[2024] KETAT 452 (KLR)

Ngondi v Commissioner of Domestic Taxes (Tax Appeal 217 of 2023) [2024] KETAT 452 (KLR) (5 April 2024) (Judgment)

Neutral citation: [2024] KETAT 452 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 217 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, SS Ololchike & GA Kashindi, Members

April 5, 2024

Between

Lenin Manga Ngondi

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is an individual trading as a sole proprietor under the name Lengman Enterprises and is in business in the construction sector.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent issued Value Added Tax (VAT) additional VAT assessment dated 2nd November 2020 for the period from 15th October 2020 to 31st October 2020. The Appellant objected partially to the assessments vide a notice of objection dated 2nd December 2020.

4. Upon review of the objection, the Respondent issued an objection decision dated 6th February 2023 rejecting the notice of objection.

5. Dissatisfied with the Respondent’s decision, the Appellant lodged a Notice of Appeal on 2nd March, 2023.

The Appeal 6. The Appellant premised its Appeal on the grounds as set out in its Memorandum of Appeal dated 13th March 2023 and filed on 14th March 2023 as hereunder:i.That the Respondent erred in law and fact by levying VAT on Appellant herein bearing in mind that the Appellant was not registered for VAT at the onset, during the course and even at the point of completing the contract when payments were done and it came to his attention that the Contractor had withheld VAT necessitating the Appellant to register for VAT on 15th October, 2020. ii.That the Respondent erred in law and in fact in failing to appreciate that the law allows a newly registered VAT taxpayer to only claim Input VAT incurred/paid within the immediately preceding 90 days and by the time the Appellant registered time had already lapsed for him to claim any single input VAT as all the works had been completed more than 3 months preceding the registration.iii.That the Respondent erred in law and in fact by implying that the whole output VAT is payable to the Respondent and failing to appreciate that the Appellant contractual works were actually executed and costs with VAT element incurred and consequently affecting the output VAT.iv.That the Respondent erred in fact and in law by arriving at an illegal tax decision against the provisions of the relevant governing tax laws.v.That the Respondent erred in law and in fact by imposing and demanding excessive and exorbitant taxes which are not only punitive but unjust and unfair given the circumstances and facts presented.vi.That the Respondent erred in law and in fact by rejecting the Appellant application on VAT assessment and raising an illegal objection while ignoring the evidence and supporting documents presented by the Appellant for the VAT assessment.vii.The Respondent erred in law and in fact by failing to objectively go through all the documents provided clearly showing that the Appellant had applied for deregistration of the VAT obligation on his pin and the deregistration had not been effected as at the date of this objection, yet this could have been easily confirmed internally from the Respondent’s systems.

Appellant’s Case 7. In support of the Appeal, the Appellant lodged Statement of Facts dated 13th March 2023 and filed on 14th March 2023 together with its written submissions filed on 12th October 2023 as hereunder:

8. The Appellant averred that in August 2019 using the said business; he bid and won a tender with the Kenya Rural Roads Authority (KERRA) which contract was valued at Kshs. 4,101,701. 79. The contract duration was for about 9 months within which the Appellant was to complete the work. Payment was to be made upon issuance of a completion certificate.

9. The Appellant stated that upon completion, a completion certificate was issued and the funds were released to his account. The Appellant also stated that he was also issued a payment voucher with the payment breakdown only to realize that the employing authority (KERRA) had withheld VAT besides withholding tax on income tax and a VAT withholding certificate was filed on 18th September, 2020. It is the Appellant’s case that upon realization of the above, he registered for VAT obligation which registration was effected on 15th October 2020.

10. Having registered for VAT, the Appellant filed a VAT return for the month of October 2020 declaring Kshs 504,957. 14 that would be cancelled out/resonate with the amount of VAT withheld by KERRA hoping to resolve the issue later. The Appellant stated that he filed the exact contract figures (Kshs 4,101,701. 79) when filing his annual income for the Year 2020 to avoid penalties despite having the VAT issue.

11. The Appellant averred that he then received a demand notice of undeclared income from KRA requiring him to pay additional VAT of Kshs 424,2161. 12 together with interest of Kshs 106,040. 16.

12. The Appellant stated that he was not registered for VAT and therefore he could not claim any input tax incurred in the performance of the said contract.

13. The Appellant argued that the law allows a newly registered VAT taxpayer to only claim input VAT incurred/paid immediately preceding 90 days (3) months and considering he was registered on 15th October 2020, and a majority of the works had been completed by July, 2020 and the withholding tax was filed on 18th September, 2020, time had lapsed for him to lay any claim on the input VAT which put him in jeopardy.

14. The Appellant averred that he applied for deregistration of the VAT on 21st July 2020 however as at the time of the objection, the deregistration had not been effected.

15. According to the Appellant, upon receipt of the assessment, he filed an objection and proposed amendments to which he committed to settle and made several instalments to the tax authority.

16. The Appellant maintained that the Respondent’s assessment is punitive and the penalties/ interest applied is excessive. The Appellant also argued that the Respondent’s assertion that the whole Output VAT was payable to it without considering the fact that the contractual works were executed and costs with a VAT element is not only unlawful but unjust.

17. The Appellant stated that the construction industries allows a margin of 30% but the 40% margin is justifiable by the prevailing circumstance.

18. The Appellant also stated that the Respondent’s objection decision failed to consider his predicament of not being registered for VAT and the prejudice that he also suffered being unable to claim the input VAT which would consequently affect the amount of VAT payable.

19. The Appellant identified two issues for determination which he analysed as follows in his submissions:i.Whether the Respondent erred in law and fact in computing the incremental output VAT.

20. On this issue, the Appellant submitted, that since the Respondent elected to impose VAT, it was prudent for the Respondent to consider the law and make necessary deductions from the tax payable. It argued that the same is anchored in Section 17(1) of Value Added tax Act No. 35 of 2013 (hereinafter ‘VAT Act’) which provides as follows:“Subject to the provisions of this section and regulations , in put tax on a taxable supply to, or importation made by, a registered person may, at the end of tax period in which the supply or importation occurred, be dedicated by the registered person, subject to the exceptions provide under this section, form 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.”

21. The Appellant argued that this provision obliged the Respondent to make necessary dedications before directing the taxpayer to pay VAT. Further, it submitted that the he had provided the formula that helped in the realization of input VAT that is subject to deduction. In the Appellant’s view the Respondent’s failure to make deduction resulted to unjustified punitive tax and the same amounted to breach to Appellant’s right to fair taxation procedure thus occasioning a miscarriage of justice.

22. To buttress this argument, the Appellant cited the case of Commissioner of investigations and Enforcement V Pearl Industries Limited (TAX appeal E086 of 2020[2022] KEHC 51(KLR) (Commercial and TAX)31 January 2022) (Judgement) where the court held as follows:-“In resolving this matter, it is important to clarify how the Kenyan VAT system operates. VAT as a tax chargeable on s supply of taxable goods or services made under or provided in Kenya on importation of taxable goods or services into Kenya.it works under the input and output tax system. Output tax refers to VAT charged on taxable purchases of goods and services for business purposes. The tax payable is the difference between the output tax and input tax. Thus, the Respondent is correct to submit that It had the right to deduct input tax form its VAT able transaction in respect of which VAT id deducible, may deduct VAT in respect of goods and services acquired by him provided that such goods and services have a direct and immediate link with output transaction of which VAT is deductible.”

I. Whether the Respondent proceeded on wrong facts in the analysis and in reaching the decision. 23. On this issue the Appellant submitted that the Respondent failed to acknowledge the provisions of VAT Act before levying the tax. It alleged it would proceed to prove the fact that the Respondent used wrong facts and thus arrived at a highly inflated tax which is punitive, excessive and/or inordinately high in the circumstance thus occasion miscarriage of justice.

24. The Appellant argued that he had not registered for VAT obligation and at the time of being awarded and completing the contract, as such he could neither charge or file VAT returns.

25. Further, that the provisions of Section 34 of VAT Act puts the threshold of registration at Kshs 5 million, whilst the Appellant had a contact for supply of services whose value was Kshs 4,101,701. 79. The Appellant argued that the Respondent misdirected himself by obligating the Appellant to register for VAT and in so doing violated the law.

Appellant’s Prayers 26. The Appellant prayed as follows:a.That this Appeal be allowed and the tax decision of the Respondent made on 6th February 2023 on the additional VAT assessment and any interests and penalties accruing thereof be set aside in its entirety;b.An order compelling the Respondent to rectify and /or remedy the additional VAT assessment;c.The agency notices be lifted; andd.Costs of this Appeal.

Respondent’s Case 27. In response to the Appeal, the Respondent lodged its Statement of Facts dated 13th April 2023 together with written submissions dated 17th October, 2023 and filed on 18th October 2023.

28. The Respondent stated that in assessing the Appellant, it relied on the provisions of Section 34(1) and (6) of the VAT Act. The Respondent also stated that the Appellant having met the threshold as provided under Section 34 of the VAT Act, the Appellant was registered for VAT. Section 34 provides as follows:“Application for registration1. A person who in the course of business –a.Has made taxable supplies or expects to make taxable supplies, the value of which is five million or more in nay period of twelve months: orb.……..Shall be liable for registration under this Act and shall, within thirty days of becoming liable, apply to the Commissioner for registration in eth prescribed form.”

29. The Respondent submitted that the Appellant had met the threshold for VAT registration but failed to apply for registration as required by Section 34 of the VAT Act as investigations revealed that the transaction was beyond the Kshs 5 million threshold.

30. The Respondent further put emphasis on the deliberate use of the phrase ‘shall’ which denotes mandatory obligation or a command. This position is reiterated in the case of Krystalline Salt Ltd V Kenya Revenue Authority [2019] eKLR where the court emphasized this fact and stated as follows:“59” The word shall when used in a statutory provision imports a form of command or mandate. It is not permissive, it is mandatory.”

31. The Respondent further submitted that upon forceful registration of the Appellant for VAT obligation as provided under Section 34(6) supra, the Respondent backdated the Appellant’s tax obligation in accordance with the dictates of the law as reproduced hereunder:“(7)The Registration of a person under subsection (1) and (6) shall take effect form the beginning of the first tax period after the person is require to apply for registration, or such other period as may be specified in the person’s tax registration certificate.”

32. Apart from the above, the Respondent stated that the burden lies with the Appellant to prove that the assessments and objection decision are wrong pursuant to Section 56 of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’).

33. The Respondent argued that pursuant to the provisions of Section 56 of the TPA, the onus is upon the Appellant to show that the assessment made on the company is excessive and incorrect; and in the Respondent’s view the Appellant has to date failed to discharge this burden. It cited the Tribunal’s holding in the cases of TAT 55 of 2018, Boleyn International Ltd Vs Commissioner of Domestic Taxes and TAT 101 of 2016, Bermac Limited Vs Commissioner of Domestic Taxes.

34. According to the Respondent, the Appellant merely objected to his tax assessments on iTax and did not attach any documents in support of its objection as provided under Section 51(3) of the TPA. The Respondent submitted that without the provision of documents and in contravention of Section 51(3) of the TPA, the Appellant has not discharged his burden of proof as provide under the TPA and Section 107 of the Evidence Act, CAP 80 of the laws of Kenya (hereinafter ‘Evidence Act’).

35. In support of this position the Respondent cited the holding of Hon Odunga J in Republic vs Kenya Revenue Authority Ex Parte Jaffer Mujtab Mohammed (2015) eKLR as follows:“a taxing authority is not entitled to pluck a figure form the air and impose it upon a taxpayer without some rational basis for arriving at the figure and not another figure. Such action would be arbitrarily, capricious and in bad faith. It would be unreasonable exercise of power and discretion and would justify the court intervening.”

36. The Respondent asserted that the explanation has been given and justified by it so well and this Tribunal should not interfere with the assessment as there is no evidence to the contrary.

Respondent’s Prayers 37. The Respondent prayed that this Tribunal should:i.Dismiss the Appeal with costs for lack of merit.ii.Find that the Appellant was eligible for registration of VAT under Section 34 of the VAT Act.iii.Find that the VAT assessed and confirmed was due and payable.iv.Uphold the assessment.

Issues For Determination 38. The Tribunal having considered the parties’ pleadings, documents and submissions puts forth the following two (2) issues for determination:a.Whether the Appellant was eligible for registration for VAT under Section 34 of the VAT Act; andb.Whether the VAT assessed and confirmed assessment was due and payable.

ANALYSIS AND FINDINGS 39. The Tribunal wishes to analyse the issues as herein-under.

a. Whether the Appellant was eligible for registration for VAT under Section 34 of the VAT Act. 40. On this issue, the Appellant submitted that he had a contract for supply of services whose value was Kshs 4,101,701. 79 which never obliged the Appellant to register for VAT under Section 34 of the VAT Act. On the other hand, the Respondent submitted that having met the threshold as provided under Section 34 of the VAT Act, the Appellant was registered for VAT.

41. Section 34 (1) of the VAT Act provides as follows:“Application for registration(1)A person who in the course of a business—(a)has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months; or(b)is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months, shall be liable for registration under this Act and shall, within thirty days of becoming so liable, apply to the Commissioner for registration in the prescribed form…”

42. Section 34 (6) of the VAT Act which the Respondent also relied upon provides as follows:“If the Commissioner is satisfied that a person eligible to apply for registration has not done so within the time limit specified in subsection (1), the Commissioner shall register the person.”

43. The Tribunal has analysed documentary evidence that the Appellant filed, namely the Final Completion Certificate in which the contract sum was Kshs. 4,101,701. 39. The Appellant has provided evidence of the payment advice through which he received Kshs. 3,852,797. 00, on 25th August, 2020. The difference between the amount Kshs. 3,852,797. 00 and the Contract sum of Kshs. 4,101,701. 39 was the VAT and withholding tax among other deductions. On the other hand, the Respondent has not proved its assertion that the Appellant had made supplies to KERRA worth Kshs. 5,988,001. 00. The Tribunal guided by the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) in which it was held as follows:“I agree with the Tribunal’s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer. The uniqueness of our tax system in placing the evidential burden of proof on the tax payer is neither a mistake nor is it unconstitutional. …..”

44. The Tribunal also relies on the case of Mount Kenya Bottlers Ltd & 3 Others v Attorney General & 3 Others NRB Civil Appeal No. 164 of 2013 [2019] eKLR the Court of Appeal cited with approval Cape Brandy Syndicate v I.R. Commissioners [1921] 1KB where it was held that that in interpreting a tax statute there is no room for any intendment or implication.

45. It then follows that the Respondent cannot register a taxpayer for VAT obligation under Section 34 of the VAT Act if the taxable supply is less than Kshs. 5 million shillings in any period of twelve months. The Respondent has not demonstrated that the Appellant made 5 million shillings or more in any period of twelve months. What is clear is that the consideration for work done was Kshs 4,101,701. 79. Consequently, the Respondent acted ultra vires in attempting to register the Appellant for VAT obligation without just cause. The Respondent’s actions are therefore, illegal, null and void ab initio.

46. Due to the foregoing, the Tribunal finds and holds that the Appellant was not eligible for registration for VAT under Section 34 of the VAT Act.b.Whether the VAT assessed and confirmed assessment was due and payable

47. Having established that the additional assessments and resultant Objection decision are null and void, the Tribunal finds that the VAT assessed and confirmed is neither due nor payable.

Final Decision 48. The upshot to the foregoing is that the Appeal is meritorious. Consequently, the Tribunal makes the following Orders: -a.The Appeal is hereby allowed;b.The Respondent’s Objection decision dated 6th February 2023 is hereby set aside;c.Each party to bear its own costs.

49. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 5THDAY OF APRIL, 2024CHRISTINE A. MUGA.........CHAIRPERSONBONIFACE K. TERER... .......... MEMBERDELILAH K. NGALA ...............MEMBERSPENCER S. OLOLCHIKE .......... MEMBERGEORGE KASHINDI................. MEMBER