[2023] KETAT 531 (KLR)

Letshego Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal 752 of 2022) [2023] KETAT 531 (KLR) (19 October 2023) (Judgment)

Neutral citation: [2023] KETAT 531 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 752 of 2022

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

October 19, 2023

Between

Letshego Kenya Limited

Appellant

and

The Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act. Its principal activity is the provision of financial services to small and micro-entrepreneurs.

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 collecting and receiving all tax revenue. Further, under Section 5(2), concerning the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The issue in dispute herein arose when the Respondent conducted a review of the Appellant's business for the period between January 2016 to October 2019 and it alleged that the Appellant had supplied imported services whereupon it assessed VAT payable under various heads of the alleged imported services totaling Kshs 88, 875,367. 77 inclusive of penalties and interests.

4. The Appellant objected to the Respondent‘s assessment on the 14th March 2022.

5. The Respondent responded to the Objection through a letter dated 14th June 2022 where it confirmed the assessment of Kshs 88, 875,367. 77

6. The Appellant dissatisfied with the objection decision, filed a Notice of Appeal on 19th July 2022.

The Appeal 7. The Appellant‘s Memorandum of Appeal which was filed on the 19th July 2022 was premised on the following grounds:a.The Respondent erred in law and fact in assessing reverse VAT on imported services for the period 2016 to 2019. b.The Respondent erred in law and fact by exploiting circumstances created by its omission and in violation of the goodwill behind the tax amnesty program to raise an assessment of Kshs 88,875,367. 77. c.The Respondent erred in law and fact in registering the Appellant for a VAT obligation without verifying the nature of business according to Section 34(4)(a) of the VATAct.d.The Respondent erred in law and fact by failing to appreciate and discharge its obligation under section 36(3)(b) of the VAT Act.e.That by raising the assessment of VAT on imported services, the Respondent has placed an absolute burden on the Appellant to apply for de-registration contrary to Section 36(3)(b) of the VATAct.

Appellant‘s Case 8. The Appellant has grounded its case on the Statement of Facts filed on 19th July 2022 with the annexures thereto and the Written Submissions filed on 16th February 2023.

9. The Appellant stated that the Finance Act 2020 amended the Tax Procedures Act, 2015 to introduce a tax amnesty to allow taxpayers to review their compliance status and make voluntary disclosures of undisclosed liabilities.

10. That based on this amnesty program, it undertook a review of its books and identified instances of non-compliance in withholding tax and Value-Added tax arising from changes in tax laws, which introduced additional compliance requirements, which it had not complied with.

11. That as a result, it made an application on 25th June 2021 for amnesty under the voluntary disclosure program according to Section 37D of the Tax Procedures Act and disclosed a tax liability of Kshs 92,621,260 inclusive of penalties and interest.

12. That on 1st October 2021, the Respondent raised an addendum on the disclosed tax liability and it raised an assessment of an additional amount of KES 5,662,309 being reverse VAT for the period 2019. It acquiesced to this demand and made full payment thereof. After payment of the initial amount of Kshs 84,325,20 disclosed and the additional amount of Kshs 5,662,309, the Respondent on 8th February 2022 raised a demand of Kshs 88,875,369 being reverse VAT for the period 2016 to 2019.

13. The Appellant clarified that:-a.It acquired Micro Africa Limited as a going concern in 2012 .b.Micro Africa (the Company) was involved in financial lending with its core clientele being salaried employees and entrepreneurs.c.In the year 2004, Micro Africa was registered for VAT obligation despite having been a supplier of exempt services and being below the registration threshold provided for under Section 34 of the VATAct.d.Despite its exempt status, the company filed VAT returns from 2004 to 2010. e.The company did not file VAT returns from the year 2010 to the point of acquisition in 2012. f.The company had not, from the point of the VAT registration in 2004 to the point of acquisition in 2010, changed its business model to the extent of offering any taxable service.

14. The Appellant contended that the Respondent had never flagged failure to file VAT returns as a non-compliance issue. It was also its position that it was not engaged in any taxable supplies.

15. It stated that it engaged the Respondent to de-register from VAT obligations at the time when the Respondent's system was under the legacy system. That it again tried to de-register when the Respondent moved to the iTax to no avail due to a system error. That however, when it followed up on the error with the Respondent it was informed that the reference number could not be traced and hence its failure to de-register.

16. It was the Appellant's position that whereas the Respondent had based the assessment of import VAT on the fact that Micro Africa and subsequently, the Appellant was registered for VAT, it averred that the registration was erroneous and a nullity because Micro Africa did not meet the requirements for VAT registration under Section 34 of the VATAct.

17. The Appellant argued that the Respondent erred by registering an entity providing financial services when it had not met the mandatory compliance threshold set out in Section 34(1) of the VATAct nor met the registration threshold for voluntary registration under Section 34(4) of the VATAct for VAT obligations.

18. It was a further argument of the Appellant that the Respondent‘s use of information disclosed under the amnesty program amounted to not only a violation of the goodwill behind the program but was also an act of bad faith on the Respondent's part.

19. It concluded by asserting that the Respondent has not disputed its tax-exempt status and that it was registered for VATin error.

20. The Appellant submitted that the fact that it did not qualify for VAT registration and had also not made any taxable supplies from 2010 to 2012 meant that it did not qualify to remit reverse VAT as per the provision of Section 10 of the VATAct on supply of imported services. It relied on the case of Commissioner of Domestic Taxes vs. Dominion Petroleum Kenya Limited to support this argument.

21. The Appellant submitted its effort to de-register the VAT obligation was successful in the year 2022

Appellant‘s Prayers 22. The Appellant prayed for orders that:a.The objection decision of the Respondent contained in the letter dated 14th June 2022 be set aside;b.The assessment and demand of Kshs 88,875,367. 77 imposed on the Appellant be set aside;c.The Appeal be allowed with costs to the Appellant; andd.Any other orders that the Honourable Tribunal may deem fit.

Respondent‘s Case 23. The Respondent has grounded its case on the Statement of Facts filed on the 2nd August 2022 and the Written Submissions filed on 6th February 2023.

24. The Respondent stated that:a.It carried out a document examination of the Appellant's records and documents to ascertain the correctness of the fees brought to charge for VAT on imported services.b.Arising from the review it discovered that management fees, guarantee fees, license and MIS costs and Software costs were not declared for VAT on imported services for the period between January 2016 to October 2019 as required under Section 10 VATAct 2013 to the sum of Kshs. 88,875,367. 77. c.It subsequently raised additional assessments against the Appellant on 8th February, 2022 for VAT for the years 2016-2019 totaling Kshs. 88,875,367. 77 including interest and penalty.d.Despite allowing it to file a late objection, the Appellant failed to provide records to support its objection as raised. It thus based and confirmed its VAT assessments on estimations as this was the only reasonable basis for assessing the VAT Tax and an objection decision was issued.e.The burden of proof lay with the Appellant under Section 56(1) of the TPA, and this onus was not discharged.

25. The Respondent averred that the Appellant was uncooperative in the provision of relevant records and also failed to respond to a request for documents hence no relevant documents or records were provided to support its objection. It stated that it is for this reason that it made its assessment based on the available information and its best judgment.

26. The Respondent contended that the Appellant failed to provide any evidence of de-registration or an application for de-registration and there was therefore no basis under which it could be de-registered as per Section 36(3) of the VAT Act 2013. As such, the Appellant was liable to pay the taxes due for the period under audit.

27. The Respondent supported its submissions with the following cases;a.Monaco Engineering Limited Vs Commissioner Domestic taxesTAT Appeal No. 67 of 2017. b.Farab International FZE vs Commissioner of Domestic Taxes TAT No. 14 of 2017(2020)c.Kenya Cuttings Limited Vs Commissioner of Domestic Taxes Appeal No. 378 of 2021

Respondent‘s Prayers 28. The Respondent prayedthat this Tribunal considers the case and finds that:a.The Respondent‘s objection decision be upheld.b.The outstanding tax arrears of Kshs. 88,875,367. 77 are due and payable by the Appellant.c.The confirmed assessment dated 14th June 2022 was proper in law.d.The Appeal be dismissed with costs.

Issues For Determination 29. The Tribunal having carefully considered the pleadings filed is of the considered view that the single issue that distills for its determination is;Whether the confirmed assessment dated 22nd August 2018 was justified?

Analysis And Determination Whether the confirmed assessment dated 22nd August 2018 was justified law? 30. This dispute rests on the answer to the question of whether a taxpayer who deals in exempt services, has erroneously registered for VAT and filed VAT returns can be assessed and compelled to pay VAT.

31. The fact that the Appellant dealt in exempt services has not been disputed by the Respondent. Its only contention is that the said Appellant was registered for VAT liability in the period under review and it was thus bound to pay VAT for imported services that were not declared.

32. Section 10(1) of the VAT Act provides as follows regarding imported services:(1)If a supply of imported taxable services is made to a registered person, the registered person shall be deemed to have made a taxable supply to himself.‖ (Emphasis Added)

33. Section 1 of the VAT Act defines a registered person‘ as thus:-registered person‖ means any person registered under section 34, but does not include an export processing zone enterprise Zone‖

34. A plain reading of Section 1 together with Section 10(1) of the VAT Act makes it clear that a registered person who receives a supply of imported taxable services is deemed to have made a taxable supply. In other words, as long as a taxpayer is registered for VAT, then such a taxpayer must account for VAT regarding transactions that qualify for VAT payment.

35. Section 36(3) of the VAT Act states as follows regarding cancellation of VAT registration:(3)The Commissioner shall, by notice in writing, cancel the registration of a person if—a.the person has applied for cancellation under subsection (1) and the Commissioner is satisfied that the person has ceased to make taxable supplies; orb.the person has not applied for cancellation but the Commissioner is satisfied that the person has ceased to make taxable supplies and is not otherwise required to be registered.

36. This means that the only way for a taxpayer to get out of the yoke of VAT liability is by cancelling its registration under Section 36(3) of the VAT Act.

37. Gleaning through the evidence on record it is clear and undisputed that the Appellant had not canceled or succeeded in canceling its VAT registration in the periods under review. The cancellation only came through in 2022 while the review period was between January 2016 to October 2019.

38. The law under Section 36(8) of the VAT Act therefore required the Appellant to account for VAT obligation during the period when the Appellant was registered. The said Section 36(8) of the VAT Act provides as follows regarding a taxpayer‘s VAT liability before its registration under the VAT was cancelled:Notwithstanding the cancellation of registration of a person under this section, the person shall be liable for any act done or omitted to be done while registered.‖

39. From the plain reading of Section 36(8) of the VAT Act, it is clear that the Appellant was under obligation to pay and or account for VAT in the period when it was so registered. The argument that it ought not to have been registered for VAT because it was dealing in exempt services is thus not sustainable.

40. The Tribunal has also noted that registration for VAT was done voluntarily by the Appellant and it even filed VAT returns for six years without a fuss between 2004 to 2019. Clearly, therefore the Appellant was aware of this obligation and by its conduct also acquiesced to its VAT obligations. Therefore it cannot now be allowed to resile from its admitted and statutory obligations only at the point when its VAT obligation has moved from nil to Kshs 88,875,367. 77.

41. Even if the Appellant erred when it registered for VAT, this error brought it within the ambit of the VAT Act and the Tribunal is thus obligated to enforce the law as it is, however unfair it may seem. The Tribunal cannot look at the intention or the hardships of the Appellant in its effort to de-register from VAT; or whether the implementation of the law would result in unfairness or inequity. This position was affirmed in the locus classicus case of Cape Brandy Syndicate vs. Inland Revenue Commissioner [1921] 1 KB 64, where it was held that:In a taxing Act one has to look merely at what is clearly stated. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.‖

42. In this Appeal, for as long as the Appellant was registered for VAT, it had obligations to account for VAT as decreed in the VAT Act. An alleged error made in applying and obtaining that VAT registration would not remove it from the tax obligations that are specified under VAT Act.

43. Based on the above analysis, the Tribunal is satisfied that the Appellant voluntarily registered for VAT obligations in the period under review and it was thus legally required Sections 1, 5(1) 10(1), 36(3) and 36(8) of the Vat Act to account for VAT in the period when it was VAT registered for VAT liabilities under the VAT Act.

Final Decision 44. On the basis of the foregoing analysis the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders;a.The Appeal be and is hereby dismissed.b.The Respondent‗s Objection decision be and is hereby upheld.c.Each party to bear its own costs.

45. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF OCTOBER, 2023. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM KIPROTICH - MEMBERCYNTHIA MAYAKA - MEMBEREUNICE NG‘ANG‘A - MEMBERBERNADETTE GITARI - MEMBER