Invoices, ETRs , Payment Evidence and Delivery Notes are not sufficient proof of purchase

Case Study: Branso Distributors Ltd v Commissioner of Investigations and Enforcement

KRA    carried   out an investigation    into the affairs of BDL and subsequently    issued a tax investigation    finding on 19th April 2018. On 24th May     2018, KRA issued    its   notice     of    assessment     for    Kshs.85,621,269 being   VAT of Kshs.29, 781,311    and   Kshs.  55,839, 958 Corporate Tax.

Upon the rejection of its notice objection, BDL appealed to the TAT on the following grounds:

·         THAT KRA  erred   in law in law by raising the additional VAT assessment    on   an approach   that   contravenes   the applicable Sections   of the VAT Act and applicable Kenyan jurisprudence.

·         THAT the   Respondent    erred   in fact and   in law   by disallowing expenses incurred    wholly    and   exclusively    in generation   of business income of BDL, contrary to Section 15 (1) of Income   Tax Act and supporting    Sections.

·         THAT KRA   had  erred in fact and in law by disallowing   input VAT incurred    for   the   making   of taxable    supplies, contrary   to   the stipulations of Section 17 of the VAT Act.

BDL  averred   that  it sources  its merchandise    from  its suppliers  and  sells the  same  to  its customers    locally.   The cost  of  purchasing   the   merchandise   is exclusively incurred    by  BDL  in  the   production   of  its  income

BDL submitted    that   it  procured  the   merchandise    from   its suppliers and    was    issued    with    invoices.     BDL made    payment    for    the merchandise on delivery   as evidenced  by the  invoices,   RTGS and  delivery  notes furnished to KRA.     Therefore, it had the  right  to  deduct   the  same  as cost  of purchases   under   the  above   stated   Section  15(1) of the  Income  Tax  Act

BDL averred    that   it is   standard    business   practice   and   in conformity with  the  law  for one  to  be issued with  an invoice  and  corresponding  ETR when making   a  purchase.   BDL averred that   the  invoices   and  corresponding ETR   were     supplied     and    provided    to   KRA .

Furthermore,   BDL  averred   that   BDL   was   provided  with copies  of RTGS for the  said invoices,   which   is  proof   of payment  to  its suppliers by the  bank

BDL submitted   that  it not  only  incurred the  input  VAT for  purposes of  making   taxable   supplies,   but  it was  also  issued  with  tax  invoices  and  ETRs which   it furnished  KRA.

BDL stated   that   in summary,    the  only  conditions  for  claim  of  input VAT are:

·         The  input  is  incurred by  a registered   person;

·         It is  incurred to  make  taxable   supplies;

·         The  input  VAT is  not  specifically  disallowed;

·         The  claim  is  backed   by a proper   tax  invoice;   and

·         Input  VAT was  actually   paid   (new  condition  from   30th March 2017).

BDL insisted  that   it had fulfilled  each  and  all the  conditions  of claim and   maintained   the   supporting  documentation    for  the  same.

BDL insisted  that  there   is  no  requirement  in law for  the  Appellant   to carry the   tax   compliance      obligations      of   any    of   its   suppliers.     That    KRA is  equipped  with   legal,  financial,   technical   and  other   resources   to undertake  its duties   in ensuring   each  and   every  taxpayer    is  compliant.

KRA   averred  that  BDL  had  claimed  input VAT from five (5)  identified  suppliers  (missing traders)   .  KRA further  contended that on or about  19th April 2018, it communicated its findings to  BDL  giving it 7 days to  show  cause why  the  input VAT and  costs claimed  from  the  five listed suppliers  should  be allowed.   BDL  was advised  on  the  person  to  contact  in case it needed   any  clarification  and  the contacts  provided therein  the said letter

KRA   submitted  that  it was not  in dispute  that  upon  its findings, KRA   issued BDL  with  a notice  to  show  cause why  the  input VAT  claimed   from   five   (5)   specific  suppliers,   should   be   allowed.    KRA   averred  that,  BDL  ignored  and/or   neglected  to  show  any cause leading to an assessment, which BDL  vide letter  dated  21st  June 2018 objected  to.

KRA also  relied  on   the  provisions   of  Section  93  of  the  Tax Procedures Act, which makes it an offence for a person who fails to keep, retain or   maintain   a  document  that   may   be  required   to   be  kept,   retained   or maintained in accordance  with  a tax law without reasonable  excuse during  a reporting period.

KRA submitted that  Section  17(2) of the  VAT Act provides  that  input  tax  is  only  deductible when  a registered  person  is  in possession of valid documentation.

KRA submitted   that  BDL had  a duty  to  furnish  specific information  requested   by  the   Commissioner   that   is   necessary  to  facilitate processing  of the refund  claims. It stated  that  it is  not true  that  BDL provided proof  of purchase  and/or  costs. KRA   averred  that  in fact  BDL    was  given   a  chance   to   provide  documents     in  support    of  the inputs  claimed   but    had  failed  to  do  so.

KRA  stated   that   though    Section  15 of  the   Income   Tax  Act allows the   deduction   of  all  expenditure   incurred    exclusively    in  the   production   of income,       BDL   had   to   prove    the   same   to   the   satisfaction    of   KRA. KRA averred    that   in the   present   case,  there   was  no proof  that  the  goods  were  purchased   since most  of the  businesses  BDL  claimed to  have   purchased    goods   from   do  not  exist,  do  not  import,    do  not manufacture   and   neither   do  they   buy  goods   from   any  locaI     company  to  be able  to  supply  the  Appellant.

KRA submitted  that  its investigations  revealed  that  there  was  a scheme  in  play  being  used  for  tax  evasion  purposes  by  fictitious  registered suppliers  referred  to  as “missing  trader”.  KRA averred  that  the scheme falls within  the definition  provided in Section 66(4)  of the VAT Act.

KRA submitted    that  it is  empowered   under   Section  59  of  the  Tax Procedures Act  to  require   the   production   of  documents   and   information     to enable  it ascertain   tax  liability  of a person.   It further   stated that  it is in evidence, as seen  from  the  findings  on  tax  investigations,    that  BDL  through  itself and/or    its agents,   was  at  all times  in the  course  of  the  investigations,    notified and  given  every  opportunity   to  engage  with  the  officers  of KRA but to  no  avail.

It is decision on 16/04/2021, the TAT observed that:

·     it is  not  just  enough   for  the  original   tax invoice   to  be availed,   the  invoices   must  themselves    relate   to  an  actual   supply or  importation   that   was   acquired    by  the  trader   to  make  the  taxable   supply. Indeed, the   ‘missing     trader    fraudulent   scheme’    that   KRA  had  described would   flourish   on  the  basis that  only  an  original   tax  invoice   or  ETR receipt is  availed   and  therefore  it is  important  to  rely,  not  just  on  the  invoice but  a proper   demonstration   of the  invoices  actually   relating  to  purchases   of the goods   and  services  that  are  applied   in the  production  of the  taxable   supplies.

·          KRA did not  err in its decision to disallow  the input VAT and purchase  cost by BDL  and to demand payment  of the VAT claimed in the period  under  investigation.

·        BDL  failed  to  discharge  its burden   of proving  that  it incurred  the costs it claimed.

BDL appealed to the High court.

In its decision 06/10/2023, the High Court observed that:

·         section 30 of the Tax Appeals Tribunal Act  and section 56 of the TPA both impose the burden of proof on the tax payer to prove that an assessment is excessive or that a tax decision is incorrect.

·         section 59 of the TPA and section 43 of the VAT Act empowers KRA to request for more and additional information to satisfy himself on the taxable income declared. The additional information and documents must of course be those which are reasonably expected to be in the hands of the tax payer as a business entity carrying out the business that it does. Section 59 of the TPA and section 43 of the VAT Act create an obligation for keeping of tax records for a period of up to five (5) years. These records must be produced when required by the tax authorities.

·         In the present case BDL ought to have produced letters from its suppliers to confirm supplies, supplier invoices, payment vouchers, delivery notes, stock records and import records. These are documents that a diligent and prudent trader who is genuinely undertaking honest business, would be expected to keep.

As Such BDL Lost