Drug company loses case against Kenya Revenue Authority on tax evasion

Kenya: The Kenya Revenue Authority (KRA) has for several years been engaged in protracted court battles with various local and multinational companies over tax evasion.

One such company is the Pharmaceutical Manufacturing (K) Ltd. The firm which manufactures medicines for sale in Kenya, Uganda and Tanzania supplies 28 per cent of drugs consumed in Kenya annually. It has 30 plants in Kenya, six in Uganda and eight in Tanzania.

On November 28, 2013, KRA sent the company a demand note for Sh122,660,538 as unpaid Value Added Tax (VAT) for imports covering the period between January 1, 2008 and November 21, 2013.

In January, the company rushed to court to challenge the notice. It filed a petition at Milimani High Court through its Managing Director Kumar Shah, a director Mr Utamchand Shah and Christine Souza, the administrative manager.

The firm took issue with the new VAT Act of 2013, arguing it imposed VAT on their raw and packaging material imported for the purpose of manufacturing medicine.

They claimed the law violated their constitutional right to equal protection and equal benefit of the law under Article 27(4). Their right to property had been violated by requiring them to pay the VAT. The managers argued their right to health to the highest attainable standard had been violated. They sought various declarations, all protecting them again the requirement to pay import VAT. They also sought declaration that the demand to pay Sh121.6 million as VAT was unconstitutional, null and void.

They claimed that for many years, they had been recognised as the leading manufacturers of pharmaceutical medicines in Kenya hence entitled to exemption from payment of VAT. They claimed that from 1988 to August 2013, the law exempted them from paying VAT on imported raw material and packaging material, until the new VAT Act was passed last year.

The company said it had paid between Sh700,000 and Sh1 million as VAT since September 1, 2013 to the time they filed the petition. Consequently, they had been compelled to increase the prices of their medicines by 20 per cent to cover the costs, hence the products had become less competitive in Kenya. Its production capacity had reduced to 40 per cent and was likely to be rendered useless by mid 2014.

Imported drugs

The firm argued that foreign manufacturers of medicines were exempted by the law from paying VAT on imports while the local firms were required to pay the same on raw and packaging materials. Kenyans were forced to consume imported drugs that were not necessarily safe. They sought borders quashing the notice and permanently stopping KRA from demanding the money.

However, the KRA Commissioner General opposed the petition through papers filed by senior revenue officers Martin K’Otieno and Grace Okuku.

They argued that the dispute was precipitated by an audit carried on the company for the period in question.

That during the post clearance audit, it was established that the pharmaceutical company had been declaring its imported raw and packaging materials for the manufacture of medicines as being exempted from VAT, which should not have been the case. The officers said the VAT demand was lawful as the tax had already become payable between 2008 and August


KRA submitted that raw and packaging materials for manufacture of medicament had never been exempt from import VAT, whether under the previous or the current law.

The Attorney General who had been named as a respondent in the petition, did not file any response or make any submissions.

High Court judge Justice Isaac Lenaola singled out one issue for determination, whether the imposition of import VAT on raw and packing materials for purposes of manufacturing medicine by the company was lawful or not.

The judge gave a thorough analysis of the provisions of the various statutes on taxes and payments.

He also analysed the facts of the case and concurred with the revenue officers that between January 2008 and November 2013, the company was not exempted from paying VAT.

“From my summary, it is clear to me that whereas all the legal provisions relating to VAT exemptions existed and were in operation during the material time, there is no evidence that those provisions were applicable to the first petitioner, nor was it entitled to enjoy VAT exemption as claimed,” Lenaola concluded.

He noted that the firm had been declaring the imports of its raw and packaging materials for the manufacture of medicament as VAT exempt.

“The first petitioner cannot devise methods of avoiding tax and then claim that it had been exempted of the same,” he added.

Less stressful

After holding there was no right to VAT exemption as contended by the company, the judge ruled that no constitutional rights could accrue, hence there was no reason to determine the issues raised by the firm and its directors’ regarding the violation of their rights.

But he took issue with KRA, questioning why they took such a long period to discover that the company was not paying import VAT. “The sum demanded of the 1st petitioner is indeed high and no business entity, however successful, will find it easy to pay. Let parties negotiate a less stressful approach to the issue including seeking waivers and payments by instalments,” the judge ruled.

He dismissed the petition by the drug firm but ordered each party to pay their own costs of the case.