The Kenya Revenue Authority (KRA) has suffered a setback in a case against 45 companies it is probing for suspected tax fraud.
On November 12, the High Court ruled against the taxman in a case in which it is accusing the firms of tax evasion, noting that it breached their legal and constitutional rights.
“The petitioners have established a violation of their right to fair administrative action and breach of their legitimate expectation,” said Justice Korir.
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KRA was investigating the companies for engaging in what is known as “missing trader fraud,” where taxpayers who do not make taxable supplies use fictitious tax invoices to claim input Value Added Tax (VAT). KRA estimates that the country has lost Sh30 billion in unremitted taxes through the missing trader scheme, money that could have afforded the country another Thika Super Highway.
It said the companies were identified as beneficiaries of the scheme and thus it issued them with a demand notice of underpaid taxes.
But the companies argued that KRA violated the procedures for assessment and audit for tax purposes as laid down in the provisions of the Tax Procedures Act, 2015.
Their lawyers told the court they were not allowed to respond to allegations of tax fraud levelled against them.
KRA, they argued, amended the demand notice requiring them to pay the taxes within seven days.
The tax agency warned that failure to comply would see the unpaid taxes accrue penalties and interest.
The traders also alleged that KRA intimidated, harassed and threatened them in what they said was aimed at scaring them from asserting their rights and countering the tax authority’s allegations against them.
One of the directors of the accused companies is also reported to have been barred from leaving the country for specialised medical treatment in India.
KRA termed the petition an abuse of the court process, as the proper forum to hear and determine the matter is the Tax Appeal Tribunal. But Justice Korir dismissed the taxman’s argument.
“The court also has supervisory jurisdiction over subordinate courts and any person, body or authority exercising a judicial or quasi-judicial function,” he said, adding that the petitioners’ case was not whether they should pay the taxes demanded by KRA.
“Their case is that the respondent (KRA) failed to follow the legal procedure as laid down in the TPA and other tax statutes,” explained Korir.
However, in what is a reprieve to KRA, the judge said the tax authority is free to restart the criminal case against the companies.