Input VAT

Pointers as you claim VAT on purchases

By Brian Kangetta, Partner – Andersen Tax in Kenya

Around 2016/ 2017, the Kenya Revenue Authority (KRA) purportedly unearthed a fraudulent “missing traders scheme”, under which it is claimed that a number of businesses had been established to generate invoices and Electronic Tax Register (ETR) receipts that were sold to willing purchasers at a portion of the face value of the invoices/ receipts. The purchasers would then use the invoices and ETR receipts to inflate their Cost of Sales and input Value Added Tax (VAT), thereby reduce their Corporate Tax and VAT liabilities.

Shreeji Enterprises (K) Ltd versus Commissioner of Investigations & Enforcement

KRA submitted that Shreeji Enterprises (K) Ltd (the Appellant) was aware of this fraudulent scheme and had benefited from it, thereby occasioning loss of tax revenue to the Government. KRA also alleged that the Appellant had failed to provide some requested documents to prove transactions worth KShs 4.8 billion, and therefore issued VAT and Corporate Tax assessments totalling KShs 3.7 billion (VAT of KShs 1 billion and Corporate Tax of KShs 2.7 billion).

The Appellant countered these assessments by providing acknowledgement of goods received from the 17 alleged “missing traders” (probably Goods Received Notes) together with invoices to which ETR receipts had been attached, which should have served as proof that the Appellant had genuinely transacted with its suppliers.

Over-and-above producing the documentary evidence, the Appellant had interacted with KRA’s iTax platform and noted that the suppliers’ Personal Identification Numbers (PINs) were properly recognised in iTax, which meant that the suppliers had been registered by KRA, and the Appellant’s VAT returns (through which the input VAT had been claimed) had not been rejected by the iTax system, in which case KRA duly recognised the suppliers’ PINs. Additionally, since the ETR regime is administered by KRA, and all ETR receipts are a product of the KRA ETR system, the Appellant argued that it was not required by law to carry out any further due diligence on the ETR receipts.

Finally, KRA tendered no evidence at all to substantiate its claim that the Appellant had dealt with “missing traders” and neither did it produce any evidence that the Appellant had merely purchased the invoices or ETR receipts that formed the basis of claiming input VAT.

In its judgement issued on 25th March 2020, the Tax Appeals Tribunal (TAT) ruled that it is irrelevant for the person claiming input VAT whether the (output) VAT has or has not been paid to the public purse – and especially so if the claimant was (without knowing or having any means of knowing) participating in a carousel fraud. Further, since the Appellant had discharged its obligation of paying the input VAT (to its suppliers) and possessed adequate evidence of purchase, it was entitled to claim the input VAT. The only obligation placed on the Appellant by law was to check that it had purchased from a VAT-registered supplier and that the supplier has a registered ETR register.

More interestingly, the TAT stated that it cannot have been the intention of the legislature to put a taxpayer in a position where he is required to produce any document that the KRA requires. In requesting for documents, KRA needs to be guided by reasonableness and the nature and circumstances of the taxpayer, so as not to request for documents that a taxpayer does not have. And to crown it all, while it is generally the taxpayer’s obligation to prove that tax was paid or that an assessment is incorrect, where KRA pleads that fraud was committed, the burden of proof (which is higher than the normal “balance of probability” standard that applies in a typical civil case) shifts from the taxpayer to KRA.

Since KRA was found not to have satisfactorily discharged the burden of proof relating to alleged fraud, the Tribunal held that the disallowing of the Appellant’s input VAT was erroneous. If VAT was not remitted to KRA, it was upon KRA to pursue its VAT-registered suppliers for this tax, as opposed to demanding it from the Appellant – and once the VAT assessment fell by the wayside, the Corporate Tax assessments were also vacated by the Tribunal.

Ernie Campbell & Co (K) Ltd versus Commissioner of Domestic Taxes

This appeal is quite similar to the Shreeji Enterprises appeal. KRA also claimed that Ernie Campbell & Co had used invoices purchased from “missing traders” to reduce its Corporate Tax and VAT liabilities.

In its judgement issued on 27th March 2020, the TAT ruled that KRA did not prove the allegation of fraud. Whereas the Appellant had submitted invoices from its suppliers to support its case, which KRA rejected, the latter had failed to identify any other document that the Appellant could have provided in order to support its arguments. For these reasons, the Appellant’s costs incurred on the basis of invoices alleged to have been issued by the “missing traders” were found to be properly deductible for Corporate Tax purposes.

Practically speaking…

These timely judgements confirm that a taxpayer is not required, by law, to ensure that his/ her supplier remits the collected VAT to the Government. A taxpayer is merely required to confirm, through interacting with the iTax system, that his/ her supplier is VAT-registered. Additionally, it is quite clear that the taxpayer should retain as much documentation as possible, proving that it received the goods or services from the supplier and that he/ she paid the supplier for the supply or supplies.

It is equally important that in interacting with KRA during an audit or investigation, the taxpayer calls for reasonability in the KRA’s request for documentation. The Tribunal seems to be guiding KRA officers that they should not expect every business to maintain specific types of documents. Based on a taxpayer’s circumstances, KRA should be flexible to accommodate documents that are in the taxpayer’s possession, to evaluate whether or not a transaction indeed occurred.

Finally, the Tribunal judgements remind taxpayers of their duty to prove that tax was paid or that an assessment issued by KRA is erroneous. However, where KRA alleges that a taxpayer committed some fraud, the burden to prove this fraud shifts to KRA, at which point KRA is required to provide appropriate evidence to support the allegation.

Hopefully all future KRA assessments will be issued on the basis of sound reason and explanation that is provided to the assessed taxpayer. It appears that KRA’s investigation findings, where indeed appropriate, ought to be shared with the taxpayer – or with an appellate body, in order to substantiate its assessments or allegations.

Brian Kangetta is a Partner at Andersen Tax, Kenya:


Andersen Tax, Kenya is a member firm of Andersen Global. Andersen Global is an international association of legally separate, independent member firms comprised of tax and legal professionals around the world. Established in 2013 by U.S. member firm Andersen Tax LLC, Andersen Global now has nearly 5,000 professionals worldwide and a presence in over 167 locations through its member firms and collaborating firms.

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