- August 8, 2024
- Posted by: admin
- Category: Uncategorized
Case Study: Kenya General Industries Limited v Commissioner of Domestic Taxes (Tax Appeal E643 of 2023) [2024] KETAT 717 (KLR) (17 May 2024) (Judgment)
The issue in dispute in this Appeal arose when KGIL applied for Withholding VAT (WHVAT) refund from where KRA opted to conduct a validation exercise to confirm the WHVAT refund. That before the validation exercise was completed, KRA issued KGIL with credit adjustment vouchers putting KGIL in a continuous credit position.
Aggrieved by KRA’s inaction KGIL lodged its Appeal seeking the intervention of the Tribunal vide a Notice of Appeal dated 29th September 2023 and filed on 2nd October 2023.
KGIL Argued that:
- It applied for a WHVAT refund following which KRA conducted a validation exercise to confirm the WHVAT amount available for refund.
- Before the validation exercise was completed KRA issued it with credit adjustment vouchers thus putting it in a continuous credit position.
- Vide an email dated 28th March 2023 KRA informed it that it could re-apply for the refund, however an analysis of its ledger indicated that most of its credits had already been utilized.
- Subsequent hereto the parties held several meetings and also exchanged several correspondences but no formal decision was issued regarding its WHVAT refund application.
- It is this failure to obtain a response to its letter and its confusion on how KRA had applied its available credits refund which precipitated this Appeal.
- It had noted that:
- In September 2017, KRA issued a credit adjustment voucher and transferred the Withholding VAT credits to the following month of August 2018 and October 2018.
- In August 2018, KGIL was in a credit position for both normal credits and WHVAT credits. That it was thus not necessary to transfer WHVAT paid from September 2017 to August 2018.
- In October 2018 KGIL was in a payable (output-input) position of Kshs. 5,089,671.81. That the WHVAT in the same month was Kshs. 5,554,360.00 thus the company ended up being in a credit position for the month.
- Input tax credit brought forward from a previous period becomes input tax of the current month and should be deducted from the output tax together with the input tax of the current month before utilizing the WHVAT for the month.
- KRA had acted in contravention of the law by misinterpreting and misapplying Section 17(5) of the VAT Act, 2013 by utilizing WHVAT credits to offset VAT payable instead of utilizing accrued input tax credits brought forward, thus denying it the opportunity to rightfully claim its withholding VAT refund.
- It was in a net WHVAT credit/refund position amounting to Ksh.125,705,977.27. That this amount is however not available for refund as provided by the VAT Act due to the erroneous utilization of the WHVAT before the deduction of input tax credit brought forward by KRA.
KRA responded that:
- Section 17(5) of the VAT Act 2013 does not dictate or specify the order or priority of utilization credits when a taxpayer has both withholding VAT and WHVAT credits from certificates issued in a month, and credit brought forward from the previous month. That the Section only clarifies the nature of excess credit that is eligible for a refund given that not all credits are refundable.
- Once utilized, the WHVAT credits become unavailable for refund application hence “the lack of opportunity for KGIL to apply”. That its iTax system is designed to block applications in respect to utilized/unavailable WHVAT credits to bar taxpayers from enjoying double benefits from the same credit, being used against liability owing and similarly paid towards refund applications.
In its ruling on 17/05/2024, the TAT held that:
- The relevant Section of the TPA that deals with refund of overpaid tax is Section 47 (1) to (3) which provides as follows:
“(1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form—
(a)to offset the overpaid tax against the taxpayer’s future tax liabilities; or
(b)for a refund of the overpaid tax within five years, or six months in the case of value-added tax, after the date on which the tax was overpaid.
2.The Commissioner shall ascertain and determine an application under subsection (1) within ninety days and where the Commissioner ascertains that there was an overpayment of tax—
a. In the case of an application under subsection (l)(a), apply the overpaid tax to such future tax liability; and
b. In the case of an application under subsection (l)(b), refund the overpaid tax within two years from the date of the application.
(3)Where the Commissioner fails to ascertain and determine an application under subsection (1) within ninety days, the same shall be deemed ascertained and approved.”
A plain reading of the above provision of the law makes it apparent that:
a. A taxpayer is at liberty to apply for a refund of overpaid tax within five years, or six months in the case of Value-Added Tax, after the date on which the tax was overpaid.
B. In case of a refund, the Commissioner is required to refund the overpaid tax within two years from the date of the application.
c. If the Commissioner does not issue its decision for refund within 90 days then the same shall be deemed to be ascertained and approved.
- Section 47(3) dictates that KRA must issue its refund decision within 90 days from the date of receipt of an application failure to which the same shall be deemed ascertained and approved.
- KGIL made its refund application on 6th November 2020. It follows that KRA was thus required to issue its refund decision by the 5th of January 2021. Its failure to issue the said refund decision meant that the refund application stood allowed on the 5th of February 2023
- The plain reading of Section 47(3) of the TPA anticipates that KRA is required to issue a decision to KGIL’s application. Such a decision must be clear that it is a response to KGIL’s refund application. That decision cannot be camouflaged in a credit adjustment voucher. It has to be a clear and express decision addressed to KGIL and stating in plain terms whether the refund application has been allowed, and if it has been declined the reasons for such refusal ought to be provided
- Upon the grant of the refund decision by dint of Section 47(3) of the TPA, KRA was required to commence the refund process of KGIL’s refund application. It instead opted to utilise KGIL’s WHVAT credits to offset VAT payable in a manner that KGIL contends is contrary to Section 17 of the VAT Act.
- A conditional refund decision would have thus made KGIL aware of the conditional grant of its refund application. It would have also afforded KGIL the opportunity and right of Appeal if it was not agreeable with that refund decision.
