High Court Rules Against RSM VAT Deduction For Taxi Expenses

Case Study: Commissioner of Domestic Taxes v RSM Eastern Africa Limited Liability Partnership (Tax Appeal E197 of 2021) [2025] KEHC 6618 (KLR) (Commercial and Tax) (20 May 2025) (Judgment)

Background

• KRA conducted a tax audit on RSM  for the period January–May 2018.
• The audit revealed inconsistencies between RSM’s claimed input VAT and the suppliers’ output VAT.
• KRA issued an auto-assessment for April 2018, raising additional VAT. RSM objected, leading to a revised assessment of Kshs. 52,692.70.
• Dissatisfied, RSM appealed to the Tax Appeals Tribunal, which partially ruled in its favor.  This set aside KRA’s decision on input VAT related to taxi hires (Kshs. 19,141.60).
• KRA then appealed to the High Court, arguing that the Tribunal misinterpreted Section 17(4) of the VAT Act.

Key Legal Issue

Whether RSM was entitled to deduct input VAT on taxi hires under Section 17(4) of the VAT Act. A section which restricts input VAT claims on passenger vehicles unless:

1.The vehicles are acquired exclusively for taxable supply (selling, leasing, or hiring cars/minibuses).

2.  The business involves continuous and regular trade in such vehicles.

17(4) A registered person shall not deduct input tax under this Act if the tax relates to the acquisition, leasing or hiring of—

(a)passenger cars or mini buses, and the repair and maintenance thereof including spare parts, unless the passenger cars or mini buses are acquired by the registered person exclusively for the purpose of making a taxable supply of that automobile in the ordinary course of a continuous and regular business of selling or dealing in or hiring of passenger cars or mini buses; or

(b)entertainment, restaurant and accommodation services unless—

(i)the services are provided in the ordinary course of the business carried on by the person to provide the services and the services are not supplied to an associate or employee; or

(ii)the services are provided while the recipient is away from home for the purposes of the business of the recipient or the recipient’s employer:

High Court Findings

• RSM failed to prove it was in the ordinary, continuous, and regular business of hiring passenger vehicles.
• Merely providing taxi invoices was insufficient; the core business activity must align with Section 17(4).
• The Tribunal had erred

7. Reading through the above provision, I note that the input VAT deduction is available to the registered person if the passenger cars or mini buses are acquired by the registered person exclusively for the purpose of making a taxable supply of that automobile in the ordinary course of a continuous and regular business of selling or dealing in or hiring of passenger cars or mini buses’ I am in agreement with the Commissioner that the use of the word “exclusively” is not idle and is salient in interpreting the scope and application of that provision.

Black’s Law Dictionary, 10th Edition (2014) defines “Exclusively” as “Only; to the exclusion of all others; without admission of others to participation.” This means something is restricted to a single entity or group, barring all others from involvement. Therefore, the input VAT deduction is not available to any person as advanced by the Respondent but only to those who are in the continuous and regular business of selling or dealing in or hiring of passenger cars or mini buses and that the said cars or mini buses were acquired specifically for that purpose.

Businesses Must Prove Core Trade in Vehicles.

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

https://www.linkedin.com/pulse/high-court-rules-against-vat-deduction-taxi-expenses-must-mwangi-syzef/?trackingId=yMbsC8AqS0%2Bl%2BCVXGmV9%2Bw%3D%3D