High Court’s VAT ruling opens Pandora’s box on tax collection

KRA Commissioner General Githii Mburu speaks during the launch of the Taxpayers month on October 4, 2021. [Wilberforce Okwiri,Standard]

A High Court’s verdict that the 2017 Value Added Tax (VAT) regulations are invalid has put Kenya Revenue Authority (KRA) in limbo - exposing it to huge claims and court cases from taxpayers seeking relief and refunds.

Justice David Majanja found that the regulations ceased to have any effect on April 11, 2017, as the then National Treasury Cabinet Secretary (CS) Henry Rotich never tabled them before the National Assembly as required by law.

The decision means that KRA’s cannot deny taxpayers a refund based on the now invalidated regulations.

Taxpayers who based their VAT refund on the regulation will is also exposed. It will also have an impact on monthly VAT compliance.

According to Justice Majanja, the CS was required to submit the regulations to the National Assembly within seven days of publication in the Kenya gazette.

The judge made the ruling while settling a dispute between a maritime firm W.E.C Lines Kenya Ltd and the Commissioner of domestic taxes over a Sh6 million VAT tax refund.

Tax refund

W.E.C through its lawyer Hamilton and Mathews had asked KRA to consider a refund for the period between February 2015 and January 2018 on the basis that it was offering zero-rated services to its parent company based in the Netherlands, W.E.C BV.

KRA declined to give a refund based on the 2017 VAT regulations arguing that the agency agreement showed that the Kenyan firm is paid a commission for customer care and post landing services that were used and consumed in Kenya.

The commissioner also concluded that the firm’s supplies do not qualify as exported services and as such were taxable at 16 per cent. 

The judge disagreed with the Commissioner by finding that the regulations he was relying on became invalid on the eighth day after the CS failed to table them in parliament.

“I hold that the VAT Regulations, 2017 ceased to have any effect immediately on the eight-day after the said regulations were not tabled before the National Assembly,” ruled justice Majanja.

“The Commissioner could not apply them to the respondent’s case as they were at the time null and void.”

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