What Amounts to ‘’Processing’ for Tax Purposes

By a letter dated 13th January 2013, KRA informed KNL of its intention to conduct tax audit for period between 2009 and 2012. KNL obliged and KRA carried out an audit on KNL after which it made a decision to demand some Value Added Tax (VAT) for the period of 2010 to 2012. By a letter dated 17th March 2014, KRA raised a demand for Kshs 20,033,422.00 against KNL claiming that KNL had failed to charge VAT for the said period in respect of transport services supplied or offered to its customers for transport from the customers’ farms to Jomo Kenyatta International Airport.

KNL raised an objection to the demand which KRA overruled by its letter dated 17th March 2014 resulting to the appeal before the Tax Appeals Tribunal.

The tribunal ruled in favour of KNL.

KRA appealed to the High Court. The grounds of the appeal case was that:

the transport services for cut flowers offered by KNL within the country were VAT chargeable but KNL had failed to charge the same.

KNL admitted that:

it provided the said services but took the position that the transport was for unprocessed agricultural produce and by virtue of Paragraph 17 of Part A of the Fifth Schedule to the VAT Act Chapter 476 of the Laws of Kenya which has since been repealed, the services were zero rated.

To the contrary, KRA maintained that the cut flowers were processed agricultural products and the transport was local and hence could not fall under the zero-rated category.

KRA argued that:

the zero rating of transportation of unprocessed agricultural produce was applicable only where the transportation was outside the country such that even if the flowers were to be categorized as unprocessed agricultural produce, the transportation services would still be standard rated because it ended at JKIA.

In its ruling on 13/12/2024, the High Court observed that:

• Processing involves carrying out a procedure which comes out with end result of products whose character or characteristics and nature are different from the original product. This would entail value addition and use of chemicals or other reactive media that alters the characteristic features of the produce. In relation to this matter, it would mean that the flowers have underwent a process in which they would be used as raw materials to make finished products and not end as flowers in their original forms.
• Procedure of dipping the flowers in a hydrating solution in order to preserve their original form does not pass for processing. If a product undergoes processing, it must be changed from the form it is at the time of preservation so that when the preservation reagent is removed and it does not go back to the same state it was with the same risks which would have affected it in its original form. In other words, the flowers in question would if processed withstand external vagaries such that their expiry or drying is not dependent on their very nature as at the time they are cut
• As long as the transportation services were for the unprocessed food produce, they were VAT zero rated.

As such KRA lost

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