KRA loses Sh427 million tax demand from drug manufacturer

NAKURU, KENYA: Pharmaceutical manufacturer, Universal Corporation Limited has won a reprieve after the High Court quashed Sh427 Million tax demand from Kenya Revenue Authority (KRA).
Universal filed the case after KRA wrote a demand letter in November 28, 2013 claiming Sh427 Million unpaid Value Added Tax (VAT) for the period January 2008-November 2013.
The drug manufacturer in the case claimed the government in a bid to reduce the costs of drugs and pharmaceuticals had waived all taxes on raw materials for packaging and manufacture of medicaments in 1995.
In the case, the company told the court the waiver followed an agreement between the ministry of Health, Treasury and Federation of Kenya Pharmaceutical Manufacturers.
However KRA while arguing its case said desk audit for January 1, 2008 to October 31, 2013 noted that the drug manufacturer had not paid import VAT on raw materials and packaging materials which would have attracted 16 per cent VAT.
The audit on import statistical data also revealed that the drug manufacturer was importing raw materials for manufacture of medicaments and wrongly lodging them into the Simba System.
KRA argued that the non-payment of VAT by the drug manufacturer was a deliberate ploy to evade payment of tax.
Justice George Odunga in his decision noted that the tax exemption enjoyed by the drug manufacturer was removed in 2001 but faulted the tax man for failing to claim the VAT from the company.
"In this case, it is clear that prior to the year 2001, the applicant enjoyed tax exemptions on VAT in respect of raw materials and packaging for manufacture of pharmaceuticals," Odunga noted. "Whereas in 2001, the said exemption was removed, no VAT was claimed from the applicant whether deliberately or inadvertently."
He noted that the drug manufacturer in his defense had contended that it was no longer in position to adjust prices of its products to bear the cost of import VAT.
"The effect of this is that the applicant would have to bear the loss which but for the inaction on the part of the respondent, it would have otherwise not absorbed," he ruled.
The Court, however, noted that from the June 2001 to May 2014 there was no specific legal regime exempting it from payment of the subject taxes.
Despite the government policy facilitating production of cheap medicines the Court noted that the minister of Finance had not translated the policy into law.
"The Respondent (KRA), in my view by its failure to act prudently, cultivated in the applicant legitimate expectation that the position prevailing before 2001 would continue to prevail notwithstanding the 2001 amendments to the Finance Act," he held.