KRA tech error gifts firm Sh500mThursday June 23 2022
A rice importer has gotten away with Sh500 million unpaid tax after the Kenya Revenue Authority failed to calibrate their systems to distinguish countries of origin.
Export Trading Company ltd paid a preferential tax rate of 35 per cent on imported rice instead of 75 per cent due to a technical error by the taxman, by failing to distinguish imports from Pakistan, which enjoyed the lower rate compared to other countries.
The Supreme Court dismissed KRA’s bid to claim the back taxes faulting the taxman for failing to calibrate the Simba system, in its automated tax collection and import clearance system, to differentiate between countries of origin.
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A bench of five judges of the Supreme Court said it is incomprehensible how the taxpayer should be made to suffer the consequences of the actions of the taxman of failing to input the correct rate in a system it had full control over.
The KRA wanted to recover Sh378 million from the rice importer plus penalties and interest amounting to Sh138 million for rice it imported from Burma, Vietnam and Thailand between 2007 and 2009.
“We reiterate the findings by the High Court and Court of Appeal and hold that the appellant acted unfairly in demanding for the alleged short levied duty almost 4 years after the initial assessment and payment of the duty so assessed were irrational and did not accord the respondent its right to fair administrative action,” the judges led by Deputy Chief Justice Philomena Mwilu said.
The judges said the rice importer had a legitimate expectation after KRA failed to collect duty at the applicable rate, having applied the rate of 35 percent in its Tradex Simba system.
Evidence presented in court was that the company imported rice from the three Asian countries. In July 2005, the East African Community (EAC) passed the Common External Tariff (CET), which set out the import duty rate for rice imported from outside the East Africa Community, at 75 percent.
The KRA effected rate on its Tradex Simba System, an automated tax collection and import clearance system implemented in 2005.
However, the EAC Council of Ministers suspended the application of the 75 percent import duty rate on rice imported from Pakistan for two years from July 1, 2005, to June 30, 2007.
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The taxman thus applied an import duty rate of 35 percent in the Tradex Simba System for all rice imports regardless of origin.
The notice was extended for another two years and KRA maintained 35 percent but clarified that the rate would only be applied to rice imported from Pakistan upon submitting a certificate of origin, among other documents.
Four years later, KRA demanded the amount from the company saying it had under-collected tax due and attributed it to ‘human and system error’ by applying the 35 percent rate instead of 75 percent.
Export Trading Company ltd moved to the High Court and Justice Wilfrida Okwany ruled that the KRA acted unfairly and unreasonably by failing to offer a satisfactory explanation on why the post-clearance audit and the subsequent demand for the short levied duty was made almost four years after the initial assessment was made.
KRA thereafter moved to the Court of Appeal and lost again and elevated the appeal to the Supreme Court.
“It is furthermore unacceptable to us that the respondent adopted the view that it did not matter whether there was a mis-declaration, under-declaration or a system error and that the appellant is entitled to demand for any levies discovered following the carrying out of a post-audit at any given time,” the Supreme Court judges said.