Forced VAT Registration Below Revenue Threshold By KRA Denied

Case Study: Commissioner of Domestic Taxes v Mutai (Income Tax Appeal E107 of 2023) [2025] KEHC 12164 (KLR) (Commercial and Tax) (31 July 2025) (Judgment)

Background:

• On 8th June 2021, KRA agents visited Mutai’s business and reviewed his records.
• Mutai explained that his business’s annual turnover was below the mandatory VAT registration threshold of Kshs. 5,000,000.
• KRA disregarded this and issued an order for mandatory VAT registration, imposing a Kshs. 50,000 fine for non-registration.
• Later, on 9th December 2021, KRA issued an additional VAT assessment of Kshs. 1,019,460 for the period January to June 2021, plus penalties.
• Mutai objected to this assessment on 29th December 2021.
• KRA upheld its decision in an Objection Decision dated 4th April 2022, leading Mutai to appeal to the Tax Appeals Tribunal.

Mutai’s Arguments:

• Mutai argued that the high sales figures KRA relied on (approx. Kshs. 6.3 million in October 2021) were “dummy entries” created during the testing and installation of a new financial system, not actual sales.
• He provided documentation, including sales records, to support this claim.

Tribunal’s Decision:

• The Tax Appeals Tribunal allowed Mutai’s appeal.
• It held that KRA erred in registering the Respondent for VAT as the sales threshold had not been met.
• It found that Mutai had discharged his legal burden of proving the assessment was incorrect by providing a plausible explanation for the dummy entries, which KRA failed to rebut.
• It also found KRA’s Objection Decision was invalid.

Grounds of Appeal to the High Court

KRA appealed the Tribunal’s decision, raising four main grounds:

• Jurisdiction & New Evidence: The Tribunal erred by considering documents attached to Mutai’s written submissions that were not presented during the assessment or objection stages, contrary to procedural law.
• Compounding Order: The Tribunal failed to consider the legal effect of a Compounding Order (and the Kshs. 50,000 fine payment) which the Appellant argued was a final admission of guilt.
• Burden of Proof: The Tribunal misconstrued the law on the burden of proof by finding the Respondent had discharged it, despite him allegedly failing to provide all requested documents.
• Document Production: Mutai failed to provide all relevant documents requested by KRA under the Tax Procedures Act and VAT Act.

Issues for Determination by the High Court

The court framed the following issues:

1.    Did the Tribunal err in law by considering documents submitted by the Respondent at the submission stage?

2.    Did the Respondent discharge the burden of proof as required by tax law?

3.    Did the Tribunal properly evaluate the evidence regarding the VAT threshold and the compounding order?

4.    Was the Tribunal’s judgment against the weight of evidence and law?

Court’s Analysis & Decision

1. On Admission of New Evidence:

• The court found KRA’s claim to be factually incorrect.
• The documents in question (sales records explaining dummy entries) were not new; they had been attached to Mutai’s Statement of Facts filed at the Tribunal in July 2022, forming part of the official record.
• Conclusion: The Tribunal was entitled to consider them. This ground of appeal failed.

2. On Burden of Proof:

• The court affirmed that under Section 56(1) of the Tax Procedures Act, the burden of proof rests on the taxpayer to show a tax decision is incorrect.
• However, the court found Mutai did discharge this burden. He provided a coherent explanation (dummy test entries) and supporting documentation for the anomalous sales figures.
• Critically, KRA did not challenge or rebut this explanation with any evidence during the proceedings.
• Mutai’s failure to provide audited accounts was justified as he was a small sole proprietor not required by law to have them.
• Conclusion: The Tribunal was correct in finding Mutai had proven his case. This ground of appeal failed.

3. On VAT Registration & Compounding Order:

• VAT Threshold: The court agreed with the Tribunal’s analysis. The figures KRA used to force VAT registration were indeed implausible (e.g., Kshs. 5.6 million in sales on a single day, 1st January 2021) and were convincingly explained as system test data. The mandatory registration was therefore erroneous.
• Compounding Order: The court analyzed Section 109 of the Tax Procedures Act, which sets strict conditions for a valid compounding order:

-It requires a written admission of the offence by the taxpayer.

-It must be considered by a committee of at least three KRA officers.

-The order must be signed by both the Commissioner and the offender.

• The court found none of these conditions were met. There was no written admission, the order was signed by only two officers, and it was not signed by the Respondent.
• Merely paying the fine did not constitute an admission of guilt under these defective circumstances.
• Conclusion: The Tribunal was right to disregard the compounding order. This ground of appeal failed.

Final Order & Outcome

• The High Court dismissed the Commissioner’s appeal in its entirety.

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