“Missing Traders” schemes in VAT fraud

“Missing Traders” schemes in VAT fraud

CASE STUDY:KRA VS GRAVITY TRADING LIMITED

In the year 2018, the KRA assessed GTL’s tax returns for the period between 1st June 2016 and November 2017. Upon conducting investigations, KRA concluded that GTL was a beneficiary of a “missing traders’ scheme whereby suppliers only manufactured invoices without actually delivering goods.

KRA was not satisfied with the documents(tax invoices & delivery notes) provided by GTL. KRA requested more information and/or documentation to support the subject transactions

KRA requested stock records and the paper trail required to demonstrate how the purchased goods were ordered, recorded, and sold. This is beyond the statutory documents provided under section 17(3) of the VAT Act

(3)The documentation for the purposes of subsection (2) shall be—

(a)an original tax invoice issued for the supply or a certified copy;

(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;

(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction; and

(d)a credit note in the case of input tax deducted under section 16(2);

(e)a debit note in the case of input tax deducted under section 16(5); or

(f)in the case of a participant in the Open Tender System for the importation of petroleum products that have been cleared through a non-bonded facility, the custom entry showing the name and PIN of the winner of the tender and the name of the other oil marketing company participating in the tender:

Vide a letter dated 18/4/2018, KRA demanded Kshs. 2,015,862/= for VAT and Kshs. 3,779,741/- for Corporation Tax. GTL objected to the tax assessment vide its letter dated 20/5/2018. KRA issued his objection decision on 23/7/2018 upholding the assessment

GTL appealed to the TAT

The TAT observed that

• GTL had adduced evidence to proof purchase. GTL provided records and delivery notes and thereby discharged its burden, which then shifted to KRA. The tribunal also found that KRA failed to provide the basis for rejecting the evidence provided by the respondent, hence failing to discharge his burden.
• Section 17(3) of the VAT Act requires a taxpayer to produce documentation to support his claim for VAT. In the present case, GTL produced business and tax invoice receipts as well as delivery notes. As at that point, GTL had discharged its evidentiary burden of proof, which shifted to KRA.
• KRA had not provided the investigation report that unearthed the alleged tax fraud

The TAT ruled in favour of GTL

KRA appealed to the High Court

KRA submitted that though section 17 (5) of the VAT Act provided for a right to claim input tax, evidence was required in support of the claim. Upon requesting information as provided by section 43 of the VAT Act, GTL failed to avail records to the satisfaction of KRA. Most of the traders that GTL claimed input from were not registered persons in contravention of section 42 (2)(b) of the VAT Act

KRA submitted that GTL only availed business and tax invoice (ETR) receipts but failed to deliver notes and stock records. GTL failed to demonstrate how the purchased goods were ordered, recorded, and sold. The suppliers did not exist and that GTL was a co-conspirator in the scheme to defraud the government of revenue

GTL submitted that the dispute was about interpretation and operation of the VAT Act.

GTL argued that KRA based its assessment on fraudulent evasion of VAT, hence having the duty to prove the fraud against the respondent. That having failed to proof fraud, the assessment could not stand.

GTL averred that it had conducted due diligence to verify the integrity of its suppliers by confirming that they had valid tax invoices, secured ETR receipts showing the name and pin of the supplier, conducted a successful PIN checker on I-tax, received the goods and made direct payment to the suppliers, and claimed input VAT.

In its ruling on 16/09/2022, the High Court observed that:

• The Tribunal failed to give due regard to the spirit of section 59 of the Tax Procedures Act and section 43 of the VAT Act as to additional information and documents required to support commercial transactions for tax purposes. The Tribunal further failed to appreciate the burden of proof set out in section 30 of the Tax Appeals Tribunal Act and section 56 of the Tax Appeals Act. In effect, the Tribunal shifted the burden of proof to KRA, which was contrary to law.
• KRA established that there was loss of VAT in the transactions as there was no proof of supply of goods. GTL, on the other hand, failed to be a responsible business entity, which is required by law to keep details of transactions for a period of five years
• Tribunal erred in not appreciating that in the present case, there was loss of VAT

As such, the High Court ruled in favour of KRA

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