The importance of accounting ledgers in tax assessments
CPA David Ndiritu Mwangi
Certified Public Accountant, Tax Agent, Tax Advisor, Tax Consultant, Business Advisor, Tax Trainer, Tax Auditor ,Tax Researcher.
Case Study: Nakuru Cement Supplies Limited Vs KRA
KRA???issued?a??Notice??under??Section??59(1)?of?the??Tax Procedures?Act, 2015_ dated??26th May,?2016 conveying?its intention to commence an investigation??or audit?into NCSL's?tax?affairs on 14th June?2016 and?further??requiring?NCSL to?provide??certain documents.?The investigations commenced??with a meeting between NCSL and KRA on 14th June 2016.
During the investigations,??it was established??that ??NCSL had not been filing Corporate Tax returns since 2011 and thus was advised to do so. NCSL complied with the directive and filed its Corporation Tax returns on 4th November 2016 and KRA then proceeded with further investigations.
KRA issued its audit/investigations??findings vide a letter dated 11th July 2017 and??requested?NCSL to?reconcile?the variances?by showing?how they?have accounted for the discounts/credits.
NCSL objected to the findings vide a letter dated ??14th July 2017 and ??further?requested?for a review?of the whole?audit/verification??of the findings. Upon??receipt of the said objection letter, KRA wrote to NCSL inviting them for a meeting?on Thursday?20th July 2017 to?look?into the issues raised. NCSL did not?attend?this meeting nor did it respond?to the letter?either.
KRA???proceeded???to???issue???tax???assessments???totaling Kshs.3,833,386,522.00 on account?of Value Added Tax and Corporation Tax for the years?2011 to?2015?upon?NCSL vide?a letter?dated 14th August 2017.
Dissatisfied with?the?assessment, NCSL filed its Objection?to the above?assessments vide a letter dated?15th September,?2016. Upon?receipt of the letter of objection, KRA wrote?to NCSL on 22nd September?2017 informing?them that?they did not provide the necessary supporting?evidence?being the purchases and sales ledgers to enable them process the Objection.
KRA therefore granted NCSL 14?days?to??provide?the??necessary??documentation?in?support??of?its Objection.
On?12th?October,?2017,?NCSL sought?a?30-day??extension?to provide?the?required?documents and?information??but was only granted 10 more?days. KRA was of the view that?a 30-day?extension was?impossible?as it would?surpass the?statutory?timeframe??of 60 days under?which?an objection must be heard?and determined.
In the absence?of a response?from?NCSL,?KRA issued its Objection?Decision??dated???10th?November?2017,??confirming???its assessment and demand for VAT of Kshs.209,586,648??and??Corporation Tax of Kshs.3,623, 799,873?for the years 2011-2015.
Aggrieved?by the?Objection??Decision, NCSL lodged?an appeal to TAT
NCSL averred that KRA sourced information??from ??third party suppliers.??An?analysis?of??this??information?revealed??that??NCSL had received?discounts/rebates/credits???or bonuses on purchases made from these third party suppliers, whereupon vide a letter dated?17th May?2017, KRA called?upon?NSCL?to?provide??a reconciliation???on?how??the?discounts/rebates/credits?or?? bonuses??were accounted for. This letter was accompanied ??by a summary ??of the monthly purchases and?rebates received?from the third party?suppliers but did not have?any supporting?documentation.
NCSL further???averred??that???while???in?the??process??of??gathering information??from???the??archives,???KRA???proceeded??to??issue Notices of Amended??Assessments??covering??years?2011 to?2015?dated??14th August 2017.?NCS ?said?action??was?done??in bad?faith, was?unprocedural,??unfair?and?contrary?to?the?rule?of law.?This is because the period?in question was wide?and documents had been archived.? KRA ought???to??have??been??understanding?and??granted???NCSL more?time to?retrieve the documents.
NCSL argued?that??the??variances??were??as ?a??result?of??KRA's insistence?on being?supplied?with?physical invoices which could?not?be traced?due to?the passage of time and?movements but the same?had?been?provided to?the?Commissioner's??team?when?filing the Monthly VAT returns.
NCSL maintained??that?the?above?variances?amounting??to Kshs. 679,458,557.00?arose?due to failure to produce?physical invoices which could?not?be traced?though?there?was?proof?from?the VAT returns?that they??had??indeed??been??filed?in?the??monthly??VAT?returns??for?those respective??years.?Therefore,??NCSL rejected KRA's variances amounting to Kshs. 1,073,507,540.
NCSL also argued that?the?amended assessment and?Objection Decision were?served?out of the?statutory?limit of 5 years from?the date of?self-assessment.?To NCSL,??the?five-year??period??in?case?of income?tax?ended?on?30th June?2017 while ?that?of VAT ended?on?20th June?2017 for all returns?for 2011. Therefore,?the?amended??assessments raised for 2011 on 17th?August 2011 were ?in contravention with?Section 31 (4)(b)(i) of the Tax Procedures?Act.
KRA averred ?that?it commenced??investigations in May 2016 and the audit findings communicated??in the letter dated?11th July 2017 covered the?years 2011 to?2015.?That?the?delay?in concluding?the?investigations was?occasioned??by NSCL's??failure to?co-operate. In any event, KRA submitted that?the law under?Section 29(5)?and?(6) of the Tax Procedures?Act empowers?the Commissioner?to look further?into the accounts?and?business of the?taxpayer??where?the?taxpayer??is?found?to have?wilfully?neglected?to?pay taxes,?or?have?evaded?or?been?involved in tax fraud
KRA submitted?that?NCSL was?fully engaged?on?the issues before?confirmation??of the?assessments.?It?invited?the Tribunal?to look at the?correspondence??exhibited?by both?parties?in the?Statements of Facts. The correspondence?showed that KRA notified?NCSLof?the?findings,?invited??them?to?meetings?to?discuss?issues arising from the investigations?and even allowed?NCSL extension of time to validate their objection.
Further,?KRA averred that?NCSL was given?ample?time to?respond?to the?queries directed?to them.?KRA proceeded to?issue notices?of?amended?assessments?after?NCSL failed?to provide????the?required??information despite?being?called?upon?to?do?so severally.
KRA???argued?that??the??extension??of?the??5-year??statutory limitation?was well?within?their?mandate, drawing?from?the?provisions of?Section??29(6)??of?the Tax?Procedure Act,?which??empowers???the Commissioner???to exceed the limit under certain?circumstances. Therefore, KRA argued that?the 5-year?limitation?was inapplicable?in this case.
In its decision on 11/4/2021 , TAT observed that:
As such KRA won the case
NCSL appealed to the High Court
On 16/12/2022, the High Court upheld the tribunal’s decision.
NCSL Under rated the role of accountants both at managerial level and oversight level in auditing
Certified Public Accountant | MBA |Tax Dispute Resolution | Tax Compliance | Tax planning | Bookkeeping | Tax Advisory
11 个月Good work bro,keep up
M.Sc. | B.COM | CPA(K) | Dip. HRM | Dip. Proc & Supplies | +254723062180 |[email protected] |
11 个月NCSL is a case of a taxpayer who ignores the importance of the role of an accountant, You may found out that, this company employed unqualified accountants whom they pay less fees. Her accountants did not see the importance of proper filling of documents after filing VAT (which the author say they did yes) or poor double entry methods or the Company was firing accountant left and right thereby leading to a disconnect in proper handing and taking over. I also noted the lack of carrying out accounting audits which I can still connect to greediness to pay the services of an independent auditors. NCSL should carry its own cross. We are accountant and accounting is our business. You can contact me at my profile contacts for your accounting services.
I aid firms manages their tax disputes , track their revenues and Expenses, and come up with framework that enables accurate and complete record keeping.
11 个月CPA David Ndiritu Mwangi However its imperative to note that, although KRA requested for ledgers, but the primary documents of accounting overrides the ledgers, because verification of same ledgers shall end at primary doc which are invoices,evidence of payment of suppliers , cash received from customers..so if the client would have given the said documents within requisite time..still the matter would have been ruled in her favour.
Health Financing | Program Management
11 个月Quite educative