Can an appointed Withholding VAT Agent be exempted from withholding VAT?

On 23rd February 2023, KRA demanded withholding VAT of Ksh 62,165,945.00 in the 2017 to 2022 years of income.

After conducting investigations against KSL’s withholding tax affairs, KRA vide an electronic mail of 9th March 2023 requested KSL to avail documents for purposes of VAT withholding compliance check.

On 9th March 2023 vide an electronic mail, KSL attached withholding exemption letters.

On 20th March 2023, KSL objected to the VAT withholding demanded taxes of 23rd February 2023 this was invalidated by KRA on 22nd March 2023 citing lack of supporting documents. KSL validated their objection on 28th March 2023.

On 28th April 2023, KRA rendered its objection decision enumerating a summary of withholding taxes amounting to Ksh 50,473,289.00 in relation to years 2017 to 2022.

Aggrieved by KSL’s objection decision dated 28th April 2023, KSL filed its notice of appeal dated 22nd May 2023 at the Tribunal on 24th May 2023.

KSL submitted that:

• a meeting with KRA’s representatives was held in the year 2018 to assess KSL’s corporate tax compliance and it was established that KSL had encountered challenges with its Point of Sale (POS) software on withholding tax and was in the process of restructuring and upgrading the same for full integration. That it was these challenges coupled with the huge transaction flow that necessitated KSL to contact KRA for support and guidance and it was indeed confirmed by KSL’s service provider (Vortex Solutions) vide a letter that there were withholding tax errors.
• following the physical and telephone calls engagement with KRA and the software challenges at hand, KSL remitted full supplier payments for the 2018 and 2019 years of income. That in the other years i.e. 2020 to 2022, KSL indicated it as a work-in-progress and was working to avail the data by February 2024.
• it was not in breach of any regulations but a technical hitch that was duly acknowledged by the system provider and that KSL was willing to provide details of payments made to suppliers and in the case of those found not to have complied, KSL would withhold their payment until compliance was done and evidence adduced.
• it was exempt from being a withholding VAT agent by virtue of the fact that it was engaged in transactions with exempt suppliers.

KRA replied that:

• whereas Section 51(3)(c) of the TPA require KSL to provide all relevant documentation in support of their objection, Section 23 of the TPA as read together with Section 43 of VAT Act mandate KSL to maintain documents required under any tax law and provide the same upon request by KRA which allows tax liability to be readily ascertained. In buttressing this position, KRA cited Section 24(2) of the TPA which provides that KRA is not bound by a tax return or information provided by, or on behalf of, a taxpayer and may assess tax liabilities using any information available.
• KSL failed to prove that the Commissioner’s tax decision was in anyway inconsistent, erroneous or incorrect. KRA relied on Section 42A (1) of the TPA in placing the responsibility of withholding and remitting VAT to KRA. KRA opined that KSL despite being obligated to withhold VAT failed to tender evidence demonstrating its compliance thus failed to controvert KRA’s computations.

In its ruling on 12/07/2024, the TAT observed that:

• KSL’s attached ten supplier letters from KRA exempting the suppliers from withholding VAT pursuant to Section 42A(4A) (repealed) of the TPA which then allowed KRA to grant an exemption from the provisions of Section 42A of the TPA to taxpayers who demonstrated that due to operation of the specified Section they shall be in a continuous credit position. The Tribunal noted that Section 2 of the VAT Act provides that;

“’exempt supplies’ means supplies specified in the First Schedule which are not subject to tax.”

• any such exemption would have been expressly granted by KRA in written form and for a specified period. KSL did not adduce any particularized express exemption that was granted to it by KRA pursuant to Section 42A(4A) of the TPA. The Tribunal noted that whereas KSL’s suppliers were exempt from withholding VAT, KSL was not afforded the same merely by implication. As such KSL was obligated to act as a withholding VAT tax agent.
• KSL took steps  to correct the anomaly with the technical guidance of KRA. As an honest taxpayer, who strived to make amends and ensure that it would pay the correct tax, KSL ought not be punished for managing its tax affairs but rather, should be guided by KRA and afforded an opportunity to pay the tax that it owes.
• KSL engaged KRA and managed to remit full supplier payments for the 2018 and 2019 years of income and that 2020 and 2022 years of income was work-in-progress.

As such, the appeal partially succeeded as per below:

• The 2018 and 2019 assessments were expunged
• KRA was ordered to review the assessment in respect of the years 2020-2022 to determine the correct taxes due.

https://hisibati-consulting.co.ke/blog/

https://www.linkedin.com/in/cpa-david-ndiritu-mwangi-99665332?utm_source=share&utm_campaign=share_via&utm_content=profile&utm_medium=android_app