A heir of supermarket chain, Naivas Limited, Peter Mukuha Kago, is locked in a Sh777 million tax dispute with the Kenya Revenue Authority (KRA) over the financial operations of a firm, which offered staffing and recruitment services to the giant retailer.
The dispute, which is ongoing at the High Court’s Commercial Division in Nairobi, involves KRA’s demand for payment of a sum of Sh777,092,137 from Achievo Limited following an audit of its financial books.
Mr Kago, who is the director of Achievo Limited, disputes the tax assessment and is afraid that if the KRA collects the amount, the firm would be at risk of being wound up, and at least 2,000 workers at Naivas would lose employment.
On the other hand, the KRA had issued agency notices to the company’s bank accounts in enforcement of the decision of the Tax Appeals Tribunal, which allowed the tax demands.
Court papers show that initially, KRA had asked for a sum of Sh962.7 million, but it revised the figure downwards following an objection by the company.
The dispute escalated to court after the Tax Appeals Tribunal dismissed the company’s appeal in May this year because KRA’s assessments were justified and there was no error.
Pending the hearing of the second appeal, Achievo Ltd obtained an interim order barring KRA from collecting the sum.
“The astronomical tax liability of Sh777,092,137 has no basis in law, and the Appellant/Applicant (Achievo Limited ) is apprehensive that unless the application is allowed and a stay is granted, the Respondent will commence execution proceedings. This will have far-reaching ramifications that potentially include winding up the Appellant/Applicant’s business and ultimately lead to massive job losses of more than 2,000 employees across the country,” says Mr Kago in the court papers.
He says the company’s main economic activity is the provision of outsourced Human Resource (HR) support services to Naivas Limited.
Under a Service Level Agreement between it and Naivas, it is mandated to hire staff and deploy them to work for Naivas supermarket stores on behalf of Naivas Limited.
“The said sum of Sh777,092,137 is VAT (value-added-tax) on salary disbursements and consequential penalties which the Respondent has imposed on the Appellant/Applicant contrary to Section 13(5) of the VAT Act,” adds Mr Mukuha.
The cited section of the VAT Act provides that in calculating the taxable value of any services, the money paid as disbursements to a supplier as an agent should be excluded from the taxable value.
The genesis of the legal dispute is that in 2024, the KRA undertook a tax audit of the company accounts for the years 2022 to 2024, and came up with a tax assessment of Sh962.7 million.
Mr Kago says the tax assessment was based on income reimbursements received by the company from Naivas Ltd for salaries paid to Naivas’ staff.
“Salary reimbursements for staff costs are not a taxable income liable to VAT pursuant to Section 13(5) of the VAT Act. On May 23, 2024, the Respondent delivered its objection decision unlawfully and erroneously assessing the Appellant/Applicant’s sum of Sh962.7, which sum was subsequently revised vide a partial consent dated November 24, 2024, to Sh777 million,” says Mr Kago.
He maintains that the assessment was erroneous because KRA failed to exempt salary reimbursements the company received from Naivas Ltd, contrary to the provisions of the VAT Act.
“The tribunal erred in law and fact by finding that the documents produced by the Appellant were inadequate. This is notwithstanding the fact that the Appellant had supplied all the documents that the Respondent had requested it to produce and thus within its right to assume and believe that it had discharged its burden of proof,” argues the company.
However, KRA wants the company to be ordered to deposit security amounting to 80 percent of the taxes in dispute as a condition for the stay pending determination of the appeal.
Through Ms Georgina Kimeu, KRA also claims that the company intends to adduce new evidence to support its request for orders suspending execution of the tribunal’s judgment.
“The applicant in its purported appeal seeks to introduce new evidence in documents in the form of bank statements that were entirely not part of the proceedings before the tribunal and without seeking leave to adduce the said documents before this court,” says Ms Kimeu.
In regard to the issuance of agency notices, Ms Kimeu says the figures involved are high, and there was urgency to protect the money from being spirited out of the company’s accounts.
“The taxes in the dispute have remained outstanding from the year 2023, and with the judgment being in its favour, the respondent will suffer prejudice if the taxes are not collected since the same have crystallised and the respondent should be allowed to enjoy the fruits of the judgment,” says Ms Kimeu in opposition.
The appeal is pending hearing and determination. The case could set a precedent for how VAT is applied to staffing agencies in Kenya, amid growing scrutiny of tax compliance in the retail sector.
