''Missing Traders'' schemes in VAT fraud
CPA David Ndiritu Mwangi
Certified Public Accountant, Tax Agent, Tax Advisor, Tax Consultant, Business Advisor, Tax Trainer, Tax Auditor ,Tax Researcher.
CASE STUDY:KRA VS GRAVITY TRADING LIMITED?
In the year 2018, the KRA assessed GTL’s tax returns for the period between 1st June 2016 and November 2017. Upon conducting investigations, KRA concluded that GTL was a beneficiary of a “missing traders’ scheme whereby suppliers only manufactured invoices without actually delivering goods.
KRA was not satisfied with the documents(tax invoices & delivery notes) provided by GTL. KRA requested for more information and/or documentation to support the subject transactions
KRA requested for stock records and paper trail required to demonstrate how the purchased goods were ordered, recorded and sold. This is beyond the statutory documents provided under section 17(3) of the VAT Act
(3)The documentation for the purposes of subsection (2) shall be—
(a)an original tax invoice issued for the supply or a certified copy;
(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;
(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction; and
(d)a credit note in the case of input tax deducted under?section 16(2);
(e)a debit note in the case of input tax deducted under?section 16(5); or
(f)in the case of a participant in the Open Tender System for the importation of petroleum products that have been cleared through a non-bonded facility, the custom entry showing the name and PIN of the winner of the tender and the name of the other oil marketing company participating in the tender:
Vide a letter dated 18/4/2018, KRA demanded Kshs. 2,015,862/= for VAT and Kshs. 3,779,741/- for Corporation Tax. GTL objected to the tax assessment vide its letter dated 20/5/2018. KRA issued his objection decision on 23/7/2018 upholding the assessment
GTL appealed to the TAT
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The TAT observed that;
The TAT ruled in favour of GTL
KRA appealed to the High Court
KRA submitted that though section 17 (5) of the VAT Act provided for a right to claim input tax, evidence was required in support of the claim. That upon requesting for information as provided by section 43 of the VAT Act, GTL failed to avail records to the satisfaction of KRA. That most of the traders that GTL claimed input from were not registered persons in contravention of section 42 (2)(b) of the VAT Act
KRA submitted that GTL only availed business and tax invoice (ETR) receipts, but failed to deliver notes and stock records. GTL failed to demonstrate how the purchased goods were ordered, recorded and sold. That the suppliers did not exist and that GTL was a co-conspirator in the scheme to defraud the government of revenue
GTL submitted that the dispute was about interpretation and operation of the VAT Act.
GTL argued that KRA based its assessment on fraudulent evasion of VAT hence had the duty to proof the fraud against the respondent. That having failed to proof fraud, the assessment could not stand.
GTL averred that it had conducted due diligence to verify the integrity of its suppliers by confirming that they had valid tax invoices, secured ETR receipts showing the name and pin of the supplier, conducted a successful PIN checker on I-tax, received the goods and made direct payment to the suppliers, and claimed input VAT.?
In its ruling on 16/09/2022, the High Court observed that:
As such the High Court ruled in favor of KRA