KRA VS Unga Limited

-Between June 2012 and April 2013 Unga lodged for a VAT refund with KRA. The amount was KES 189,958,332

-By a letter dated 7th October 2014, KRA informed Unga that its VAT refund claims totaling Kshs. 189,958,332.00, “are all processed and in the Finance Department.” It further stated that the National Treasury had put a freeze on payment of all refund claims prior to 31st December 2013. Subsequently, KRA requested Unga to provide various documents to enable it update its corporate tax records pending processing of the VAT refund claim.

-By its letter dated 27th April 2015, Unga informed KRA that all the requested information had been provided save for the tax return for the year 1998 which it could not trace. It however informed KRA that it had filed the tax return on the basis of its audited financial statements and the 1998 tax computations as well as the receipt of the instalment tax paid in 1998 for a sum of Kshs. 9,000,800.00. It further requested to know if it could resubmit the tax return for the year 1998 in a bid to ensure that all the necessary information was provided.

-In its letter dated 5th May 2015, Unga wrote to KRA requesting to transfer its overpayment accumulated for the year 1997 being Kshs. 12,597,014.00 and the year 1999 being Kshs. 1,294,000.00 to offset its principal tax liability for the year 2010.

- KRA responded by its letter dated 9th October 2015 informing Unga that the tax return for the year 1998 had not been filed and that the transfer of the payment was not possible. It instead demanded payment of the principal tax liability for the year 2010.

-KRA ,in a letter dated 27th June 2017 withdrew the letter dated 7th October 2014 wherein it had confirmed processing the VAT refund claim. It based its actions on adjustments which Unga should have made in its financial records and which were not made. The overall effect of the adjustments was to wipe out the entire VAT refund claim for the period June 2012 and April 2013 which had been approved.

-Unga objected to the decision by KRA

-Upon issuance of objection decision by KRA, Unga appealed to the TAT.

-TAT ?held that the VAT tax refund to be due and payable and further ordered that the overpayments of 1997, 1998 and 1999 be utilized to settle Unga Limited’s tax liability for the year 2010.

-KRA appealed to the High Court.

-KRA submitted that:

·?????????TAT misinterpreted section 47 of the TPA which required that before approving a refund, the Commissioner must ascertain the validity of the claim and subject it to audit.

·????????Unga insisted that it had filed but misplaced its tax return for the year 1998 and that even its auditors could not trace it, its tax affairs were no longer verifiable hence it could no longer pay out a refund as a matter of prudence

·????????While KRA accepted that under section 29(5) of the TPA, it is prevented from making default assessment 5 years from the reporting period, it submitted that Tribunal ignored the contention that though the law is silent on the limitation on the tax payer, it did not mean that the period for filing was open

·????????A ?loss carried forward from 1998 will continue to be carried forward beyond the years that the KRA ?can legally audit such that when Unga Limited filed a 1998 tax return in 2015, KRA was precluded from requesting for documents from subsequent years

-Unga Submitted that:

·????????TAT correctly interpreted section 52B of the Income Tax Act which is now section 28 of TPA when it found that there is no time limitation on when the tax payer can file a self-assessment tax return. It contends that the law envisions late submission which can only accrue penalty under section 72 (1)(a) of the Income Tax Act, now section 83 (1)(d) of the TPA

·????????While KRA cited discrepancies in the 1998 tax return, it did not provide actual figures as to what the alleged discrepancies were and to what extent they affected the refund claim.

·????????KRA ?has never disputed the validity of the VAT refund claim which was processed under the VAT Act and determined to be payable.

·????????KRA ?is empowered to make a default assessment within 5 years of following the last date of reporting unless there is gross or wilful neglect, evasion or fraud on the part of the tax payer under section 29(6) of the TPA. That KRA failed to make use of this provision in respect of the 1998 tax return

·????????The withdrawal ?of??the 7th October 2014?letter violated its legitimate expectation that its VAT refund was being processed and that funds were going to be released as soon as they were available from the National Treasury

In its ruling on?29/01/2021,the High Court observed that:

·????????Under section 29 of the TPA, KRA is empowered to make a default assessment when a tax payer fails to file a tax return. This power is however limited in time to five years under section 29(5) thereof. However, where the taxpayer submits a late return, the Commissioner is empowered under section 83 of the TPA to impose a fine. As Such KRA could not interrogate the 1998 tax return

·????????KRA acted contrary to the principles of legitimate expectation. “that keeping the Appellant for two years and eight months placing it in suspense, the Respondent failed to exercise its statutory duty by acting unfairly and unreasonably by letter the Appellant believe that it was processing its VAT refund claims.”

·????????Holding on to a refund payment by KRA in anticipation of a tax liability which has not crystallized in this case is not supported by law. This is borne out section 47(4) of the TPA which provides that a refund is what is paid over when the Commissioner has applied overpayment to, “payment of any other tax owing by the taxpayer under the tax law”’ and “payment of a tax owing by the taxpayer under any other tax law.” In this case, the Commissioner did not demonstrate before the Tribunal that Unga owed any tax under the VAT Act, Income Tax Act or any other law which could be applied before the refund.

As such Unga Limited is entitled to a VAT Refund as earlier ruled by the TAT

KRA Lost