When lack of records result to disproportionate and excessive tax

CASE STUDY:TROPICAL OIL MOVERS LIMITED VS KRA

Toml is a fuel brokerage company.

On 6th September 2018, KRA wrote to Toml stating that the records it held indicated that Toml was a non-filer of Corporation Tax from the period 2016 to the date of the letter contrary to sections 24 and 26 of the Tax Procedures Act, 2015 (“the TPA”).

Toml did not comply with KRA’s demand. It proceeded to raise default assessments on 29th October 2018 for KES. 59,566,842.32 and KES. 58,373,669.85 for the income years 2016 and 2017, respectively.

Toml responded that as a fuel broker, the gross margins were below KES. 2.00 per litre. Hence, the turnovers could not attract such high taxes, which had been assessed at 80% .

In an email dated 26th November 2019, KRA requested additional documents from Toml to verify the sums represented in the audited accounts for the years 2015 and 2016 that Toml had submitted to KRA. The said documents requested included Bank Statements for the period 2014 to 2016, Sales Invoices for the period 2014 to 2016, Purchase Invoices for the period 2014 to 2016, Expense Invoices, Monthly ETR Z-Reports, Sales Schedules, Purchases Schedules and Expense Schedules .

Toml only forwarded the bank statements.

Upon objection decision confirming the taxes, Toml appealed to the TAT

In its judgement, TAT remarked that although Toml provided its audited financial statements for the period under assessment, Toml failed to provide relevant source documents to enable KRA to verify the contents of the financial statements. The Tribunal concluded that Toml’s objection failed to meet the validity threshold underscored by section 51(3)(c) of the TPA.

TAT further stated under section 56(1) of the TPA, a tax payer bears the burden of proving that KRA’s decision was incorrect and that in doing so, the taxpayer is aided substantially by the grounds of objection with the backing of evidence in the form of relevant documents. The Tribunal held that in addition to its failure to file its returns and objection notice in a timely manner, Toml failed to discharge the burden of proof placed upon it.

Toml appealed to the High Court

In its decision on 22/08/2022, the High Court observed that:

• In as much as Toml claims that it submitted documents that could have aided KRA to determine its correct tax position, Toml never furnished KRA with all documents requested by KRA in its email dated 26th November 2019 which included Sales Invoices for the period 2014 to 2016, Purchase Invoices for the period 2014 to 2016, Expense Invoices, Monthly ETR Z-Reports, Sales Schedules, Purchases Schedules and Expense Schedules.
• The documents are the kind which Toml is required to keep under section 23 of the TPA and which KRA was entitled to demand, and Toml obliged to produce under section 59(1) of the TPA.
• In addition, under section 56(1) of the TPA, Toml bears the burden of demonstrating that KRA’s decision in reaching the assessments complained was incorrect. By failing to provide the documents requested, KRA’s position on the assessments remained unchallenged as Toml failed to prove KRA was incorrect.

As such, Toml lost the appeal

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