REPUBLIC OF KENYA IN THE TAX APPEALS TRIBUNAL APPEAL No.206 OF 2015

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1 REPUBLIC OF KENYA IN THE TAX APPEALS TRIBUNAL APPEAL No.206 OF 2015,. GOCJD. BREAD KENYA LIMITED ".. n.~.-.~~.. ~ <o "" APPELLANT =VERSUS= THE COMMISSIONER OF DOMESTIC TAXES RESPONDENT JUDGEMENT INTRODUCTION 1. The Appellant is a limited Liability Company incorporated in Kenya on 29 th February The Company is in the business of producing and selling bread. 2. The Respondent is established under the Kenya Revenue Authority Act. Cap 469 of the Laws of Kenya, charged with the function, am<?nk9!h~rs, of assessment, accounting and administration of tax law on behalf of the Government of the Republic of Kenya. BACKGROUND:- 3. The Appellant carries on the business of manufacturing Bread since October In order for it to be tax complaint it was obliged to register for Value Added Tax (VAT) under paragraph 1 of the Sixth the Schedule to the VAT Act, Cap 476 (Repealed). As its products were Zero (0 0 /0) rated it was also required to install an Electronic Tax Register (ETR) which would generate receipts as required under Paragraph 6 of the said repealed Act. 4. The Appellant without Registering itself for purposes of charging VAT, purchased an Electronic Tax Register on the 5 th February 2013, which was approved by the Respondent on the same date and allocated reference number KRNETR/ /00445E Judgement Appeal NO.206 OF 2015 (Good Bread Kenya Limited) Page 1

5. The Appellant submitted period October a Refund Claim on form VAT 4 for the 2012 to July 2013, amounting which was received by the Respondent 6. The Respondents lodged by., conducted the: to Kshs.

2 5. The Appellant submitted period October a Refund Claim on form VAT 4 for the 2012 to July 2013, amounting which was received by the Respondent 6. The Respondents lodged by., conducted the: to Kshs.7,240, on the 27th of August an audit pursuant to the refund claim and." i'approved Appellant.of "payment Kshs.2,163, The Respondent 2014, that it disallowed KshsA,551, Kshs.5,076, which was incurred May 2013 which was the Registration 8. replied which on purchases date of the Appellant's of VAT and Kshs.555, The Appellant accepting Vide its letter of 30th June notified the Appellant to the that Kshs.555,~80.14 consisted of prior to 7th effective date of which was time barred. Respondent on 6th August was time barred, 2014 but objecting to the said KshsA,551, disallowed and followed up with a letter on the Effective Date of Registration (EDR) 25th May 2016 giving rea~qq~,}'yb:iit's CIaim was ids~qr~~s!!y d isaiiq.~~q. 9. The Respondent said by its letter dated 1st September audit findings upon which the Appellant intention to Appeal on 19th October 2015 i 2015 confirmed its gave its notice of and filed this Appeal on 29th October THE APPEAL:10. The Appellant In its Memorandum of Appeal listed 10 grounds thereof with the relevant ones being; a) The Appellant Registration Number stated Judgement for and obtained Tax under Personal Identification (PIN) P L on 5th March concedes under Paragraph that it applied from the Respondent b) The Appellant and that it was that it was obliged to register for VAT 1 of the 6th Schedule to the repealed required to acquire Appeal NO.206 OF 2015 (Good Bread Kenya Limited) an ETR which VAT Act would Page 2

3 generate receipts as required under Paragraph 6 of the 7th Schedule of the Repealed VAT Act. In obedience thereof, the Appellant duly purchased the ETR Register on 5 th February 2013 which was approved by the Respondent on the same date.,:-,c}<the Appellant.further stated that.it.submitted manualvs.e and Pay As You Earn (PAYE) returns from March 2012 till May 2013 to the Respondent when the latter upgraded it to the Respondent's Online Return Sllbmission platform In the Integrated Tax Management System (ITMS) on r= May 2013 and it continued to File its Returns thereafter as required by law. d) During the Registration on ITMS Online Return Submission, the Respondent alerted the Appellant thatthelr VAT obligation had not been activated as a result of which the Appellant activated it on the 7th of May e) Since the Appellant was manufacturing Zero Rated supplies it J9,9g~d Jr.s Refund Claims with the Respondent on 7 th October f) On the 30th 'June 2014, the Respondent communicated to the Appellant in response to the said Refund Claims to the effect that out of the sum of Kshs.7,240, it disallowed a sum of Kshs.5,076, and approved an amount of Kshs.2,163, The amount disallowed by the Respondent comprised of input claims prior to Registration for VAT covering the period 12th October 2012 to April 2013 and input VAT incurred prior to Registration which covered the period May to July 2013.lt also disallowed VAT Refund on supplies which had inaccurate date details. THE RESPONSE Judgement Appeal NO.206 OF 2015 (Good Bread Kenya Limited) Page 3

11. The Respondent Appeal upon being served filed by the Appellant Facts dated Statement proceeded the 25th day of November of Facts drawn of the sets out of to file its Statement of 2015.

4 11. The Respondent Appeal upon being served filed by the Appellant Facts dated Statement proceeded the 25th day of November of Facts drawn of the sets out of to file its Statement of The Respondent's in art elaborate circumstances Appeal and substantively the Memorandum and filed on its behalf by Jane Kangee, MST.Refunds.Manager, background with occasioning manner the the filing of the deals and responds to each of the grounds of the Appeal as follows; a) The Respondent acknowledges first time VAT Claimant that since the Appellant when it submitted form VAT 4- for the period bound to undertake October was a its refund claim on 2012-July 2013, an audit to estal:5lish whether it was that Refund was due and payable. b) It further concedes for the months that the Appellant of October 2012 submitted :~oapril VAT 3 Returns 2013 but takes the RQs.LtiqQ~!hat its audit ot"jbe~,~rt;?ellahf~.xqh,~rations established } s- that it was only registered.(pr"vat its refusal to the requested to April 2013 amounting together of Section May 2013, hence 2012 to Kshs3~073, before the Appellant requirement 7th Refund for the period October c) It is the Respondent'szposition period on the that the claim relating was registered does not meet the 11(2) of the VAT Act (2008) with Legal Notice Number to the as read 195 of the said Act. The above Section states as follows; Where the amount of input tax that may be so deducted under subsection(io) exceeds the amount of output tax due, the amount of the excess shall be carried forward to the next tax period: provided that any such excess shall be paid to the registered person Judgement Appeal No.206 OF 2015 (Good Bread Kenya Limited) Page 4

by the commissioner where the commissioner is satisfied that such excess arises from:- (a)making zero-rated supplies; or (aa) tax withheld by appointed tax withholding agents (b)deleted by Finance

5 by the commissioner where the commissioner is satisfied that such excess arises from:- (a)making zero-rated supplies; or (aa) tax withheld by appointed tax withholding agents (b)deleted by Finance Act ',.,,;',.. The refund was therefore payable if the excess input tax over output tax due in the relevant tax period, arose from Zero Rated sales made by a registered person. d) The Respondent acknowledges that the tax payer submitted VAT 3 returns for the months of October April 2013 but contends that the Appellant was not registered untii 7 th May 2013 when its registration was captured after its VAT registration. THE HEARING:- 12. The matter came up for hearing for the first time on the 4th day of Aprjl,..?OJ9yvhen it was adjourned at the instance of the parties who required more time with the aim of exploring the possibility of settling the dispu:t~\'by way of negotiations. The Tribunal cautioned the parties to observe the strict tirnelines as set out in the Tax Appeals Tribunal Act 2013; (TAT) with the matter being adjourned to 27th April, 2016 to record a consent or proceed with the hearing. 13. On the 27th day of April, 2016 the parties informed the Tribunal that they had not reached any compromise and would consequently proceed with the hearing of the appeal. It was then ordered by consent of all the parties that the Appeal proceed by way of oral and written submissions. Subsequently, The Appeal was orally heard on the 2 nd August and 16th September 2016 at which time the parties highlighted their submissions as well. Judgement Appeal No.206 OF 2015 (Good Bread Kenya Limited) Page 5

6 ISSUE FOR DETERMINATION 14. The sole and only issue for determination by the Tribunal on the basis of the pleadings and the oral and written submissions on record before the Tribunal is:,~~whetl1erlhe"effedive-date of registration (EDR)olthe Appellant for the purposes of a Refund of the VAT claim was the?h May 2013 or 5 th March 2012" APPELLANT'S CASE 15. The Appellant urged the Tribunal to consider the following interrogatories in its favour in orderto determine that it was entitled to the said VAT Refund. a) Was the Appellant registered for VAT during the period of the disallowed refund claim? b) Did the Appellant fulfill the obligations of a "taxable person" in law during the said period? c) Wa~ the Respondent aware that the Appellant was a registered entity and did it accept it as such? 16. In support of its contention that it was entitled to the said VAT Refund the Appellant relied on Paragraph 2 of Legal Notice No 95 of 11th June 2009 amended...regulatlon 3 of the VAT Regulations 1994 (LN195) which states as follows; a) In paragraph I deleting the word "torm VAT I" and substituting therefore with the words: a form prescribed by the.. " commissioner. b) Deleting paragraph (2) and substituting therefore the following paragraph (2) Any person who knowingly i. (jives false information; ii. Failsto give full information; or Judgement Appeal No.206 OF 2015 (Good Bread Kenya Limited) Page 6

iii. Makes an application to register a person who is already registered, in the form referred to in paragraph 1 shall be guilty of an offence 17. The Appellant's Tribunal reading of the above to.

7 iii. Makes an application to register a person who is already registered, in the form referred to in paragraph 1 shall be guilty of an offence 17. The Appellant's Tribunal reading of the above to.adopt was-that discounting provision the above b) In the absence Domestic number it meant: as the only universal registration of a prescribed by, effectively amendments the use of the VAT 4 registration a) The PIN remained which it urged the for all Taxes. Form by the Commissioner Taxes to be used for Registration of for VAT obligation only the PIN Registration was valid. 18. The Appellant was quick to add that since the Respondent prescribe the above form until the corninglnto effect of the VAT Act 2013 which was signed into law on 2nd September requirement for the prescribed did not 2013 where the forum was made under Section 38 of that Act that prescribed form would not'applv retroactively 19. The~8P~!J!Q! contained including 24 to' 30.of its writt~~ft'submissions procedures it underfook to promote for Tax payers with att?shments extracts from its:'website, user guide were constitute argue90"lt~!,l%there~egd,+qent's explanations in paragraph administrative registration further on the electronic online of several documents news paper cuttings and ITMS not helpful to the Respondent as these did not. a legally prescribed form by the Commissioner as required by the above provision. 20. The Appellant contends that in the absence of a " form prescribed by the Commissioner" its registration legal date for VAT registration replaced Judgement by activation for PIN on 5th March 2012 was the and could not be substituted or selection of VAT obligations Appeal No,206 OF 2015 (Good Bread Kenya Limited) and or which were Page 7

8 mere administrative procedures unilaterally introduced by the Respondent. 21. The Appellant insists that as shown by its VAT ledger, the Respondent did not explain why the VAT Returns for October 2012 to April 2013 were omitted-from'.the Register whilst it -noted in/the Appellant's Ledger that the EDR was 7t h May The Appellant avers that it submitted all monthly VAT returns on or before the due dates as stipulated inparagraph 7 of the 7 th schedule to the repealed VAT Act. 23. The Appellant also stated thatit purchased and used an ETR as required by paragraph 5 of the 7 th schedule of the said repealed Act and the VAT (Electronic Tax Register), Regulations, The Appellant further states that the Respondent supervised the programming and approval of the ETR for use by the Appellant on 5 th February 2013 and that this could only have been done to a VAT Registered entity. 25. It was the Appellant's argument that it was incumbent upon the Respondent to demonstrate how its system could allow it's Returns to be captured even though it claims that the Appellant was not registered. According to the Appellant the responsibility of receiving, stamping and capturing of returns in the system at that time lay with the Respondent who therefore had a duty to offer some explanation for the said omission. 26. The Appellant contended that Section 68(5) of the VAT Act, 2013 lend credence to its argument. That Provision states; "where a tax was due to be paid or refunded under the repealed Act but was not so paid or refunded. it shall be paid or refunded as though it were a sum due under this Act'~. Moreover, it would appear that the Respondent is in agreement with the Appellant on Judgement Appeal No.206 OF 2015 (Good Bread Kenya Limited) Page 8

9 this issue when it makes reference to Section (2) of the Repealed VAT Act. That Section provides as follows; uwhere the amount of input tax that may be so deducted under subsection (I) exceeds the amount of input tax due, the,:;.,'.v=emounr oitbe.excess shall be cerriediorwerd-toithenext period; Provided that any such excess shall be paid to the registered person by the commissioner where the commissioner is satisfied that such excess arisesfrom:- (a)making zero- rated supplies; or (b)tax withheld by appointed tax withholding agents (c)deleted by FinanceAct 2009 ANALYSIS AND FINDINGS 27. Having carefully considered the Pleadings, oral and written submissions and relevant documents, the Tribunal is satisfied that the Appellant dealt with Zero ~?t~g.g()ods andthat it was therefore entitled for a VAT Refund where applicable. In order to resolve this issue it is imperative that the Tribunal addresses the following; i a) Whether the Appellant was registered for VAT during the period of the disallowed refund claim. b) Whether the Appellant fulfilled the obligations of a "texeble person "in law during the said period. c) Whether the Respondent was aware of or accepted the Appellant as a registeredperson. It is to these issues that this judgment now turns: - a) Was the Appellant registered for VAT at the time of lodging the Refund Claim and if so what was the Effective Date of Registration for VAT? Judgement Appeal NO.206 OF 2015 (Good Bread Kenya Limited) Page 9

28. In order to answer this question, the Tribunal has had careful recourse to the following relevant provisions of the said Repealed Act; Section 6(3) of the said Repealed Act provides as

10 28. In order to answer this question, the Tribunal has had careful recourse to the following relevant provisions of the said Repealed Act; Section 6(3) of the said Repealed Act provides as follows;,';"a:-person.who: makes or intends to make. taxable supplies is a taxable person while he is, or is required to be, registered under the sixth Schedule; and a taxable supply is a supply of Taxable goods or services made or provided in Kenya" Which when read together with Section 27 of the said Repealed Act which states; The sixth Schedule shall have effed with regard to the Registration of taxable persons and de-registration of registered persons. And Paragraph3(1) of LegalN 195 of the said Repealed VAT Act which provides as follows regarding application for registration; I~pp! c?!(il?nfor registration under paragraph 1and 3 of the sixth Schedule to the Act shall be submitted in a form prescribed by the Commissioner.,~ 29. A careful reading of the above provisions of the law and the facts on record reveal that the Appellant registered and obtained the Tax Payer Registration Certificate on 5 th, March 2012 and on the date of Registration, elected to utilize the Income Tax obligation online and did not avail itself of its VAT obligations despite the option of doing so being available on the same Platform and continued filing its VAT returns manually until May 2013 which the Tribunal has established as the EDR. No explanation has been offered by the Appellant as to why it continued filing its VAT returns manually whilst it was fully aware of the said EDR and the shift to the ETMS effective 30 th March Judgement Appeal NO.206 OF 2015 (Good Bread Kenya Limited) Page 10

11 b) Whether the Appellant fulfilled the obligations of a "texeble person "in law during the said period 30. There is no doubt as to the Appellant's fulfillment of its obligations as a taxable person as is clear from the records. The Appellant.applied. for tax.registration within 30_days of.obtaininglts-certiflcate of incorporation in compliance with paragraph 1 of the 6 th Schedule to the Repealed VAT Act. The Appellant also submitted all monthly VAT Returns as stipulated in paragraph 7 of the 7 th Schedule to the Repealed VAT Act manually prior to its registration for VAT. The Appellant also purchased and used _an ETR in compliance with - - paragraph (5) of the 7 th schedule to the Repealed VAT Act and the VAT (Electronic Tax Register) Regulations. There was no contention as to the fulfillment of the above obligations the only issue being the EDR for VAT obligation for the purposes of VAT Refund Claim. C) Whether the Respondent was aware or accepted the!,-ppellant as a registered person. 31. There is no doubt that the Appellant was dealing with zero rated supplies and was legally entitled for VAT Refund however; the law clearly stipulates under Section 11(2) that for one to seek for VAT refund one had to be Registered for VAT. The Appellant was registered for VAT on the 7 th May, 2013 but the refund claim was for the period between October 2012 and July The Appellant's Claim for the period in which it was registered for VAT as per Section (2) of the Repealed VAT Act was allowed while the VAT Claim relating to the period prior to registration was disallowed. The Appellant ought to have claimed any input incurred prior to registration for VAT under Section 12 of the VAT Act (2009) by filing VAT form 5 as required under paragraph 13 of the said Legal Notice. Judgement Appeal No_206 OF 2015 (Good Bread Kenya Limited) Page 11

32. The upshot is that having established and determined that the Effective Date of Registration (EDR) by the Appellant for VAT obligation was the 7 th of May 2013 the Appellant's Refund Claim of

12 32. The upshot is that having established and determined that the Effective Date of Registration (EDR) by the Appellant for VAT obligation was the 7 th of May 2013 the Appellant's Refund Claim of ~shs.4,521,780,17 which was incurred prior the Appellant's,','., Registration.for- VAT is not allowable anditthereforefollows: That this Appeal is not merited and is accordingly dismissed. In view of the above facts the appropriate order which commends itself to the Tribunal is for each partyto bear its own costs. 33. Right of Appeal explained. 34. Orders accordingly. DATED and DELIVERED at NAIROBI this?1~day of ~ In the Presence of:-... nu«c2/!.t(f!.t. for the Appellant... aa.rut7.4.~ IfJ.II~t/J{IJ for the Respondent ~~ A. G.J',J;' KAMAU CHbJRMAN ~ W'ILFRED GICHUKI MEMBER...~...~... OMAR J. MOHAMMED MEMBER Judgement Appeal No,206 OF 2015 (Good Bread Kenya Limited) Page 12

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