Original tax invoices are not a sufficient proof of purchases

Case Study: Baitul Investments Limited VS KRA

The genesis of the dispute herein is an investigation conducted by KRA into allegations of what has now commonly come to be known as the ‘missing trader tax fraud’. This is a tax fraud scheme where taxpayers deliberately and fraudulently claim tax rebates from bogus purchases using fictitious documents such as tax invoices and ETR receipts as a result of which a taxpayer either pays less or no taxes at all, as part of the scheme. The taxpayer may also carry huge liabilities as trade creditors from one year to another and make payments into fictitious bank accounts, yet the alleged creditors and suppliers are actually non-existent.

The findings of the investigations in question were communicated to BIL vide a letter dated 18th April 2018. KRA then issued BIL with a Notice of Assessment dated 16th May 2018 for Kshs. 438,137,615/= comprising of principal VAT and corporation tax. BIL filed a Notice of Objection dated 13th June 2018 contesting the assessment.

Upon reviewing and considering the objection, KRA issued its Objection Decision on 17th July 2018, confirming the assessment in its entirety. BIL was aggrieved by the decision of KRA and filed an appeal at the Tax Appeals Tribunal . The Tribunal on 28th May 2021 rendered its decision dismissing the appeal and upholding the assessment of Kshs. 438,137, 615/=

BIL appealed to the High Court. Among the grounds of appeal were:

• The Honourable Tribunal erred in law and fact in finding that it is both legal and standard business practice that the documents required under both section 17 of the VAT Act and VAT Regulations 2017, to support a claim for VAT are invoices and corresponding ETRs, delivery notes, payment records and store records which documents were provided and acknowledged as received by KRA.
• The Honourable Tribunal misconstrued the provisions of both section 30 of the Tax Appeals Tribunal Act and section 107 of the Evidence Act in concluding that BIL had failed to discharge its burden of proof. The Honourable Tribunal failed and/or declined to take cognisance of the fact that KRA had been provided with all the documents that it requested for as proof of purchases by BIL and did not at any particular time contest the authenticity of the same. Having discharged its burden of proof, it was upon KRA to demonstrate that the evidence adduced was insufficient to prove the contrary and not BIL
• The Honourable Tribunal fundamentally erred in failing to take cognizance of the fact that BIL duly issued KRA with copies of invoices and corresponding ETR, RTGSs and store records for all its purchases as is normal business practice, a fact that was confirmed by KRA’s witness and their authenticity remains uncontested.
• The Honourable Tribunal erred in failing to find that BIL had a right to deduct the cost of purchases under section 15(1) of the Income Tax Act.

KRA argued that:

• With regard to the disallowed input VAT, KRA contended that BILs input VAT claims were disallowed because BIL had not provided the documents required under section 17(3) of the VAT Act
• In response to the deduction of expenses, KRA also submitted that sections 15(1) and 16(1) of the ITA must be read together. It was KRA’s case that the expenditure incurred in the production of income must be proved to the satisfaction of KRA. Despite the demand letters issued to BIL, BIL did not produce the required documentation, noting that the onus required under section 56 of the TPA was on BIL to discharge.
• KRA stated that BIL was also not able to provide records as required under section 59 of the TPA. In particular, KRA had asked for evidence of the actual supply of the items. KRA averred that BIL did not provide KRA with proof of purchases or costs and for this reason there was no basis for KRA to allow inputs as claimed by BIL where it was stated that BIL had been found to be a beneficiary of missing trader schemes. KRA stated that one of the alleged traders had, in fact, confirmed in writing that it had never done any business with BIL, a position that BIL did not rebut.
• BIL did not produce the required documentation, noting that the onus required under section 56 of the TPA was on BIL to discharge.

In its ruling on 12/05/2023, the High Court observed that:

• As noted by the Tribunal, it was not 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 supply.

This finding is supported by section 17 (1) and (2) of the VAT Act, which provides that:

(1)Subject to the provisions of this Act 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 in a return for the period, 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)—(a)the person does not hold the documentation referred to in subsection (3), or

(b)the registered supplier has not declared the sales invoice in a return, and the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation:

• The documents presented by BIL showed anomalies, and KRA was not satisfied that BIL was not a beneficiary of the missing trader scheme. KRA proceeded to ask for further documentation from BIL to prove otherwise. No more documents were forthcoming from BIL, and the Tribunal also concluded that ‘the actions of KRA in disregarding the ETRs and supporting documents to be reasonable’
• in adherence to section 59 of the TPA and section 43 of the VAT Act, a taxpayer is also required to keep and produce documents when required by the tax authorities. It is anticipated that every vigilant businessman would have his records intact, especially for tax purposes. A presumption of correctness arises from the Commissioner’s Assessment. This presumption remains until the taxpayer produces competent and relevant evidence to support their position. When the taxpayer comes forward with such evidence, the presumption vanishes, and the case must be decided upon the evidence presented.

As such, BIL Lost

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