Inside the Malco Group Tax Case: Lessons for Businesses

Case Study: Malco Group Limited v Commissioner of Domestic Taxes (Tax Appeal E176 of 2024) [2024] KETAT 1654 (KLR) (21 October 2024) (Judgment)

This case has stirred important conversations around tax governance, particularly on the role of tax planning, clarity in financial reporting, and proactive forecasting of tax obligations. Failure to anticipate or fully understand tax liabilities can expose even well-established companies to legal disputes, reputational damage, and substantial financial penalties.

Beyond the courtroom, this case serves as a cautionary tale: that the lack of tax foresight is a strategic risk. In this article, businesses can draw lessons on clarity, compliance, and proactiveness as essential pillars of sustainable business strategy.

Background

• The MGL, Malco Group Limited, was awarded a tender by the Ministry of Petroleum & Mining to supply LPG tabletop cookers for Kshs. 100,000,000. The contract was signed on June 22, 2020, when the goods were VAT-exempt under the VAT Act.
• The Finance Act 2020, effective July 1, 2020, amended the VAT status of the goods, making them taxable at 14%. The MGL supplied the goods after this change but did not charge VAT, leading to a dispute with KRA.
• The Ministry refused to pay VAT, arguing the contract price was fixed.
• MGL did not deduct input VAT.
• KRA issued an assessment order to the Appellant dated 31st October 2023 on VAT for November 2020 for principal tax amounting to Kshs. 14,000,000. Upon receipt of the assessment, the Appellant objected to it on 29th November 2023.
• KRA issued its objection decision vide a letter dated 21st December 2023 on the Appellant’s objection, partially confirming its decision to demand an additional tax amounting to Kshs. 17,315,790.00

Appeal

MGL,  being dissatisfied with the objection, appealed to the Tax Appeal Tribunal

MGL’s Arguments

• The contract price was exclusive of VAT, as the tender was awarded before the VAT amendment.
• The MGL incurred losses due to paying VAT on importation but not receiving VAT from the Ministry.
• The demand for VAT remittance is unfair, as it constitutes double jeopardy.
• Tax laws should not apply retrospectively, and the MGL complied with the law at the time of contract signing.

KRA’s Arguments

• VAT liability is determined at the time of supply, not contract signing. The goods were taxable when supplied.
• The MGL failed to declare and remit output VAT as Section 5 of the VAT Act required.
• The assessment of Kshs. 17,315,790 (including penalties) was lawful under the Tax Procedures Act.
• The MGL’s loss does not exempt it from VAT obligations.

Tribunal’s Decision

• The Tribunal ruled that VAT liability arises during supply, not contract inception. Since the goods were supplied after the Finance Act 2020 took effect, the MGL was obligated to charge and remit VAT.

Double Loss

• MGL paid VAT on imports (Kshs. 11.7M) but could not recover it from the Ministry.
• KRA then demanded output VAT (Kshs. 14M) on the sale, even though the Ministry never paid it.

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