 2023) (Ruling)

Neutral citation: [2023] KEHC 18859 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Income Tax Appeal E070 of 2020

FG Mugambi, J

June 23, 2023

Between

Kenafric Bakery Limited

Appellant

and

Commissioner, Domestic Taxes

Respondent

Ruling

1. The appellant has been described as a limited liability company whose principal activity is baking and sale of bread to various retail outlets including schools and colleges. The respondent is established under section 3 of the Kenya Revenue Authority Act, and is charged with the mandate of assessment, collection and accounting of government revenue.

2. The dispute between the parties is uncontroverted. It arises from a claim for input VAT tax of Kshs. 91,381,817/= under section 18 of the VAT Act 2013. This follows the change of the VAT status of ordinary bread on 3rd April 2017 introduced by the Finance Act 2017. The claim by the appellant was for input VAT incurred between April 2015 and March 2017.

3. Upon conducting an audit the respondent informed the appellant that in accordance with section 18 of the VAT Act, only 5,105,491. 70 was refundable. Kshs. 86,276,325. 30 was disallowed. The appellant objected to the findings and the respondent gave an objection decision confirming its position, culminating in an appeal before the Tax Appeals Tribunal (TAT) and judgment in favour of the respondent. It Is this decision that has brought about the present appeal, through the Memorandum of Appeal dated August 10, 2020.

4. There are two issues for determination. The first is whether the Finance Act 2017 was meant to apply retrospectively and secondly, on the interpretation of section 17 and 18 of the VAT Act and whether section 18(1) permits deduction of all input tax on ‘’all supplies’’ made within a period of twenty-four months preceding the date. The appeal was canvassed by way of written submissions dated November 30, 2020 and October 13, 2020 filed by the appellant and respondent respectively.

5. The appellant submits that the TAT failed to appreciate that tax legislation must be strictly construed. That the TAT failed to understand that the claim by the appellant was made under section 18(1)(a) of the VAT Act which deals with taxable supplies and not section 18(1)(b) of the Actwhich deals with exempt supplies. The appellant’s view is that the conditions under section 18(1)(a) of the Actdo not apply to the claims made under 18(1)(b) and vice versa.

6. The appellant also submits that section 18(1)(a) was not subject to either section 18(1)(b) or to section 17(1) of the Actand as such, the limitations under the latter two sections were not applicable to the rights of the appellant under section 18(1)(a).

7. The respondent submits that the appellant claimed input VAT on materials that had already been consumed and therefore unavailable for the production of taxable supplies, which input tax had been denied under the repealed law. It was the respondent’s case that the same could not be granted under the new law. The respondent in effect states that the law cannot be applied retrospectively. The respondent takes the view that the material carrying the input tax must be in place as at the date the law changed so as to become deductible.

8. The respondent invites this court to consider the import of section 23(3) of the Interpretation and General Provisions Act.

Analysis 9. I have considered the pleadings, authorities cited and the rival submissions by counsel. This appeal is centered around the interpretation of section 18 of the VAT Act. The business of the appellant, which is manufacture of bread, is not controverted. The application of VAT tax to the appellant is also not controverted. The fact that ordinary bread was VAT exempt up to April 2, 2017 and that vide the Finance Act 2017, became zero rated, is also acknowledged, as is the fact that the Act came into effect on April 3, 2017.

10. Zero rated VAT means that the supply of goods or services is still subject to VAT but the rate of VAT is 0%. In essence, this means that a supplier is not required to charge VAT on their sales, but may still claim back any VAT that they may have on their inputs. VAT tax exempt on the other hand means that the supply of the goods and services is not subject to VAT at all. The supplier in this case cannot charge VAT on sales or claim VAT on their inputs.

11. The impact of this difference on a business entity is obvious. While a business that sells zero rated goods can still claim input VAT, this is the opposite for sale of VAT exempt goods. Prior to the coming into effect of the Finance Act 2017, the appellant’s goods were tax exempt. The Act made the goods zero rated, thereby allowing for input VAT claims.

12. Against this momentary background, counsel for both parties have laid before this court numerous helpful decisions touching on the interpretation of tax statutes. These authorities point towards what this court must consider in rendering its decision in this matter.

13. It is generally agreed that words in a tax statute should be given their ordinary meaning, with no room for intendment or presumption; that the approach taken should not produce an injustice to either party or an absurd result; that the statute should be read holistically and in full knowledge of the intent, paying attention to the context of its enactment by the legislature. (see decisions such asRepublic v Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd[2012] eKLR and T.M. Bell v Commissioner of Income Tax [1960] EALR 224)

14. The appellant takes the view that section 18 (1)(a) of theVAT Act permits deduction of input tax on all supplies made within a period of twenty-four months preceding the date when exempt supplies become taxable. As such, it is the appellant’s view that the law would apply retroactively and that input tax for supplies made between April 3, 2015 and April 3, 2017 ought to be allowed. The appellant denies that section 17(1) of the Act was applicable in this case.

15. Conversely, he respondent avers that the material carrying input tax must be in place as at the date the law changed so as to become deductible. Effectively, the respondent refutes the retroactive application of the law.

16. The respondent has cited section 23(3) of the Interpretation and General Provisions Act (Chapter 2 Laws of Kenya) in support of their submission.It provides as follows:Where a written law repeals in whole or in part another written law, then, unless a contrary intention appears, the repeal shall nota.revive anything not in force or existing at the time at which the repeal takes effect; orb.affect the previous operation of a written law so repealed or anything duly done or suffered under a written law so repealed; orc.affect a right, privilege, obligation or liability acquired, accrued or incurred under a written law so repealed; ord.affect a penalty, forfeiture or punishment incurred in respect of an offence committed against a written law so repealed; ore.affect an investigation, legal proceeding or remedy in respect of a right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid, and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed, as if the repealing written law had not been made.”

17. I am in accord with the respondent on the point that an amending enactment should be generally presumed to change the relevant law only from the time of the enactment’s commencement. (see Halsbury’s Laws of England 4th Edition Re-Issue Volume 44 (i) para1433). There are however exceptions to the general rule against retroactivity.

18. To determine whether an amendment ought to apply retroactively or not, the important consideration should be the intention of the legislature in enacting the statute. This is a position supported by section 23(3) of Cap 2. In other words, there is nothing necessarily wrong with a retroactive law. This position has been supported by the Supreme Court inSamuel Kamau Macharia and Another v Kenya Commercial Bank Ltd and 2 Others, SCK Application No. 2 of 2011 [2012] eKLR. The Court held that“A retroactive law is not unconstitutional unless it:(i) is in the nature of a bill of attainder;(ii) impairs the obligation under contracts;(iii) divests vested rights; or (iv) is constitutionally forbidden”

19. This court is inclined to look at the intention of the legislature in enacting a statute by examining the words used, in their ordinary and natural sense and to apply that intention, notwithstanding the inconvenience that the interpretation would cause. I further agree with the decision inMunicipality of Mombasa vs Nyali Limited[1963] EA 374 to the effect that“Whether or not legislation operates retrospectively depends on the intention of the enacting body as manifested by the legislation. In seeking to ascertain the intention behind the legislation the courts are guided by certain rules of construction. One of these rules is that if the legislation affects substantive rights it will not be construed to have retrospective operation unless a clear intention to that effect is manifested; whereas if it affects procedure only, prima facie it operates retrospectively unless there is a good reason to the contrary. But in the last resort it is the intention behind the legislation which has to be ascertained and a rule of construction is only one of the factors to which regard must be had in order to ascertain that intention.”

20. Against this background and in the complete appreciation of these interdicts, I now proceed to determine the import of section 18 and particularly 18(1)(a) of theVAT Act. The relevant parts of the heavily contested provision provides as follows:Tax paid prior to registration(1)Where—(a)on the date exempt supplies made by a registered person become taxable, and the person had incurred input tax on such supplies; or(b)on the date he is registered, a person has incurred tax on taxable supplies which are intended for use in making taxable supplies, the person may, within three months from that date, claim relief from any tax shown to have been incurred on such supplies: Provided that this subsection shall apply where such supplies are purchased, within the period of twenty-four months immediately preceding registration or the exempt supplies becoming taxable.(2)Where the Commissioner is satisfied that the claim for relief is justified, he shall authorise the registered person to make an appropriate deduction of the relief claimed under subsection (1) from the tax payable on his next return

21. My understanding of section 18(1)(a) which is what I find applicable, is that the date when the appellant’s exempt supplies became taxable supplies is April 3, 2017. This is when the law was amended to provide for zero rating of ordinary bread. Section 18(1) of the Act further provides that on the date when the exempt supplies become taxable, the appellant would be entitled to claim input tax which they had incurred. For the appellant to succeed in its claim, the supplies produced must have been purchased 24 months prior to April 3, 2017.

22. Section 18(2) would then kick in, requiring the appellant to provide proof so as to be eligible for the VAT refund. Such claim would have to be in the form of records of the supplies and purchases by the taxpayers for the 24 months preceding the date when the supplies became zero rated.

23. With respect to the applicability of section 17(1) to the facts in this case, I would concur with Korir J, (as he then was), in Universal Corporation Limited & 2 others v Kenya Revenue Authority & another [2021] eKLR and state that from a strict interpretation of the two sections, Parliament no doubt intended that the relief should be claimed under section 18(1) and (2) and not under section 17 of the Act as submitted by the respondent. This explains why the 24-month period was expressly included in section 18(1)(b).

24. I therefore concur with the submission that since the Finance Act 2017 came into effect on 3rd April 2017, the appellant, having been affected by the change of the tax regime was entitled to claim input taxes between April 2015 and March 2017. To hold otherwise would amount to divesting the appellants of their accrued substantive right to claim input tax by rendering such input tax as not claimable since it was impossible for them to lodge the input tax claims in the past (see Universal Corporation Limited & 2 others v Kenya Revenue Authority & another [2021] eKLR).

Determination and orders 25. The upshot of this is that the appeal is successful. The decision of the Tax Appeals Tribunal dated July 9, 2020 and the objection decision of 21st March 2018 are hereby set aside. There shall be no orders to costs.

DATED, SIGNED AND DELIVERED IN NAIROBI THIS 23rd DAY OF JUNE 2023. F. MUGAMBIJUDGECourt Assistant: Ms. Lucy Wandiri.