How KRA’s error and backdating of tax led to tussle with brewer

Former Kenya Revenue Authority Commissioner General John Njiraini (centre) during a visit to Naivasha-based Keroche Breweries in 2016. [File]

The dispute between Keroche Breweries and Kenya Revenue Authority (KRA) over Sh9.1 billion tax is becoming a mega show of deceit that exposes dark forces threatening existence of local companies.

For 14 years, the alcoholic manufacturer has not known peace as it fights with KRA over alleged tax debt for a non-existent drink it stopped producing in 2007.

It is one of the longest running tax disputes in the country, having gone to the High Court, Court of Appeal, Tax Appeals Tribunal (TAT) and now taking the same route again with looming uncertainty for local entrepreneurs facing the heat of hostile tax environment.

It is the fear being expressed by Keroche through an application at the High Court challenging the tribunal’s decision allowing KRA to demand the Sh9.1 billion tax.

“KRA knows we don’t owe them, that we never collected the exorbitant amount and that the money does not exist in our accounts. Our question is how they allowed us to manufacture for 10 years, collect taxes then turn around and backdate our taxes,” claims the company.

After the tribunal delivered its verdict on March 9, KRA issued agency notices demanding Sh9.1 billion which created an impression Keroche Breweries has not been paying taxes.

But documents filed in court by the company reveal a grim picture of the dark tax world, unjustified demands, discrimination and a push that can be equated to a selfish entity playing victim of their own mistakes.

The dispute revolves around two of Keroche’s products, Vienna Fortified Wine which stopped being produced in 2007 and Vienna Ice ready-to-drink vodka which too is on its death bed due to KRA tax demands, which pushed its price beyond reach of population it targeted.

The company has raised questions over KRA’s insistence to be paid the whopping Sh9.1 billion despite two previous court decisions, both at the High Court and Court of Appeal which found that the demands were unjustified and illegal.

“KRA wants us to pay for their error and are not telling the truth when they create impression that we don’t pay taxes. They even acknowledged that they made an error in backdating our tax and pursuing what is not there,” swore Keroche CEO Tabitha Karanja in her affidavit.

Records show the company was classified by KRA as a large tax payer with an approximated Sh2 billion annual tax remittance which is projected to increase with a larger market share.

The dispute dates back to 1997 when KRA classified Vienna Fortified Wine under Harmonised System Code Tariff 22.04 which attracted 45 per cent tax, a position reconfirmed by KRA’s assistant commissioner HM Mulwa in April 1998.

But after nine years, KRA changed tune in October 2006 claiming they made a mistake and decided to classify the product on higher tax tariff of 22.06 which increased the tax rate to 60 per cent.

The company objected, but KRA stood its ground and went ahead to assess the arrears and backdated to five years totalling Sh1.1 billion.

Keroche’s argument was that they were being forced to pay for what they did not collect from consumers since they were selling the drink at a lower price.

The dispute went to Parliament which rejected the proposals to increase taxes on locally manufactured drinks.

Former Trade Assistant Minister Omingo Magara who in 2007 was a member of a parliamentary committee that handled the dispute stated that KRA acknowledged their mistake since it was clear taxation does not work retrospectively.

“Tax cannot work retrospectively, it is a matter of fact and if you can’t agree on facts then there is no law which can change that fact. It was a factual position for us that KRA attempted to backdate the tax it demanded from Keroche,” said Magara.

Keroche also challenged the tax demands in court arguing that KRA had checked all its tax returns and countersigned all payments made every month.

In addition, KRA had officials stationed at the factory who monitored daily output from the bonded warehouse, conducted audits and had never raised any issue about the wrong tax classification.

“We were convinced the tax demands were not genuine as we had complied with our tax obligations and overpaid by Sh84 million. It was not a normal dispute between a taxpayer and the taxman,” claimed Keroche.

According to the company, the tax wars were being fuelled by competitors and their announcement of putting up a Sh5 billion plant to increase production that was viewed as threat to the dominant players in the beer making industry.

In response, KRA insisted they were justified in backdating the tax after realising their mistake of classifying Keroche’s Vienna Fortified wine.

Justice Joseph Nyamu in a decision delivered on July 6, 2007 quashed KRA’s demands, ruling that the change of tariff and its application retrospectively was a threat to rule of law, unjustified and an abuse of power.

Ironically the 2007/08 Finance Bill changed classification of Vienna Fortified wine to tariff code 22.06 which increased tax duty to 60 per cent which tripled its price while zero rating tax on similar products made by Keroche’s competitors.

The company was forced to stop producing the wine but since its core value was to serve the low end market, it came up with a new product, Vienna Ice ready-to-drink Vodka which was an innovative drink where alcohol was mixed with water in the prescribed percentage.

“We introduced another ready to drink beverage in 2007, but it was interesting to note that our competitors had the same year  introduced a lower price Keg to try and catch us up in the low end market with their product being zero rated,” said Ms Karanja.

Keroche’s idea in the new vodka was similar to what a consumer would do when mixing vodka with water. They made it ready to drink through precision by mixing 188ml of Crescent Vodka and 312ml to make 500ml Vienna Ice ready-to-drink Vodka.

All was well until seven years later in August 2014 when KRA disputed the formula of taxing the new product and demanded that the water used in mixing the drink be taxed as well. KRA changed the tax tariff for the drink and backdated it for three years which totalled Sh6.1 billion.

Keroche in a letter dated August 23, 2014, disputed the calculation arguing that taxing water used to mix the drink would make it more expensive than beers.

Another round of pull and push ensured through several communications until July 22 2015 when KRA through a letter acknowledged that the product was an innovation, but that Keroche should try to resolve the dispute through Alternative Dispute Resolution (ADR) or through TAT.

The parties agreed for ADR, but again they couldn’t reach an agreement when KRA insisted that the new tax would be applicable to Vienna Ice ready-to-drink Vodka.

“Our understanding was that KRA already collected taxes due on the 188ml Vodka. They were trying to tax water at the same rate as the alcohol while our position was that if they had to charge for water then it had to be the same rate of bottled water, not higher,” said Keroche.

Meanwhile, KRA appealed against the High Court decision which quashed the Sh1.1 billion tax demands on Vienna Fortified Wine and after a ten-year wait, Appellate Judges Kihara Kariuki, Martha Koome and Festus Azangalala on February 3 2017 partially upheld the High Court’s decision.

They upheld that KRA illegally reclassified Keroche’s Vienna Fortified wine and quashed the assessment of Sh1.1 billion tax. The court, however, allowed KRA to issue new tax notices accompanied by supporting documents.

KRA reignited the dispute in May 2017 when they sent the same demands in three separate letters for value added tax, excise duty and withholding tax totalling Sh1.1 billion which had been quashed and declared null and void.

On June 2, 2017, Keroche wrote back to KRA objecting the tax demands on account of both the High Court and Court of Appeal decisions which declared them as unjustified.

But KRA through letters written on August 3, 2017 stood their ground forcing Keroche to seek intervention of the TAT where the two disputes, one for Sh1.1 billion for Vienna Fortified Wine and Sh6.1 billion for Vienna Ice were consolidated and the tribunal delivered its verdict in favour of KRA.

Although KRA issued a tax assessment for Sh9.1 billion, the company in its application challenging the decision argues that the taxman inflated the figures for ulterior motive.

“The two issues at TAT totalled Sh7.2 billion being Sh1.1 billion for the backdated Vienna Fortified wine and Sh6.1 billion for the Vienna Ice. Their inflation of the figure proves our fear of ill motive of crippling our operations,” said Keroche.

Justice David Majanja agreed with their submissions to put on hold implementation of the TAT decisio, but ordered the company to pay Sh500 million deposit which the company is unable to raise and has appealed at the Court of Appeal.

“It is not possible for any company to pay Sh500 million within 30 days with the current economy which has been worsened by the coronavirus pandemic. Even our bank account does not have that amount and KRA knows it because they monitor our financial transactions,” swore Ms Karanja.

The case before the High Court is scheduled for direction today while the Appellate Court is yet to make a determination on staying payment of the Sh500 million security.