Unreconciled Variances Between Sales declared for VAT purposes and Sales declared for Income Tax purposes subjected to tax

Unreconciled Variances Between Sales declared for VAT purposes and Sales declared for Income Tax purposes subjected to tax

Case Study: Newmont Commodities v Commissioner of Domestic Taxes (Appeal E511 of 2023) [2024] KETAT 1307 (KLR) (6 September 2024) (Judgment)

KRA conducted a return review exercise comparing NC’s declarations of sales/purchases in the Value Added Tax  and Income tax returns and raised additional assessments of VAT and Income tax on the resultant variance for the years 2016 to 2018.

KRA issued its assessment orders for VAT for December 2016 and December 2018 and Income tax for the years of income 2016 and 2018 via  the iTax portal on 9th December 2021.

NC objected to the additional assessments on 8th January 2022.

The Objection was rejected by KRA.

NC appealed to the TAT. Among the grounds of appeal were:

  • That KRA erred in law and fact by charging VAT on the entire variance in sales for the year 2016 contrary to the provisions of the VAT Act, 2013.
  • That KRA was wrong in submitting to tax the entire variance in sales for the year 2017 after comparing the sales as declared in the VAT returns from those in the ITC return.

NC stated that:

  • KRA in its objection decision, subjected the sales in variance of Kshs. 816,650,793.40 in the year 2016 to VAT at the general rate of 16%, charging Kshs. 130,664.126.94.
  • KRA contravened the provisions of the Second Schedule to the VAT Act, 2013 by subjecting exempted sales in variance to VAT at the general rate of 16%.
  • KRA failed to understand that the goods that NC trades in are both vatable and exempted in their nature and by subjecting the sales in variance to VAT, KRA contravened the provisions of the VAT Act, 2013 which specify the class of goods or items that should be charged VAT and those that should not be charged VAT.
  • the variance as established by KRA in the year 2016 was in relation to rice importation as supported by the purchases contained in the Customs Management System.

KRA Responded That:

  • it noted variances between VAT and income tax declarations for the years of income ending December 2016 and 2017 and undeclared income from imports for the year of income 2018. That it issued VAT and income tax assessments following this finding.
  •  Section 31(1) of the Tax Procedures Act empowers it to make alterations or additions to an original assessment from available information for a reporting period based on KRA’s best judgement.
  • Section 51(3) and Section 59 of the Tax Procedures  require NC to provide records to enable KRA to determine its tax liability. KRA stated that NC failed to provide sufficient supporting documents.
  • KRA stated that from the documents that NC provided in support of the objection, KRA established that:

a. The variance between VAT and income tax of Kshs. 49,864,200.00 for 2017 and Kshs. 816,650,793.40 for 2016 for VAT was not supported by the records availed neither were explanations for the variances provided.

b. For the variances of purchases for the years 2016 and 2017, the taxpayer provided the ledgers with an explanation of the variances, as such the variance was sufficiently supported.

In its decision 06/09/2024, the TAT observed that:

  • Section 23(1) of the Tax Procedures Act  provides that a taxpayer is required to keep records as follows: –

“A person shall—

(a)maintain any document required under a tax law, in either of the official languages;

(b)maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained; and

(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

  • Despite the law under Section 62 of the VAT Act, Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act expressly placing a burden on NC to prove its case, NC in this case failed to discharge this burden to the extent that it did not provide any evidence to support its transactions that gave rise to the turnover variances in 2016 and 2017 for VAT and income tax returns.
  • NC thus failed to prove that its supplies in 2016 were exempt from VAT and that the declaration in the 2017 VAT return was an erroneous.

As such NC lost on this two grounds

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Unreconciled Variances Between Sales declared for VAT



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