Input VAT attributable to exempt sales is not claimable

Case study: Jilk Construction Company Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal 1436 of 2022) [2024] KETAT 1012 (KLR) (12 July 2024) (Judgment)

JCCL filed VAT returns for the months of August 2021 and March 2022 and claimed input tax against the sales for the said period. KRA conducted returns review and upon conclusion of the exercise, alleged that input VAT claimed by JCCL was not merited. Consequently, KRA issued VAT assessment dated 15th September 2022 and the dispute arose therefrom.

Dissatisfied with the assessment, JCCL objected on 17th September 2022. Upon considering the objection, KRA issued its Objection Decision dated 16th November 2022.

JCCL being dissatisfied, appealed to the TAT on the following grounds:

  • That KRA erred in law and fact in disallowing the input VAT for the period August 2021 and March 2022 despite the fact that the same were genuine and incurred in furtherance of its business.
  • That KRA erred in law and fact by alleging that there was no evidence of supply between JCCL and Afrikon Ltd thereby wrongly disallowing input VAT incurred and confirming the assessment.
  • That KRA erred in law and fact by finding that invoices from its supplier, Afrikon Ltd were not from zero rated supplies.

JCCL argued that:

  •   the claim for input VAT arose because Afrikon Ltd had been awarded a contract by the National Irrigation Board on 4th June 2019. The contract was for the construction sheet pilling for the Bura Irrigation and Settlement Scheme Rehabilitation Project. Due to the inability of Afrikon to complete the contract, the same was assigned to JCCL vide an agreement dated 31st August 2022.
  • it demonstrated the purchases/input VAT claims by providing the following documents: Invoices to support the purchases from Afrikon Ltd, copy of contract between the National Irrigation Board and Afrikon Ltd, an agreement for the assignment of the contract between JCCL, and Afrikon Ltd, and Tax exemption certificate issued by the National Treasury.
  • it explained and demonstrated that since Afrikon Ltd could not continue with the contract entered into with the National Irrigation Board, the implementation and completion of the contract was assigned to JCCL, who proceeded to execute the said contract as per the terms of the consent. In executing the contract as per the terms of the assignment entered into with Afrikon Ltd, JCCL assumed and paid all liabilities and belonging to Afrikon Ltd.
  • whereas KRA alleged that the claim of input VAT from Afrikon limited invoices could not be allowed under Section 17 (2) (b) of the VAT Act because Afrikon limited had not declared the invoices on their part, it submitted that the position by KRA had no basis in law and at the time when the input VAT were claimed or disallowed by KRA, there was no requirement that a supplier has to declare the invoices on their end for JCCL’s input VAT claims to be considered valid. It therefore submitted that KRA was not able to impeach the invoices.

KRA Responded that:

  • Regulation, 7 (1) of the Value Added Tax (Electronic Tax Invoice) Regulations, prescribes mandatory elements of an invoice among others including: the PIN of the registered user of a register, the buyer’s PIN, and the item code of supplies (for exempt, zero-rated and other rate supplies) as provided by the Commissioner in accordance with the Act. JCCL invoices did not satisfy the requirements
  • whereas JCCL attempts to legitimize its claim on the premise that the subject supplies encompassed exempt goods, JCCL’s claim should fail because the subject supplies were made in the years 2021 and 2022 respectively. It goes without saying that the applicable law is the provision of the Value Added Tax  as amended by the Finance Act 2015. In particular, the First Schedule Part I and II, paragraphs 51 and 20 provides , Part I paragraph 51, reads:

Taxable goods, imported or purchased for direct and exclusive use in the implementation of official aid funded projects upon approval by the Cabinet Secretary responsible for the National Treasury.

Part II paragraph 20 reads:

Taxable services for direct and exclusive use in the implementation of official aid funded projects upon approval by the Cabinet Secretary to the National Treasury.

  • from the master plan, it is unequivocal that ONLY goods that were exempt under the donor funded project were eligible for exemption which is buttressed by the proviso at the end of the letter which states;

In this regard, you are advised that any subsequent application for exemption should indicate the amount/quantity approved in the master list, the exempted amount/quantity, the balance and the amount/quantity being applied for. In addition, the Ministry of Water, Sanitation and Irrigation will take responsibility for the items that are granted exemption.”

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

  • whereas the issue of the tax invoices had been extensively canvassed by the parties herein, the thrust of the issue focuses more on the tax-exempt status of JCCL’s supplies and not JCCL itself in relation to the subject project.
  • JCCL argued that it filed a tax exemption certificate issued by the National Treasury dated 20th August 2022 captioned as, ‘Exemption from Excise Duty, Import Duty, VAT, IDF AND RDL’’:  If JCCL inherited a tax-exempt project from Afrikon, then JCCL’s claim for input VAT is inconsistent with the provisions of Section 17 (1) of the VAT Act which provides that input VAT is only deductible to the extent that the supply or importation was acquired to make taxable supplies.

Consequently, the Tribunal held that KRA was justified in disallowing the input VAT for the period August 2021 and March 2022

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