It is not enough to provide documents but there should be evidence that an actual transaction took place for a taxpayer to deduct input VAT

It is not enough to provide documents but there should be evidence that an actual transaction took place for a taxpayer to deduct input VAT

Case study: Feradon Associates Limited v Commissioner of Domestic Taxes (Income Tax Appeal E005 of 2021) [2024] KEHC 2356 (KLR) (Commercial and Tax) (8 March 2024) (Judgment)

KRA audited the affairs of FAL for the period between January 2012 and September 2015. Pursuant thereto, he issued an assessment on 24/5/2016 for Kshs. 103,943,096/-. The assessment was for Corporation Tax, PAYE, VAT and Withholding Tax together with interest.

FAL objected to the assessment on 23/6/2016 and at the same time made an application to correct an error under section 90 of the Income Tax Act. FAL filed for amendment of self-assessment returns upon correction by KRA

KRA issued the objection decision on 22/8/2016 whereby he confirmed an assessment of Kshs 90,375,490/- being Corporation Tax and VAT including penalties and interest. Dissatisfied with the objection decision, FAL lodged an appeal at the Tax Appeals Tribunal on 29/9/2016. The Tribunal dismissed the appeal vide its judgment made on 9/10/2020 reviewed on 7/9/2020.

Being aggrieved by that decision, FAL appealed to the TAT on 27/1/2021 on the following grounds:

• That the Tribunal erred in law and in fact by holding that VAT input claims under section 17 ought to be verified.
• That the Tribunal erred in failing to evaluate the evidence before it and determining issues that did not form part of KRA’s objection decision.

FAL submitted that:

• Under section 17 of the Act, the tax payer was under no obligation to prove that the ETR provided was genuine and therefore the Tribunal erred in broadening the scope of the law.
• KRA had the right to request for more documents but he did not do so but chose to give an objection decision. It was further submitted that all the documents requested by KRA were availed and this fact was not disputed by KRA.

KRA replied that:

• it was not enough to provide documents but that there should be evidence of a transaction that took place to establish that there was an actual purchase undertaken. That the burden of proof was on FAL as KRA had demonstrated that the pin numbers on the ETRs differed with those of the vendor.
• the Tribunal correctly held that the documents adduced by FAL did not support a purchase.
• some of the expenses declared by FAL were fictitious as they were not supported by genuine ETR receipts. That the genuineness of the invoices was an issue for determination by the Tribunal.

In its ruling on 08/03/2024 ,the High Court observed that:

• Section 17 of the VAT Act provides for credit for input tax. Sub-sections (1) and (2) provides as follows: –

(1)Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.

(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation. Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

A simple reading of section 17(1) of the VAT Act reveals that input tax is deductible where it is incurred when of taxable good/service is made. This is to say that in order to deduct input tax, a trader must have made actual purchase of taxable supplies. For this reason, a tax payer is required to furnish proof of actual purchase.

In the instant case, FAL had claimed input VAT and produced ETR receipts to support the claim. On the other, KRA disallowed the documents stating that the same was not genuine.

• It is not disputed that section 56 of the Tax Procedures Act and section 20 of the Tax Appeal Tribunal Act places the burden of proof on the taxpayer. When FAL produced the ETR receipts, it discharged its evidentiary burden of proof. But when KRA challenged the authenticity of the documents supplied by FAL and stated that the ETR receipts were not genuine, the evidentiary burden shifted to FAL to demonstrate that the same were acquired out of genuine commercial transaction. Based on this, FAL was required to give additional information and documents to prove that supply actually happened.

As such FAL Lost

https://hisibati-consulting.co.ke/

https://www.linkedin.com/in/cpa-david-ndiritu-mwangi-99665332?utm_source=share&utm_campaign=share_via&utm_content=profile&utm_medium=android_app