On February 2, 2024, the Tax Appeals Tribunal rendered an important judgment, one that should remind us that the existence of laws and the functioning of institutions as envisioned is indeed the bastion of tax justice, especially in an environment where ambitious revenue targets risk inclining the regulator to the perverse outcome of overreach in its assessments.
The matter was appeal No.1514 of 2022, Cellnet Ltd as the appellant vs the Commissioner for Domestic Taxes who was the respondent. Cellnet Ltd is a private limited company whose trade is the sale of airtime, connector packs, mobile phones and accessories.
The bone of contention was that the Kenya Revenue Authority (KRA) conducted an assessment on Cellnet Ltd covering July 2015 to June 2020 upon whose conclusion the taxman issued an assessment on June 28, 2022, worth Sh245.8 million, Sh134.7 million being assessment attached to Corporate Income Tax and Sh111.1 million being assessment attached to value-added tax.
Cellnet Ltd opposed this assessment and upon review, KRA partially allowed the objection and issued an assessment worth Sh12,982,500 related to value-added tax, to which Cellnet Ltd still objected and escalated the matter to the Tax Appeals Tribunal. In its determination, the tribunal set aside 60.8 percent of the Sh12.98 million assessment by KRA, allowing just Sh5.08 million.
Cellnet Ltd sold pre and post-paid airtime on behalf of Safaricom PLC and the issue with the value-added tax assessment issued by the KRA arose because whereas the firm argued that commissions earned from the sale of airtime were exempt from value-added tax, KRA held that Cellnet Ltd did not demonstrate the extent to which the commissions were captured under the First Schedule of the value-added tax, which captures exempt items.
Why was the Tax Appeals Tribunal’s determination significant? Section 29 of the Tax Procedures Act deals with default assessments. This is related to instances where a taxpayer has failed to submit a tax return for a reporting period as required by law.
An assessment could be about a shortfall by the taxpayer in the case of a deficit carried forward in line with the Income Tax Act— it could be about an excess by the taxpayer in the case of a surplus due to input tax carried forward in line with the Value Added Tax Act, or tax due (including nil amount) payable by the taxpayer.
Section 29(2, d) provides that in arriving at its assessments, the KRA will inform the taxpayer of the period to which the amount assessed relates and this was the canary in the coal mine for KRA in the appeal filed by Cellnet Ltd at the Tribunal.
The Tribunal established that in its amended assessment issued on June 28, 2022 (the assessment that downgraded from Sh245.8 million to Sh12.98 million), KRA’s assessment dated back to 2016 when legally the purview within which the assessment could have been made was between July 2017 and June 2022.
This was a big issue in this case because Section 29 (5) of the Tax Procedures Act provides that “An assessment shall not be made after five years immediately following the last date of the reporting period to which the assessment relates”.
In effect, the Tribunal established that in the matter before it, The KRA had run afoul of the law given that it was conducting an assessment on a taxpayer for a period that exceeded five years.
The absolute sweetener in this finding was not that the taxman had been caught by the Tribunal but that the Tribunal had raised this matter suo moto. This means Cellnet Ltd did not include among its prayers to the Tribunal the consideration that KRA’s assessment was erroneous to the extent that it was in contravention of the provisions of Section 29(5) of the Tax Procedures Act. As such, the Tribunal picked this issue of its motion and in the greater interest of protecting tax justice.
Indeed, the judgment the Tribunal rendered indicates that Cellnet tabled only three prayers. The first, is that the Sh12.98 million value-added tax assessment be set aside in its entirety. Two, that it (Cellnet) sufficiently supported, provided evidence and demonstrated full tax compliance in its operations.
Three, that its appeal be allowed. Nowhere did Cellnet Ltd challenge KRA’s assessment on account of the provisions of Section 29 of the Tax Procedures Act and more specifically, sub-section five which spells out the five-year horizon limit for which assessments are admissible.
I should hasten to add at this point that Section 29(6) of the Tax Procedures Act clearly creates a window through which an assessment may extend beyond the five-year horizon cap set out in sub-section five.
In instances where there is evidence that a taxpayer engaged in gross or wilful neglect of tax obligations, evasion or fraud then indeed, the law allows KRA to conduct an assessment that stretches beyond five years.
It is such small, yet significant, wins that should edify our faith in Kenya’s tax law and the institutions entrusted with the administration of tax justice.
