TRIBUNAL RULES THAT KRA IS RESPONSIBLE FOR PROVING VAT FRAUD
The Tax Appeals Tribunal (TAT), in a judgment delivered on 25th March 2020 (Tax Appeals No. 58 and 186 of 2019), opined that although the burden of proof rests on the taxpayer to prove the payment of tax or that an assessment is wrong, the burden shifts to the Kenya Revenue Authority (KRA) at the point where issues of VAT fraud are raised.
KRA alleged that Shreeji Enterprises (K) Limited (the Appellant) was a beneficiary of a well-orchestrated scheme known as the “missing trader tax evasion scheme” which was purportedly unearthed around 2016/2017 and involved the use of fictitious invoices to inflate cost of sales through brief case companies. KRA asserted that the Appellant used these fictitious invoices to claim input VAT and thus reduce its VAT liability. The Appellant denied KRA’s averments and supplied documentation to support the claimed transactions including invoices and sales ledgers. However, KRA demanded more information including the Appellant’s cash books which the Appellant did not produce; hence, KRA’s objection decision confirming the assessment of VAT and corporation tax totalling KES 3.7 Billion.
Issues of Determination
- Whether KRA erred in its decision to disallow input VAT claimed by the Appellant.
- Whether disallowing input tax raised a legitimate assessment for demand for additional corporation tax
Whether KRA erred in its decision to disallow input VAT claimed by the Appellant.
The TAT invoked the common principle that a taxable person who makes transactions in respect of which VAT is deductible as input tax may deduct the VAT in respect of the goods or services acquired by him, provided that such goods or services have a direct and immediate link with the business of the claimant and that the relevant documentation is in place to support the claim. Further, that this system should apply whether or not there is a missing trader in the value chain.
The TAT opined that under the current legislation, the only obligation placed on the Appellant in respect of investigating the status of its suppliers was to confirm that it purchased its supplies from a VAT registered trader and that the trader had an ETR register. The TAT ruled that no evidence was produced to show that the Appellant knew or should have known that through his purchase, he was taking part in transactions connected with the fraudulent evasion of VAT.
The TAT opined that although the current tax laws provide that the onus of proof lies with the Appellant to prove that tax was paid or that KRA’s assessment was wrong, it cannot have been the intention of the legislature to put the tax payer in a position where he would be required to produce any documentation (however unreasonable) that the taxman may require. In demanding the production of documents, the TAT opined that KRA should be guided by reasonableness and the nature and circumstances of the trader.
Lastly, the TAT found that although the burden of proof rests on the tax payer to prove payment of tax or that an assessment is wrong, the burden shifts to KRA at the point where issues of VAT fraud are raised. It further held that the standard of proof in fraud is distinctly higher than the normal civil standard of balance of probability. Consequently, the TAT found that the Respondent neither satisfied the burden of proof nor the standard of proof required and thus found the appeal to have merit.
Whether disallowing input tax raised a legitimate assessment for demand for additional corporation tax
We note that the TAT did not directly address this question, probably because it was rendered moot based on the above.
Putting it into Perspective
The ruling comes as a great relief to taxpayers who are falling prey to the aggressive tax collection policy being pursued by the KRA in an effort to meet its collection targets. It provides comfort to tax payers as they will not be burdened by excessive demands by the KRA in responding to tax assessments. In addition, taxpayers who act in good faith should now have more certainty regarding their tax obligations and operate their businesses without fear of reprisal by KRA, provided that they maintain adequate documentation to support their transactions. Consequently, this should be able to contribute to the speedy processing of VAT refunds and remove any unnecessary delays occasioned by superfluous documentation demands.
The KRA is currently pursuing taxpayers using the Value Added Automated system. Their approach has been one of pursuing claimants of input tax rather than the suppliers who are under the law responsible for charging, accounting and paying the tax. This judgement, in our view, goes a long way to show that KRA’s approach is fundamentally wrong both in terms of fairness to taxpayers and in KRA’s interpretation of VAT law. The burden of proof as to the actions of the supplier cannot rest with the recipient of the supplies and this judgement reaffirms that.
The KRA has indicated their intention to appeal the TAT ruling on the following grounds:
- THAT the Tribunal erred in fact and in law in failing to appreciate that the dispute before it was based on Section 59 of the Tax Procedures Act, which expressly gives power to the KRA to request the production of records and additional information which can fully satisfy the KRA where it is of the view that the information given is insufficient.
- THAT the Tribunal failed to appreciate and/or give due regard to the provisions of Section 43 of the VAT Act 2013 applicable to the dispute which requires the taxpayer to keep transactional records for a period of five years.
- THAT the Tribunal erred in both law and fact in failing to take into account and/ or disregarding evidence adduced by the witness of the KRA that the taxpayer allegedly procured steel worth KES. 4,821,085,712 on cash basis and the cash books were not available for perusal.
- THAT the Tribunal erred in both law and fact in holding that a stamp on an invoice is sufficient evidence of a transaction.
- THAT the Tribunal erred in fact by failing to appreciate that in this case there was VAT loss because there was no exchange of goods or services in respect of which VAT input was claimed by the taxpayer.