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KRA suffers major blow in court battle with taxpayers

waweru

Kenya Revenue Authority commissioner general Michael Waweru (left) and his counterpart from Large Tax Payers Office John Njiraini. The authority has been blocked from a major avenue it has been using to recover money from defaulters. File

The Kenya Revenue Authority has been ordered to refund money it drew from a bank for failing to remit taxes from a customer — handing a major victory to taxpayers, who have been suffering the wrath of overzealous tax collectors after revenue targets.

The Constitutional Court declared illegal the tax man’s decision to raid I&M Bank’s account at the Central Bank for money it had not received from a taxpayer after it realised it could not recover the levies from the customer.

I&M went to court after the tax man raided its account before the lapse of the period that agents have to remit the money to KRA.

Commercial banks act as KRA’s tax agents and are required to send to it money received from taxpayers within 30 days of receipt. KRA had gone to the Central Bank after Kenya Syntans and Chemicals obtained a court order stopping the direct debiting of its account, leaving I&M Bank between a rock and a hard place.

Lady Justice Jeanne Gacheche ruled that money held by financial institutions on behalf of their customers is shielded from compulsory acquisition by KRA under the income tax Act — which means that the tax man must immediately return the Sh2.7 million it withdrew from I&M’s account.

The tax man debited the bank’s account while pursuing more than Sh11 million, which it says Kenya Syntans and Chemicals Ltd owed it in unpaid taxes.

The judge’s decision blocks a major avenue that KRA has been using to recover tax monies from defaulters and may further slow down the authority’s race to meet its revenue targets.

“The court’s interpretation of the law has put the tax man and the taxpayer on an equal footing,” said lawyer Macharia Kahonge.

The income tax law demands that once KRA has served a bank with an agency notice relating to any of its customers, the bank has 30 days to comply unless reasons for incapacity to act are communicated to the Commissioner of Income Tax.

Disregard law

Failure to honour an agency notice constitutes an offence in addition to shifting the tax liability to the account of the agent, a provision under which the tax man directed CBK to attach I&M’s account pending remission of the money from Kenya Syntans.

I&M Bank, represented by Allen Gichuhi of Walker and Kontos Advocates, told the Constitutional Court that KRA had acted in disregard of the law by raiding its account at the CBK before the 30-day window had lapsed.

The bank told KRA it could only remit Sh2.8 million when it received a demand for Sh11 million in lieu of taxes due from Kenya Syntans, which had meanwhile obtained a court order to stay the enforcement of the notice, blocking I&M from raiding its account to pay the tax man.

I&M had asked the court to declare KRA’s agency notices requiring immediate payment of any taxes due illegal because they were in contravention of the law that grants the agent a 30-day grace period from the date of service of the notice.

The Kenya Bankers Association termed the ruling timely, saying the tax man had been abusing its legal right to make any person or institution pay without their consent.

Under the Kenyan tax laws, a service of a warrant of attachment by KRA automatically turns a recipient into an agent of the tax authority and failure to comply makes them liable.

The judge ordered Central Bank to refund the Sh2.7 million it drew from its account through the instigation of the taxman.

KRA had maintained that the notices it had served I&M and CBK were legal and that it could not comply with the earlier court order because it had already received the Sh2.7 million from CBK.

The court ruled that failure to comply with the court’s directive rendered all subsequent actions null and void and ordered the CBK to refund the money. She said the notice was not only premature but was in total disregard of the provisions of the law.

The Commissioner of Income Tax has the authority to recover outstanding taxes through forced sale. Distress action is enforced generally by use of court bailiffs or auctioneers as a last resort. KRA is required to obtain a court order in all cases involving tax evasion, which is classified as an economic crime under the Anti-Corruption & Economic Crimes Act.

Prosecution is undertaken in conjunction with other law enforcement agencies and is in addition to other recovery measures provided for in law.