Why Invoices and Delivery Notes are not sufficient proof of purchase for VAT purposes

Case Study KRA Vs Metoxide Limited

In the tax period between July and December 2014, the ML received supplies which were subjected to VAT payments and later claimed for input tax deduction in respect of the tax period.

KRA rejected ML application for input tax deduction on the grounds that one of the ML’s suppliers, HEL was involved in illegal printing of ETR invoices.

Consequently, KRA issued an objection decision on 4/7/2018 on the basis that ML did not receive any taxable goods from the said HEL and thereby confirmed the assessment and found that the principal VAT amount of Kshs. 1,990,784/- together with the penalty and interest was payable.

Aggrieved by the said objection decision, ML appealed against it to the TAT

ML submitted that it was entitled to input tax deductions under section 17 of the VAT Act as it had utilized the raw materials supplied by HEL in the production of zinc oxide. That it had subsequently charged VAT on the zinc oxide and paid/accounted for the same to KRA That it was therefore entitled to claim under section 17 of the VAT Act

ML produced invoices and prove of payments that indeed it had purchased and paid for the said supplies

ML also availed production records to prove that the purchased materials were used for production.

KRA proceeded to produce a delivery note from ML which glaringly cast doubt as to the alleged delivery of 5200kg of the raw material in question.

KRA demonstrated to the Tribunal that a vehicle purported to have made the delivery was motor vehicle registration number KAT 011T which turned out to be a Nissan Sunny

In its findings, the tribunal noted that:

· . ML had discharged its burden under section 56 of the Tax Procedures Act. Documents produced were sufficient to prove the supply

· Once ML had produced all the documents, the burden had shifted to KRA to prove that the said documents were not sufficient

By its Judgment made on 6/8/2020, the Tribunal made a finding that the appeal was merited, that the ML was entitled to claim input tax .

Aggrieved by the decision of the tribunal, KRA lodged an appeal to High Court.

In its decision, the High Court made the following observations:

· The tribunal erred in holding that the respondent had discharged its burden under section 56 of the Tax Procedures Act

· The central issue is whether there was proof of a taxable supply for which ML could base its claim for input tax refunds. Section 56(1) of the Tax Procedures Act provides that, the taxpayer has the burden of proving that a tax decision is incorrect.

· KRA produced one purported delivery by HEL and demonstrated to the tribunal that a vehicle purported to have made the delivery was a Nissan Sunny. It was common knowledge and the court took judicial notice that such a vehicle could not have made delivery of a whooping 5200kg of the subject raw material.

· The existence of the production records could not be proof that the materials used was the ones supplied by HEL . ML ought to have produced evidence of the supply of the taxable goods specifically HEL. The production records could as well have been in respect of the goods from the other suppliers. It was for ML to prove that the HEL supplied it with taxable goods. That was possible for a prudent trader who kept its documentation. That was what was expected of all traders

As such KRA won the case

The ruling was delivered on 02/09/2021