VAT is chargeable at the instance where there is a supply of service to any person, regardless of the connection the person has with the supplier

Case Study: KRA vs. Pesa Link

KRA, after a verification of IPSL affairs which established that IPSL had not levied VAT to KBA members for use of its Pesalink Platform issued a VAT tax demand for Kshs.17,508,000/-.

The case ended up at the TAT

On 06/008/2021, the TAT ruled in favour of KBA that:

• VAT on joining fees by members of KBA was set aside.
• IPSL was liable to pay VAT on joining fees paid to IPSL by non-members of KBA
• Claim for input VAT made within 6 months of the end of the tax period was allowed

KRA appealed to the High Court

KRA argued that :

• Having established that IPSL was not levying VAT for use of its Pesalink platform by KBA members, KRA argued that it had computed the value of the supply in line with section 13(1) (b) of the VAT Act and assessed the tax payable based on the open market value of the supplied services. KRA submitted that it established that non-members of KBA were charged Kshs.2,500,000/- as a joining fee, and it is this rate that KRA applied to assess the VAT due on the taxable supply.
• KRA further argued that providing a platform for a consideration amounts to the supply of service subject to VAT pursuant to section 5 read together with section 2 of the VAT Act, 2013. Further, section 5(3) of the VAT Act places the burden of accounting for VAT in the supplier of the service, in this case IPSL.
• KRA reiterated that section 17 of the VAT Act, 2013 is unambiguous and sets clear guidelines that Taxpayers have up to six month to claim input VAT and the same ought not to be claimed monthly when VAT returns are made. If no such claim is made, then that input VAT is no longer available to the taxpayer.

IPSL responded that:

• Members of KBA financed the establishment of the Pesalink platform by contributing funds to KBA as shareholder loans and by virtue of financing the creation of the platform, they were not required to pay a joining fee or enlist to use the platform. IPSL, however, charges a one-off joining fee to non KBA members of Kshs.2,500,000/- which amount is levied VAT, under the Act.
• IPSL submitted that the Tribunal was right in finding that the assessment by KRA on VAT by KBA members was premised on the wrong assumption that money contributed by the KBA members could be treated as joining fee and hence be deemed Vatable under the VAT Act. It is the argument of IPSL that the two years under review, the funds so paid to IPSL by KBA were loans to support its establishment that the same would be recoverable in the future in the event that the platform returned a profit. In the interim period, the KBA members continue to use the pesalink platform at no cost

In its ruling on 18/04/2023, the High Court observed that:

• VAT, being a consumption tax, is chargeable at the instance where there is a supply of service to any person, regardless of the connection the person has with the service provider or supplier. It matters not the relationship between IPSL and KBA and its members in the affairs of IPSL. The determinant factor is that once IPSL supplied a taxable service, then VAT became due and payable on the same. Therefore the position taken by the Tribunal in setting aside the assessment of the VAT due from IPSL on account of services supplied to KBA members through its Pesalink platform was erroneous and misinterpretation of the VAT Act since section 5 of the Act does not provide a category for exemption.
• IPSL filed its VAT returns late, outside the 6 months period as prescribed by the VAT Act. In light of this, the Tribunal erred in finding that the claim of input tax by IPSL should be allowed

The High Court concluded that the tribunal erred in its holding that the KBA members were exempted from VAT for use of the Pesalink platform of IPSL and allowing IPSL to claim input tax outside the 6-month window set by the VAT Act.

As such the High Court ruled in favour of KRA

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