The Importance of accounting ledgers in tax assessments

Case Study: Nakuru Cement Supplies Limited Vs KRA

The Importance of accounting ledgers in tax assessments –

KRA issued a Notice under Section 59(1) of the Tax Procedures Act, 2015_ dated 26th May, 2016 conveying its intention to commence an investigation or audit into NCSL’s tax affairs on 14th June 2016 and further requiring NCSL to provide certain documents. The investigations commenced with a meeting between NCSL and KRA on 14th June 2016.

During the investigations,

It was established that NCSL had not been filing corporate tax returns since 2011 and thus was advised to do so. NCSL complied with the directive and filed its Corporation Tax returns on 4th November 2016, and KRA then proceeded with further investigations.

KRA issued its audit/investigations findings vide a letter dated 11th July 2017 and requested NCSL to reconcile the variances by showing how they have accounted for the discounts/credits

NCSL objected to the findings vide a letter dated 14th July 2017 and further requested for a review of the whole audit/verification of the findings. Upon receipt of the said objection letter, KRA wrote to NCSL, inviting them for a meeting on Thursday 20th July 2017, to look into the issues raised. NCSL did not attend this meeting, nor did it respond to the letter either.

KRA proceeded to issue tax assessments totaling Kshs.3,833,386,522.00 on account of Value Added Tax and Corporation Tax for the years 2011 to 2015 upon NCSL vide a letter dated 14th August 2017.

Dissatisfied with the assessment, NCSL filed its Objection to the above assessments vide a letter dated 15th September, 2016. Upon receipt of the letter of objection, KRA wrote to NCSL on 22nd September 2017 informing them that they did not provide the necessary supporting evidence being the purchases and sales ledgers to enable them to process the Objection.

KRA, therefore, granted NCSL 14 days to provide the necessary documentation in support of its objection.

On 12th October, 2017, NCSL sought a 30-day extension to provide the required documents and information but was only granted 10 more days. KRA was of the view that a 30-day extension was impossible as it would surpass the statutory timeframe of 60 days under which an objection must be heard and determined.

In the absence of a response from NCSL, KRA issued its Objection Decision dated 10th November 2017, confirming its assessment and demand for VAT of Kshs.209,586,648 and Corporation Tax of Kshs.3,623799,873 for the years 2011-2015.

Aggrieved by the Objection Decision, NCSL lodged an appeal to TAT

NCSL averred that KRA sourced information from third-party suppliers. An analysis of this information revealed that NCSL had received discounts/rebates/credits or bonuses on purchases made from these third party suppliers, whereupon vide a letter dated 17th May 2017, KRA called upon NSCL to provide a reconciliation on how the discounts/rebates/credits or bonuses were accounted for. This letter was accompanied by a summary of the monthly purchases and rebates received from the third-party suppliers but did not have any supporting documentation.

NCSL further averred that while in the process of gathering information from the archives, KRA proceeded to issue Notices of Amended Assessments covering the years 2011 to 2015 dated 14th August 2017. NCS said action was done in bad faith, was unprocedural, unfair and contrary to the rule of law. This is because the period in question was wide and documents had been archived. KRA ought to have been understanding and granted NCSL more time to retrieve the documents.

NCSL argued that, the variances were as a result of KRA’s insistence on being supplied with physical invoices which could not be traced due to the passage of time and movements but the same had been provided to the Commissioner’s team when filing the Monthly VAT returns.

NCSL maintained that the above variances amounted to Kshs. 679,458,557.00 arose due to failure to produce physical invoices that could not be traced though there was proof from the VAT returns that they had indeed been filed in the monthly VAT returns for those respective years Therefore, NCSL rejected KRA’s variances amounting to Kshs. 1,073,507,540.

NCSL also argued that the amended assessment and objection decision were served out of the statutory limit of 5 years from the date of self-assessment. To NCSL, the five-year period in case of income tax ended on 30th June 2017, while that of VAT ended on 20th June 2017 for all returns for 2011. Therefore, the amended assessments raised for 2011 on 17th August 2011 were in contravention with Section 31 (4)(b)(i) of the Tax Procedures Act.

KRA averred that it commenced investigations in May 2016, and the audit findings communicated in the letter dated 11th July 2017 covered the years 2011 to 2015. That the delay in concluding the investigations was occasioned by NSCL’s failure to co-operate. In any event, KRA submitted that the law under Section 29(5) and (6) of the Tax Procedures Act empowers the Commissioner to look further into the accounts and business of the taxpayer where the taxpayer is found to have willfully neglected to pay taxes, or have evaded or been involved in tax fraud

KRA submitted that NCSL was fully engaged on the issues before confirmation of the assessments. It invited the Tribunal to look at the correspondence exhibited by both parties in the Statements of Facts. The correspondence showed that KRA notified NCSL of the findings, invited them to meetings to discuss issues arising from the investigations and even allowed NCSL extension of time to validate their objection.

Further, KRA averred that NCSL was given ample time to respond to the queries directed to them. KRA proceeded to issue notices of amended assessments after NCSL failed to provide the required information despite being called upon to do so several times.

KRA argued that the extension of the 5-year statutory limitation was well within their mandate, drawing from the provisions of Section 29(6) of the Tax Procedure Act, which empowers the Commissioner to exceed the limit under certain circumstances. Therefore, KRA argued that the 5-year limitation was inapplicable in this case.

In its decision on 11/4/2021 , TAT observed that:

(The Importance of accounting ledgers in tax assessments) –

NCSL was accorded an opportunity to present its case. Further, the parties engaged in an ADR review but were unable to resolve the disputed issues due to what appears to be NCSL’s failure to provide the requested documents nor could it reasonably explain why the documents were not retained as per Section 23 of the Tax Procedures Act. NCSL was then invited to a meeting to discuss issues arising from the audit findings, which invitation it did not honor. In all, there is no evidence to suggest that NCSL was never given an opportunity to present its case.
Section 59 of the Tax Procedures Act, 2015 requires the taxpayer to produce records pertaining to tax investigations
NCSL has a duty to submit records to the Commissioner under Section 58 of the Tax Procedures Act, 2015.
The taxpayer has a duty to keep its records for a period of 5 years in accordance with the provisions of Section 23 of the Tax Procedures Act
Section 23(1) of the Tax Procedures Act, 2015 requires a taxpayer to maintain documents required under any tax law for a period of 5 years from the end of the reporting date. The assessment in dispute commenced in 2016 and related to the years 2011 to 2015. Clearly, this was within the 5-year period that NCSL was required to maintain its documentation. Without any other plausible explanation, NCSL was required to provide all the requested documentation. It is also worth noting that NCSL was unable to produce such documentation required even for a single year
KRA was specific on the information and documents needed, being 2011-2015 purchase ledgers in support of the monthly purchases submitted and 2013 sales ledgers in support of the monthly figures reported, which NCSL failed to provide. Up to this point, the Tribunal found that KRA was not bound to consider the alleged evidence provided in soft copies.
KRA did not go past the 5 year limit since NCSL only filed its Corporation Tax returns on 4th November 2016 for the years 2011 to 2015 where after KRA issued its assessments within the set time limit of five (5) years

As such, KRA won the case

NCSL appealed to the High Court

On 16/12/2022, the High Court upheld the tribunal’s decision.

(The Importance of accounting ledgers in tax assessments)

The Importance of accounting ledgers in tax assessments

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