The High Court has barred the Kenya Revenue Authority (KRA) from pursuing a Sh27 million tax claim against Monarch Insurance, citing a breach of law.
Justice Julius Ng’arng’ar said it was unlawful for KRA to lodge tax claims against the insurer in 2023 for a transaction executed in 2011, which is more than a decade later and way past the five-year window prescribed in law.
The court held that KRA’s claim was time-barred and thus unenforceable.
The judge upheld Monarch’s contention that it was unreasonable to require such records more than a decade after execution, when Section 235 of the East Africa Community Customs and Management (EACCM) Act 2004 requires a taxpayer to keep records for only five years.
“In my considered view, the appellant’s argument is merited as the statutory duty to retain records is expressly limited. Further, once the statutory period lapses, the taxpayer cannot reasonably be compelled to produce documentation,” said the judge.
The court said to hold otherwise would expose taxpayers to perpetual liability contrary to the principle of certainty in taxation.
Monarch filed the appeal after the Tax Appeals Tribunal, in a ruling dated August 9, 2024, backed the KRA’s demand, stating that the insurance company failed to demonstrate by documentary evidence that the bonds in question had been cancelled or discharged.
The origin of the legal dispute is an audit conducted by the KRA’s Commissioner of Customs and Border Control on its Simba system.
During the reconciliation process, the commissioner noted that a taxpayer/importer, Alicia Freighters Limited (Alicia), had an outstanding unaccounted security bond amounting to Sh27 million.
The Commissioner, vide a letter dated July 27, 2023, issued a demand notice to Monarch Insurance to account for the security bond within 14 days.
In its appeal, Monarch argued that the tribunal erred in not considering the policy behind the legal requirement to cancel the Custom Transit Bonds within one to three years.
The policy is aimed at ensuring there is no dumping. Monarch argued that allowing an unlimited amount of time within which the regulator can enforce such cancellations was contrary to this policy objective.
The court allowed the argument, citing Section 107(3) of the EACCM Act, which provides that a security bond, unless discharged by due performance of the conditions, would be discharged by the Commissioner on the expiration of three years.
Justice Ng'arng'ar said Monarch was entitled to expect enforcement of the bonds within a reasonable time frame, and failure by the KRA to enforce the bonds within the statutory period was unreasonable.
"From the pleadings, the customs bonds were executed in the years 2011 and 2013, and the respondent (Commissioner) initiated enforcement in 2023 beyond the statutory period under the law. There is no evidence on record that the respondent sought an extension to enforce the bonds beyond the statutory period," said the court.
Because statutory limitation periods are cast in stone, the court ruled that the timelines could not be circumvented in public interest and that the tribunal erred in failing to appreciate this statutory safeguard.
However, the court declined arguments that the KRA should have first pursued Alicia Freighters Limited before calling upon the surety (Monarch).
"The law allows the respondent to pursue the surety directly without having to pursue the principal debtor first. The law recognizes the surety as the principal debtor. I find no fault in pursuing the surety in the circumstances," said Justice Ng'arng'ar.
For its part, the Commissioner said KRA first issued a demand letter to Alicia to account for the bond within 14 days, but Alicia failed to respond, prompting a reminder and a demand for the duty from Monarch Insurance, which was the guarantor of Alicia.
"There was nothing unreasonable, unfair, or unjust in demanding accountability of the outstanding bond within 14 days since the appellant’s letter dated October 4, 2023, was simply contesting the amount of time granted by the respondent (Commissioner)," said the KRA.
