Taxpayer’s Burden of Proof in Tax Disputes


SSL is a supermarket

Sometime in April 2018, KRA commenced a review of SSL’s tax declarations and communicated its preliminary findings through the letter dated 16th April 2018.

According to KRA, between the period August 2014 and January 2018, SSL used invoices from some listed suppliers for which no deliveries were made to account for its input VAT and that the same invoices were used to account for expenses in its financial statements thus reducing SSL’s income tax liability as well. As a consequence, KRA required SSL to pay underpaid taxes amounting to KES 60,095,206.00 as KRA continued to analyse the information it held.

Between 2nd May and 2018 and 10th May 2018, KRA issued various VAT additional assessments in respect of underpaid VAT wherein KRA demanded KES 20,906,054.14 together with interest of KES 5,095,819.60. SSL objected to these assessments by the letter dated 28th May 2018 on the grounds that it had claimed input VAT using valid tax invoices which are electronic tax register receipts or ESD compliant and that a file containing the copies of the invoices along with the ETR receipts or ESD signatures had already been submitted to KRA through its earlier letter of 27th April 2018.

SSL further stated that section 17(4) of the VAT Act, 2013 does not prohibit one from claiming input VAT on the items listed in KRA’s schedule and also does not stipulate that the supplier has to pay output VAT for SSL to claim the input VAT the collection of the tax.

In response to the objection, KRA emailed SSL on 11th June 2018 seeking proof of payment, bank statements for the period November 2014 to March 2018 and stock records for the same period to be furnished within seven days of the email

In the meantime, KRA also issued various income tax additional assessments on 21st May 2018 in respect of underpaid income tax and demanded KES 26,631,885.24 together with interest of KES 5,540,977.08. SSL objected to these assessments through its letter dated 7th June 2018 on the grounds that it had claimed purchases using valid purchase documents which were fully paid to the suppliers and that section 45(1) of the Income Tax Act allows it to claim expenditure that are wholly and exclusively incurred in the production of business income. SSL, therefore, asserted that the purchases/expenses claimed in its books of accounts are legitimate expenses and should be allowed for tax purposes. It maintained that the amount assessed is not as per the tax returns submitted, and thus, the tax decision raised by KRA was erroneous and excessive in the light of the grounds raised.

In response to the documents requested by KRA, SSL responded through its letter dated 25th June 2018 where it indicated that it had sent the bank statements to KRA in soft copy on 20th June 2018 and that the letter was submitting payment details for the invoices in question. On the request for stock records, SSL stated that the same were huge and bulky, and it suggested that KRA physically verify them at its premises.

In response to the objections, KRA made two objection decisions dated 12th July 2018 and 6th August 2018. KRA held that not withstanding SSL’s assertion that it has maintained full records for the purchases disallowed, KRA had established that there was no supply of taxable goods made by the said listed suppliers and in this regard, KRA confirmed the assessments as issued.

SSL appealed to the TAT

In its ruling, the tribunal observed that:

a) A brief perusal of the evidence provided by SSL indicated that it had indeed met the threshold under section 17 of the VAT Act, 2013 for qualifying for input VAT deduction but that KRA, in disregard of this evidence, had disallowed SSL’s claim on the premise that its investigations revealed that SSL was engaged in a missing trader scheme without any shred of evidence to back its position

b) once the taxpayer had satisfied the requirement of section 17 of the VAT Act, 2013 in its claim for deduction, its legitimate expectation began to accrue and KRA, by disallowing its claim without a basis in law has grossly injured this expectation

c) The legal burden of proof normally rests upon the party desiring the court to take action, thus a claimant must satisfy the court or tribunal that the conditions which entitle him to a claim have been satisfied which is in line with the provisions of section 107 of the Evidence Act (Chapter 80 of the Laws of Kenya). The Tribunal noted that the very nature of KRA’s allegations was that SSL was in a fraudulent scheme to claim input VAT and that the Tribunal has been unequivocal and unrelenting in reminding KRA in similar claims that the standard of proof in fraud is distinctly higher than the normal civil standard of balance of probability and KRA had not attained or satisfied that standard.

As such, TAT ruled in favour of SSL

KRA appealed to the High Court.

In its ruling on 25/04/2022, the High Court observed that:

a) Section 30 of the TATA and section 56 of the TPA impose the burden of proof on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect

b) The record shows that KRA visited SSL’s premises where it stated that no stock records were availed and that this is what led to KRA’s conclusion that there were no actual purchases made.

c) SSL failed to discharge its legal burden of proof and failed to disprove KRA.

As such SSL lost. Consequently the TAT ruling was quashed.

Taxpayer's Burden of Proof in Tax Disputes

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