Proof of Payment for input VAT claim purposes

Case Study :Sera Steel Limited VS KRA

KRA reviewed SSL’s records and iTax returns and allegedly detected inconsistencies in the months of January to May 2018 between the invoices declared by the taxpayer and its suppliers. It subsequently issued an additional assessment of Kshs 26,515,399.65 on the basis of invoices that were not found in the supplier’s VAT returns.

SSL lodged an objection to the assessment on 20th November 2021

KRA, on receipt of the said objection advised SSL that the same was invalidly lodged for failure to provide supporting documents pursuant to the provisions of Section 51(3) (c) of the Tax Procedures Act.

SSL subsequently provided copies of documents that had been requested. KRA thereafter reviewed and issued an objection decision dated the 1st December, 2021, which partially allowed SSL’s input VAT claim amounting to Kshs 15,909,322.11 and the unsupported input VAT amount of Kshs 10.606,077.54 was rejected.

KRA informed SSL that the main cause of the inconsistency noted were the lumped sales to consumers who were not registered for VAT and the differences in invoice number and referencing between SSL and their suppliers.

SSL appealed to the TAT on the following grounds:

  • KRA erred in fact and law by disallowing a portion of the input VAT deducted by SSL on the basis that SSL did not adduce the proof of payment by the respective invoices
    That KRA erred in fact and law in asserting that a portion of the input tax deducted by SSL was not in accordance with the provisions of the Value Added Tax (VAT) Act, 2013.
  • That KRA erred in fact and in law by failing to appreciate the nature of the intercompany transactions between SSL and one of its suppliers, Palak International Limited where payments were done through set off in the ledgers without having to unnecessarily and inconveniently incur costs in back and forth monetary transactions.
  • That KRA erred in fact and law by failing to appreciate that SSL had provided all the documents required for claiming its input VAT and was not under legal obligation to enforce declaration of output tax by its suppliers during the assessed periods.
    That KRA erred in fact and law by unilaterally adjusting SSL’s VAT credits downwards prior to the exhaustion of the appeal remedies, thereby infringing on SSL’s rights to a fair administrative process and the right to fair hearing.
  • That KRA erred in fact and law by failing to provide the legal basis for disallowing a portion of the input VAT

KRA responded that:

  • Invoices availed by SSL to support its purchase declarations in the VAT returns did not fully support the claim.
  • Its reading of Sections 17(2) and 17(3) of the VAT Act required SSL to provide it with documents for input VAT to be deductible, and this was not done.
  • Section 56(1) of the TPA placed the burden of proof that the tax assessed was not payable by SSL on SSL. This burden was not discharged.
  • SSL failed to prove that the input VAT was lawfully due as it did not produce invoices for consideration by KRA.

In its ruling on 17/03/2023, the TAT observed that:

  • SSL attached KRA’s assessment orders, letter of objection and iTax acknowledgement, and KRA’s objection decision. SSL did not file the documents that show and / or prove that its transactions were paid in kind. The Tribunal has also noted that the same allegation that the transactions in issue were paid in kind was made to the Commissioner, but documentary proof of such payment was never provided. This resulted in the denial of SSL’s claim for input VAT.
  • As per TPA Section 56 , It was incumbent on SSL to provide documents proving that it made some payments in kind and that it was indeed in an intercompany business transaction between it and one of its suppliers, Palak International Limited.
  • The burden would have been discharged by either providing the forwarding letter, which was used to forward all the documents that KRA had requested; or by filing all the documents that were supplied to KRA at the Tribunal This was not done.

As such, SSL lost

Proof of Payment for input VAT claim purposes

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