Validity of a Tax Objection Notice

Case Study: Mukasi Builders Limited vs. KRA

KRA conducted a compliance  assessment  on MBL’s VAT returns  and  annual  income  tax.  The affected months on VAT returns were December 2015. December 2016. December 2018, December 2019, and June 2020. For the annual  income tax returns, the periods  affected  were  in 2015.  2016, 2017 and 2018
On 13th  October 2020,  KRA  communicated its findings to MBL  indicating  that  taxable   income  as per  payment  from  Embu County in June 2020 was not declared,  IT2C vs VAT declaration  variances were observed and that MBL had been claiming capital allowances.
KRA  asked MBL  to review  the  returns  &  submit supporting  documents. MBL was  also advised  to amend the returns, make  the  necessary   payments  and  provide  supporting documents within  14 days.
On  2nd   December   2020,   KRA   issued  a  notice   of assessment and  demand  for tax of Kshs. 6.4m  for VAT and Kshs. 23.6mfor  income  tax, on grounds  that MBL “failed to  respond  to  the  issues  raised  by  either  providing  the requested documents  or amending  the  affected  returns.”  The  letter also advised  MBL that  in case it disputed the  assessment,  it had a right to object  for the assessment  in accordance  with  Section  51 of the Tax Procedures Act, 2015.
On  20th January 2021,  KRA  sent a notice  for demand  of tax in arrears  of Kshs. 55.9m,  for the period  December  2015 to October 2020.  MBL was given  seven days within  which to pay.
MBL objected  to the assessment through  a letter received by the Respondent  on 29th January 2021.
The notice of  objection  was rejected on the grounds that it was not validly lodged. The rejection of the notice of objection  was the genesis of this appeal

MBL appealed to the TAT.

The  appeal  was  premised  on the  following  grounds  as stated  in the Memorandum of Appeal filed with the Tribunal on 11th June 2021;-
  • The  dispute   to  be  adequately   addressed   through  an  alternative dispute  resolution   (ADR).
  • KRA  to  review  their additional   assessments  or start a new assessment.
  • MBL   as taxpayer  be given  fair tax administration  and  tax (if any),  resulting  from  this case.
  • KRA   to  lift  the   bank   restrictions    to  allow   MBL   to resume  business  as the case is being  solved.

KRA responded that:

  • MBL  lodged  an invalid  objection  notice  that  did  not meet the  threshold  specified  under  Section  51(3)  of the  Tax Procedures Act.
  • MBL failed  to precisely  state  the grounds  of objection,   the amendments required  to  be  made   to  correct   the  decision,   and the reasons   for  the  amendments   contrary   to Section51 (3) (a) of the TPA, 2015.
  • MBL failed  to  discharge   his evidential   burden   of  proof under  Section  107 (1)  of the  Evidence  Act in demonstrating  that  the assessment by  the   Respondent   was  in  any  reasonable    manner, incorrect or excessive.

In its ruling on 09/09/2022, the Tax Appeal Tribunal observed that:

  • The failure to submit documents  is in contravention  to Section 51 (3) of the Tax Procedures
A notice  of objection  shall be treated  as validly  lodged by a taxpayer under  subsection  (2) if
(a) the notice of objection states  precisely the grounds of objection,  the amendments required to be made to correct the decision, end the reasons for the amendments;
(b)in relation to an objection  to an assessment,  the taxpayer  has paid  the entire  amount  of tax due under  the ‘assessment that  is not  in dispute  or has applied  for an extension of time to pay  for the tax not  in dispute  under section  33(1);  and…..
  • KRA has statutory  powers to request documents   and  information   from  a  taxpayer   for  purposes   of determining the taxpayer’s  tax liability.  This is provided  under Section 59 (1) (a) of the Tax Procedures Act, which stipulates that:-
“For purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to the tax law, the Commissioner or an authorized officer may require any person, by notice in writing, to -(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person’s custody or. under the person’s control relating to the tax liability of any person;”
  • MBL did not pay the tax in dispute before submitting the objection as required by the law.
Section 51(3) (b) of the Tax Procedures  Act clearly states that a notice of objection shall be treated  as validly lodged by a taxpayer  under subsection
(2) if- “In relation to an objection assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1);.”
Having found that the objection  was not validly lodged,  the Tribunal did not  delve  into the other  issue that  fell for its determination as it was rendered moot
Validity of a Tax Objection Notice

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