On the 15th March 2024 at the High court in Nairobi, Justice Prof (Dr) Nixon Sifuna delivered a judgement which every taxpayer should read; the proverbial poetic justice. Without mincing words, the learned judge delivered a scathing rebuke on the Kenya Revenue Authority (KRA) for administrative overreach, capricious conduct, and taxpayer harassment.
The Judge went further to assert the rights of the taxpayer noting that – There needs to be moral hygiene and legal hygiene in tax collection. The tax collector-taxpayer relationship should not be the command and control “horse and horse rider” relationship it should be mutually beneficial and kindly regard each other.
Additionally, the Judge asserted that public authorities must exercise their power fairly and not in a manner that frustrates the purpose for which the power is granted. It is not for the tax authority to cook up figures, make unsubstantiated allegations, arbitrary tax demands, extortion and harassment. What invited this severe reprimand?
Income Tax Appeal No E209 of 2021 – Kenya Revenue Authority vs Tuffsteel Limited in brief:
- On various dates in 2020, the KRA carried out a tax audit on Tuffsteel in which they raised concerns on the authenticity of export sales reported by Tuffsteel (via the Ugandan land border at Busia). The concern was primarily because exports are exempt from VAT and therefore a refund on VAT input would ensue. Verification on whether or not an export had occurred was the heart of the matter.
- Tuffsteel produced export certificates issued from the KRA’s customs system to confirm that exports had occurred. The KRA demanded additional corroborating evidence such as weigh bridge tickets and import entries by Ugandan custom to confirm that the exports had indeed occurred. Tuffsteel did not produce the additional documents.
- The KRA completed the audit and issued an additional assessment for VAT of circa Kes 208m. Tuffsteel disagreed with the assessment and raised an appeal at the tax appeals tribunal (TAT) case 330 of 2020.
- The tax appeals tribunal upon inspecting the export certificates produced by Tuffsteel agreed that exports had occurred and struck down the assessment. KRA disagreed with the TAT decision and lodged an appeal at the high court.
- In the appeal before the high court, KRA laid the ground for their appeal that the TAT did not appreciate the custom process at the border and therefore erred in law and in fact by striking down the assessment. The primary reason for this claim was that even though Tuffsteel had produced export certificates, the same entries could not be tracked in the Ugandan custom system and therefore there was reasonable suspicion that the export and not occurred and a fraud had been committed.
- Tuffsteel submitted that there is no legal requirement by an exporter of goods (via a land border) to have import entry documentation. Further, Tuffsteel submitted that the procedure that results in issuance of export certificates is run and managed by the KRA and there was no denial that the certificates had originated from the KRA system upon compliance with the KRA export procedures. On the issue of weigh bridge tickets, Tuffsteel submitted that this was not a requirement of the export protocols neither was it in law.
The Judge held that a certificate is a legal document, whose integrity is guaranteed by the law, not a mere piece of paper that can be disowned freely, casually and at will. The certificate therefore has a legal effect. In the absence of an assertion that the certificate has been obtained irregularly, or it’s a forgery, it is reckless for the issuer (KRA) to disown it.
Further, the Judge noted that KRA acted capriciously and arbitrary. In disowning a certificate itself validly, regularly and formally issued and then demanding taxes on allegations and suspicions. Without challenging the authenticity of the certificates, KRA relied on guesswork, speculation and utter suspicion in their treatment of the taxpayer. The Judge dismissed KRA’s appeal with costs.
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