A purchaser cannot claim input VAT in absence of a Valid Tax Invoice

Case study: NML Holdings Limited (Formerly Nanyuki Mall Limited) v Commissioner of Investigation and Enforcement (Tax Appeal E129 of 2023) [2024] KETAT 865 (KLR) (28 June 2024) (Judgment)

NML got into an agreement for purchase of a commercial property for an all-inclusive purchase price of Kshs. 250,000,000.00. The transfer of the aforementioned property in favour of NML was registered on 21st December 2021 and the vendor of the suit property was paid the entire purchase price on 20th January 2022. Unfortunately, the vendor did not issue NML with the necessary tax invoice despite several reminders to do so. Upon payment of the purchase price, NML included this transaction in its input VAT schedule in March 2022.

However, vide a letter dated 7th February 2023, KRA declined the said input VAT claim on the basis that NML did not provide the tax invoice for the said transaction and thereafter issued an assessment order No. KRA202301127032 dated 7th February 2023. NML objected to the said assessment vide a letter dated 9th February 2023. Subsequently, vide a letter dated 15th March 2023 KRA rendered its objection decision disallowing the objection and upholding its earlier assessment to the effect that NML was not entitled to claim input VAT on the property purchase transaction.

?NML appealed to the TAT

NML contended that:

• The sale being that of a commercial property is a vatable transaction as provided in the VAT Act. Accordingly, this being a commercial property, included in the said all-inclusive purchase price was VAT which was calculated as follows:

a. All-inclusive Purchase Price - KShs.250,000,000.00.

b.VAT amount included in the Purchase Price - Kshs.34,482,759.00.

• The entire purchase price which was financed by NML's bankers, under terms of a bank undertaking issued by the said bankers to the Vendor to make payment of the entire purchase price upon registration of the transfer of the property in favour of NML and a charge in favour of the said bank. The Transfer was registered on 21st December, 2021 and payment of the purchase price was paid on 20th January, 2022.
• The Vendor was duly paid the entire purchase price in accordance with the aforesaid terms of bank undertaking. However, he did not issue the necessary tax invoice despite many reminders.
• Recognizing that input VAT is claimable within defined timelines, following payment of the purchase price NML included this genuine transaction in their VAT Input schedule in March, 2022.
• Through its letter dated 7th February, 2023, KRA declined the aforesaid input VAT claim on the basis that NML did not provide the tax invoice. This decline was despite the fact that NML provided alternative supporting documentation including the sale agreement which provided that payment of applicable taxes was the responsibility of the Vendor, evidence of payment of stamp duty at the commercial rate of 4% by NML (being the commercial rate for stamp duty), evidence of payment of the purchase price and other related documents.

In its ruling on 20/06/2024, the TAT observed that:

• ? NML made a claim for Input VAT on 31st March 2022 which is approximately three months after the registration of the transfer of the suit property in favour of NML and two months after payment of the purchase price of the suit property. As such NML’s claim for Input VAT was not time barred having been made within the six-month period provided for in law.
• the sale agreement provided did not expressly state that VAT was charged. KRA noted that the Vendor of the suit property had not declared this particular transaction in his respective VAT returns neither has he provided confirmation that he charged VAT in this transaction.
• Section 17(2) and (3) of the VAT Act provides that:

“1.Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.

2.If, at the time when a deduction for input tax would otherwise be allowable under subsection (1)—

a.the person does not hold the documentation referred to in subsection (3), and

b.the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation:

Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.

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…”

• NML in this case does not have a tax invoice. Section 17(2) of the VAT Act as outlined hereinabove provides a guideline on what should happen where the tax invoice relating to the supply is not available. The section provides that the deduction for input tax shall not be allowed until the first tax period in which the person holds a tax invoice

AS such NML lost