Input VAT Deduction, VAT Returns and Documentation

Case Study: Foresight Infrastructure Inc Vs Commissioner of Domestic Taxes

KRA conducted a compliance check exercise of FII’s books and records for the income period from January 2013 to August 2017. It communicated its findings through its letter of 11th April 2018. KRA found, inter alia, that FII neither filed nor paid Value Added Tax (VAT) for the years of income 2013 and 2014. KRA charged VAT on the income declared in the income tax returns and raised an additional assessment of Kshs. 35,883,547.00, inclusive of penalties and interest.

FII objected to the VAT assessment through its letter dated 8th June 2018. It challenged the legal basis for the imposition of the 20% penalty and late declaration Kshs. 218,950.00 interest levied for the 2013 year of income as it was FII’s view that the penalty applicable for non-submission of VAT returns was Kshs. 10,000.00 per return or 5% of the VAT payable and not the 20% indicated in the demand. FII also challenged the imposition of interest of 52% and 40% and urged KRA to clarify the computation calculations on the number of months that FII had been adjudged to have been in default.

On the VAT charged, FII stated that KRA had not taken into account input VAT incurred by FII on the purchases acquired by it to make taxable supplies. FII asserted that it incurred input VAT which it deducted within the stipulated period of 12 months under the repealed VAT Act (Chapter 476 of the Laws of Kenya) (“VAT Act (Repealed)’’) and 6 months under the VAT Act, 2013 as evidenced by its VAT control account and other documentary evidence as provided for by the VAT Regulations. Further, there were some months in 2013 and 2014 years of income where FII was in a VAT credit position and that the only penalty applicable for these months ought to have been Kshs. 10,000.00 per return for non-submission of VAT returns as opposed to the penalty amounts demanded by KRA. It asserted that the interest at the rate of 1% per month on the VAT payable should only be computed for the months that FII was in a VAT position.

FII contended that VAT Act (Repealed) and the VAT Act, 2013 do not peg the deduction of input VAT to the filing of VAT returns and that the law requires that the deduction of input VAT from output VAT should be done in the tax period in which the supply occurred provided that the registered person is in possession of the necessary documentation and the input VAT was incurred to make taxable supplies. Thus, FII stated that it was in compliance with the provisions of the relevant VAT laws and regulations when deducting the input VAT for the 2013 and 2014 years of income. It had maintained all the records relating to input and output VAT since it began operations and that these documents were available for verification by KRA on request. Moreover, FII stated that it had always maintained a VAT account showing the output VAT, input VAT, and the VAT payable/recoverable for each month as required by the VAT Regulations.

KRA issued the Objection Decision. On the penalty of 20%, KRA stated that this was a tax shortfall penalty and that it had applied section 84(2)(b) of the Tax Procedures Act, 2015 (“the TPA”). On the late payment penalty interest, KRA stated that according to section 38 of the TPA, interest had been computed at a simple interest rate of 1% therefore there were 52 months between January 2014 and April 2018 and 40 months between January 2015 and April 2018 for the years 2013 and 2014 respectively. That late declaration interest of Kshs. 218,949.00 had been charged on the late declaration of the sales amounting to Kshs. 6,842,169.00 declared in 2015 instead of 2013.

On the input VAT deductibility, KRA held the view that guided by section 17(2) of the VAT Act, 2013, input VAT for the period under review was time barred as at the time of issuing the demand and was therefore not allowable and that input VAT was claimable through filing of VAT3 return with KRA. KRA also denied that FII was in a credit position for the period under review. For these reasons, KRA maintained its earlier position as to the VAT demand, and after taking into account the sum already paid by FII, it now demanded the sum of Kshs. 19,887,346.00 in respect of VAT.

FII appealed to the Tribunal against the Objection Decision. The Tribunal, after hearing the parties, partially dismissed the appeal and upheld the Objection Decision subject to KRA charging FII the penalty conceded of Kshs. 10,000.00. In arriving at this decision, the Tribunal framed three issues for determination; Whether input VAT deducted by FII for years of income 2013 and 2014 was time barred, whether the filing of VAT returns is a prerequisite for deducting input VAT and whether the late payment interest and tax penalties charged by KRA is legal.

On the issue of the input VAT deductions being time barred, the Tribunal referred to section 17(2) of the VAT Act, 2013 and stated that the provision is clear and unambiguous in so far as it sets out the criteria to be followed by a taxpayer in seeking a refund of input VAT and that it is couched in mandatory terms as to the documentation required and time prescribed, that it should be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred. That section 19(1) of the VAT Act, 2013 provides that tax shall be due and payable at the time of supply whereas section 19(2) of the VAT Act, 2013 allows a registered person to defer payment of tax due to a date not later than the twentieth day of the month succeeding that in which the tax became due.

Having studied FII’s documentation, the Tribunal noted that it commenced filing VAT in January 2015 and did not file 2013 and 2014 returns until April 2018 upon conclusion of KRA’s audit and that FII did not demonstrate to the satisfaction of the Tribunal by way of any documentary evidence or even at least given dates and documents used to claim the input VAT so as to sustain its contention that it need not file VAT returns to claim the input VAT.

The Tribunal held that FII had failed to demonstrate to its satisfaction by way of any documentation or indication of the dates to show when the claim for input tax was lodged to support its contention. Consequently, the Tribunal held that the Appellant had failed to prove that it lodged the input claim on time as it did not file VAT returns for the relevant tax period.

As to whether the late payment interest and tax penalties charged by KRA was legal, the Tribunal relied on FII’s admissions in its submissions to hold that the penalty that is payable by FII is the late filing penalty of the higher of 5% of the tax payable under the return or Kshs. 10,000.00.

FII appealed to the High Court

In its ruling on 16/06/2023, the High Court observed that:

• The only conditions provided for a taxpayer to qualify for input VAT are as follows:

1. That the input tax was incurred on a taxable supply made to or on importation made by a taxpayer at the end of the tax period
2. That the input tax is deducted by a registered person on taxable supplies made by him; and
3. That the input tax is to be allowable for deduction within six months or twelve months after the end of the tax period in which the supply or importation occurred or after the input tax becomes due and payable depending on the applicable period.

• Input VAT is still allowable, irrespective of whether a return has been filed or has been filed late. What is important is that the supply or importation was within the prescribed period, it related to a taxable supply, and that it was a supply or importation made by a registered person. The fact that one has not filed a return does not necessarily mean that its input deduction can not be allowed as long as it has fulfilled the aforementioned requirements.
• There was no evidence to indicate that FII had sought a deduction of the input VAT within the prescribed period. FII also conceded in its objection that the documents in respect of the input VAT were in its premises and that same was available for inspection by KRA on request
• It was upon FII to demonstrate that KRA was wrong in not allowing its input VAT deductions. To do this, it ought to have presented evidence before KRA and the Tribunal that the deductions sought related to input tax that was incurred on taxable supplies made to or on importation made by it at the end of the respective tax periods, that it is a registered person and thus is able to make the said deductions on taxable supplies made by it and that the deductions related to a period within six months or twelve months after the end of the tax period in which the supply or importation occurred or after the input tax became due and payable depending on the applicable period. This could not be done by availing a VAT schedule account as FII did. A schedule of payments is not sufficient proof of expenses or purchases
• The proper way of claiming input tax is by filing the appropriate return and that a tax payer who does not file this return runs the risk of the resultant penalty for non-filing and after the expiry of the allowable statutory period cannot claim input VAT therein.
• The Tribunal did not err by holding that the penalty payable by FII was the higher of 5% of the tax payable or Kshs. 10,000.00. However, from the judgment, KRA accepted that FII paid the Kshs. 10,000.00.

As such FII Lost

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