Input VAT incurred prior to registration OR on exempt supplies becoming taxable is claimable


The dispute arose from a claim for input VAT tax of Kshs. 91,381,817/= under section 18 of the VAT Act 2013. This follows the change of the VAT status of ordinary bread on 3rd April 2017, introduced by the Finance Act 2017. The claim by KBL was for input VAT incurred between April 2015 and March 2017.

Upon conducting an audit, KRA informed KBL that in accordance with section 18 of the VAT Act, only 5,105,491.70 was refundable. Kshs. 86,276,325.30 was disallowed. KBL objected to the findings, and KRA gave an objection decision confirming its position, culminating in an appeal before the Tax Appeals Tribunal (TAT) and judgment in favour of KRA

KBL appealed to the High Court

The High Court settled on two issues of determination:

  1. Whether the Finance Act 2017 was meant to apply retrospectively.
  2. on the interpretation of section 17 and 18 of the VAT Act and whether section 18(1) permits deduction of all input tax on ‘’all supplies’’ made within a period of twenty-four months preceding the date.

KBL submitted that the TAT failed to appreciate that tax legislation must be strictly construed. That the TAT failed to understand that the claim by KBL was made under section 18(1)(a) of the VAT Act which deals with taxable supplies and not section 18(1)(b) of the Act which deals with exempt supplies. KBL’s view was that the conditions under section 18(1)(a) of the Act do not apply to the claims made under 18(1)(b) and vice versa.

KBL also submitted that section 18(1)(a) was not subject to either section 18(1)(b) or to section 17(1) of the Act and as such, the limitations under the latter two sections were not applicable to the rights of KBL under section 18(1)(a).

KRA submitted that KBL claimed input VAT on materials that had already been consumed and therefore unavailable for the production of taxable supplies, which input tax had been denied under the repealed law. It was KRA’s case that the same could not be granted under the new law. KRA, in effect, stated that the law can not be applied retrospectively. KRA took the view that the material carrying the input tax must be in place as of the date the law changed so as to become deductible.

In its ruling on 23/06/2023, the High Court observed that:

  • Zero rated VAT means that the supply of goods or services is still subject to VAT, but the rate of VAT is 0%. In essence, this means that a supplier is not required to charge VAT on their sales but may still claim back any VAT that they may have on their inputs. VAT tax exempt, on the other hand, means that the supply of the goods and services is not subject to VAT at all. The supplier, in this case, can not charge VAT on sales or claim VAT on their inputs. As such, the impact of this difference on a business entity is obvious. While a business that sells zero rated goods can still claim input VAT, this is the opposite for the sale of VAT exempt goods. Prior to the coming into effect of the Finance Act 2017, KBL’s goods were tax-exempt. The Act made the goods zero rated, thereby allowing for input VAT claims.
  • It is generally agreed that words in a tax statute should be given their ordinary meaning, with no room for intendment or presumption; that the approach taken should not produce an injustice to either party or an absurd result; that the statute should be read holistically and in full knowledge of the intent, paying attention to the context of its enactment by the legislature

Section 18 and particularly 18(1)(a) of the VAT Act, provides that

Tax paid prior to registration

(1) Where—

(a) on the date exempt supplies made by a registered person become taxable, and the person had incurred input tax on such supplies; or

(b) on the date he is registered, a person has incurred tax on taxable supplies which are intended for use in making taxable supplies, the person may, within three months from that date, claim relief from any tax shown to have been incurred on such supplies: Provided that this subsection shall apply where such supplies are purchased, within the period of twenty-four months immediately preceding registration or the exempt supplies becoming taxable.

(2) Where the Commissioner is satisfied that the claim for relief is justified, he shall authorise the registered person to make an appropriate deduction of the relief claimed under subsection (1) from the tax payable on his next return

  • The date when KBL’s exempt supplies became taxable supplies is 3rd April 2017. This is when the law was amended to provide for zero rating of ordinary bread. Section 18(1) of the Act further provides that on the date when the exempt supplies became taxable, KBL would be entitled to claim input tax, which they had incurred. For KBL to succeed in its claim, the supplies produced must have been purchased 24 months prior to 3rd April 2017.
  • The Finance Act 2017 came into effect on 3rd April 2017, KBL, having been affected by the change of the tax regime, was entitled to claim input taxes between April 2015 and March 2017 .

As such, KBL won

Input VAT incurred prior to registration

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