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Mastermind loses bid to quash Sh442m KRA tax demand

WORK LIFE
By Patrick Alushula | Oct 9th 2017 | 2 min read
By Patrick Alushula | October 9th 2017
WORK LIFE
(Photo: Courtesy)

The Court of Appeal has upheld the High Court’s decision to allow the Kenya Revenue Authority (KRA) to recover Sh442.2 million in unpaid tax from cigarette maker Mastermind Tobacco.

Mastermind had gone to court challenging a KRA decision to demand the money as under-declared excise tax and penalty on its Supermatch brand of cigarettes.

In quashing the tobacco firm’s appeal, the court said it was satisfied that the taxman was legally justified in recovering the money and dismissed the entire case as lacking in merit.

Mastermind had alleged that KRA erroneously and unlawfully calculated the excise duty payable.

It further argued that the 2008 amendments to the Finance Act had created ambiguity and uncertainty in tax payment, claims the court dismissed.

“It is clear to us that the above amendment made a specific provision for determination of duty on cigarettes. The appellant (Mastermind) cannot validly ignore the amendment and rely only on sections 127 and 173 of the Act,” said the court.

Mastermind had argued that KRA made a reference to “the 5th column”, which did not exist, making the law ambiguous.

Judicial remedies

However, the Court of Appeal said this “cannot obliterate the duty to pay taxes”, which is clear enough in the act.

Prior to 2003, excise duty on cigarettes was determined on the basis of production costs, but that was changed in 2003 to be calculated on the basis of retail selling price per 1,000 cigarettes, also referred to as mille.

At the time, Supermatch was retailing at between Sh1,500 and Sh2,500 per mille and fell under category B. 

Despite the increase in excise duty on cigarettes in three consecutive years to 2007, the brand was not affected because its retail price remained in category B, which was being charged at Sh650 per mille.

In 2007, however, KRA argued in court papers that Mastermind increased the price to Sh2,560, therefore moving to category C where it should have started paying tax of Sh900 per mille. 

Consequently, the taxman slapped the firm with the additional tax in June 2008. Mastermind, which did not switch to the new price, told the court it was not in control of the price at which retailers sold the brand and it was, therefore, unfair of KRA to assess tax on prices that already had Value Added Tax.

It termed KRA’s move “unfair, absurd, arbitrary, capricious and calculated to frustrate legislative intent”.

The court also ruled that the law for the period in dispute was clear that tax was based on retail price.

“There is in our view no justification for issuing judicial review remedies on the basis of illegality on the respondent’s part,” ruled the court.

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