Taxman locked in Sh2.1 billion arrears row with NSSF

The Kenya Revenue Authority (KRA) has demanded Sh2.1 billion from the NSSF for income tax arrears related to valuation of assets of the workers’ retirement fund, shining a spotlight on the book-keeping at the workers’ retirement fund.

KRA, according to documents filed in court, has demanded that the National Social Security Fund (NSSF) should pay income tax for the year 2004 to 2006, the period during which the fund manager allegedly failed to carry out valuation of its assets – which was a pre-condition for exemption from income tax.

NSSF has however argued in court that the law exempts it from paying income tax regardless of whether it complied with the assets valuation rule or not, and wants the court to quash KRA’s demand.

“The local committee erred by failing to hold that non-compliance with the rules, if any, by the appellant did not extinguish the income tax exemption status of the appellant but rather only subjected its board of trustees to a penalty,” says NSSF in papers filed in court on August 15.

The court documents reveal a fatal mistake of non-compliance by the NSSF board that could now see it part with at least Sh2.1 billion unless it succeeds in its appeal pending before the High Court.

Sometime in 2002, a rule was enacted that imposed conditions that required NSSF to value its assets and allocate any gains to contributors to qualify for exemption from paying income tax. Before this NSSF was not paying income tax, but there were no conditions attached to the exemption.

NSSF failed to comply with this condition until 2007 when it started compliance, after the auditor pointed out this mistake. KRA last year directed NSSF to pay income tax for the years 2004 to 2006 after auditing its accounts.

Aggrieved by this decision, the NSSF appealed to KRA’s Local Committee arguing that the Income Tax Act exempts it from paying income tax whether the condition had been complied with or not.

The NSFF claimed the Income Tax (National Social Security Fund Exemption) Rules, 2002 provides only for a penalty not exceeding Sh10,000 for non-compliance with any condition prescribed by the rules. It further argued that KRA has no power to withdraw NSSF tax exemption status, claiming that the tax man can only impose penalties.

The workers’ retirement fund further termed the decision to impose tax on its income from 2004 to 2006 as discriminatory since KRA had not asked for income tax for 2002 and 2003, during which the condition had not been complied with. NSSF further claimed that the tax assessment for the years 2004 and 2005 was done in 2013 after lapse of the seven-year window and should therefore be rejected.

KRA opposed the appeal before the Local Committee arguing that the exempt status could have only be attained upon compliance with the exemption rules, failure to which tax on their income became applicable.

KRA said the clause in the Income Tax Act which makes provision for exemption makes it mandatory for NSSF to comply with the prescribed condition to qualify for exemption. The taxman told the committee the exempt status was withdrawn but NSSF failed to acquire it by complying with the conditions and therefore has itself to blame.

The Local Committee rejected the appeal in its ruling delivered on July 4, prompting NSSF to move to the High Court.

NSSF in documents filed in court argues that it had earlier in June last year lodged a claim for tax refund of Sh904.9 million for the year 1996 and 1997 that triggered KRA to slap it with Sh2.1 billion income tax demand. KRA responded by pointing out that the total credit in favour of NSSF is Sh425.5 million.

The letter further said that Sh953.9 million principal tax resulting from non-compliance is due, to be paid together with penalties and interest totalling Sh2.1 billion.

The letter noted that the amount is payable on demand, adding that Sh425.5 million refund in favour of NSSF for the year 1996 and 1997 is being processed, which the pension manager appealed to the Local Committee and lost.

NSSF accuses KRA of failing to appreciate the fact that the money belongs to retirees and pensioners will be the losers should the demand be upheld.

“The local committee erred by disregarding the public interest aspect in this matter considering that the same can significantly affect pensioners and retirees funds,” says NSSF.