Can the 6-Months VAT input claim rule be relevant in challenging the taxman's additional assessments arising from non-filing of VAT ?

CASE STUDY:GRACAN CONSTRUCTION LIMITED VS KRA

GCL is in the business of construction and/or property development. Sometime in 2020, KRA conducted a verification exercise on GCL’s tax status for the period of January 2015 to December 2019 pursuant to a demand notice issued to GCL on 3rd July 2020 and discussions held during the verification process of GCL’s records.

?As regards Corporation Tax, the income from the grossed up Withholding Tax certificates was compared to income declared in GCL’s annual income tax returns and KRA found that the Corporation Tax payable together with penalties and interest was Kshs. 2,095,117.00. From the variance established from Corporation Tax, KRA then computed the Value Added Tax (VAT) payable as Kshs. 5,474,298.00. KRA raised an additional assessment for VAT by grossing up Withholding Income Tax amounts for the periods 2014 - 2019 and comparing the amount to cumulative sales declared by the taxpayer for both VAT and income tax for the respective years. KRA found a variance of Kshs. 26,208,360 for the year 2017 in regard to VAT which was then charged at 16% to bring about the VAT due at KES 4,193,338.00.

?KRA raised the assessments on iTax on 7th September 2020. GCL was in agreement with the Corporation Tax assessment but filed an objection to the VAT assessment on 9th September 2020. In its objection, GCL sought to be allowed an input tax deduction of Kshs. 3,114,930.00 against the assessed output tax of Kshs. 4,193,338.00 for the month of December 2017 to revise the assessment to Kshs. 1,078,408.00. GCL averred that these were purchases that were not claimed inadvertently and should be allowable since they were incurred and also form part of the purchases that were considered in their Income Tax assessment. GCL further argued that the purchases fell within six months from the December 2017 return period/date.

?After reviewing the Objection, KRA issued an objection decision on 6th November 2020 . KRA held that under section 17(2) of the Value Added Tax Act, 2013 (‘’the VAT Act’’), GCL’s input claims were time-barred since they were past the six-month period allowable for deduction from the time of supply

?GCL appealed to the TAT on the following grounds

• KRA erred by acknowledging revenue without taking into consideration the attached expenses and that KRA’s actions of denying those inputs amounted to infringement of?GCL’s right to claim input VAT and further offended the principles of accounting where all income is expected to have expenses attached to it.
• KRA had infringed on its constitutional rights to a fair administrative action in its tax assessment

?In its ruling the tribunal observed that:

• At the time a taxpayer amends its self-assessment, inclusion of any omitted input VAT may be claimed at that point. However, in this case the Tribunal found that GCL did not make an amendment to its self-assessment during which time it had a right to claim omitted input VAT and that it is only after KRA raised the additional assessment on GCL for 2017 that the issue of the omitted input VAT was raised and then only during the objection stage
• Matching concept assertions relate to income tax while the case at hand relates to VAT.
• Section 17(2) of the VAT Act is mandatory and specific on the conditions on which a taxpayer can claim input tax, when it can be considered and allowed. It stated that GCL ought to have followed the procedure laid down in the VAT Act as underpinned in the provisions of section 2(2) of the TPA.
• GCL made the input VAT claim after the statutory period and that the Tribunal’s hands were tied in respect to extension of time and that it was unable to vary the same.

GCL appealed to the High Court

In its ruling on 31/10/2022, the High Court Observed That:

• Under section 17(2), a claim for input tax is not dependent on whether there is an amended or additional assessment made by either the taxpayer or KRA. As long as the purchase is within the six-month window period then the same ought to be allowed
• There is nowhere in statute where these late claims are to be excused or allowed merely because there was an additional or amended assessment raised by KRA. Any claim outside the 6-month period provided is time barred and cannot be allowed under the express terms of?section 17 of the VAT Act.
• KRA rightly rejected these claims as they fell outside the six months’ statutory period from the date of supply

As such GCL lost the case