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1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act, Cap 486 Laws of Kenya.
2. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority (KRA) is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue and the administration and enforcement of all tax laws set out in parts 1 & 2 of the first schedule to the Act, for purposes of assessing, collecting and accounting for all tax revenues in accordance with those laws.
3. The Appellant entered into a contractual agreement with the Ministry of Petroleum and Mining (the Ministry) to supply and deliver LPG tabletop cookers valued at Kshs. 100,000,000/=. At the time of execution of the contract, LPG tabletop cookers were exempt from VAT but prior to the delivery of the goods, the Finance Bill 2020 came into effect and amended the VAT Act, rendering the goods subject to VAT at the rate of 14%. Consequently, the Respondent issued a tax assessment against the Appellant, demanding Kshs. 14,000,000/= as VAT on the goods supplied.
4. Upon receiving the assessment, the Appellant challenged the tax liability through an objection dated 29/11/2023 and the Respondent issued its objection decision vide a letter dated 21/12/2023 where it not only upheld the assessment but also increased the amount demanded to Kshs. 17,315,790/=.
5. Aggrieved by that decision, the Appellant appealed to the Tax Appeals Tribunal.
Appeal before the Tax Appeals Tribunal
6. The Appellant raised the following grounds;
a) The Respondent erred in fact and law by holding that the payment of kshs 100,000,000/= to the Appellant by the Ministry of Petroleum and Mining was inclusive of VAT.
b) The Respondent erred by disregarding the tax-exempt status of the Appellant’s goods, established at contract inception, which renders the demand for VAT remittance to the Respondent factually unsustainable.
c) The Respondent erred in holding that the VAT assessment of kshs 17,315,790/= (inclusive of interest and penalties) is due and payable.
d) The Respondent erred in fact and law in finding that the additional assessments were duly raised.
e) The Respondent erred in fact and law in disregarding the unique circumstances of the supply made by the Appellant that involved exempt goods tendered by a government institution.
f) The Respondent erred in fact and law in disregarding the loss suffered by the Appellant and the subsequent double jeopardy by imposing VAT that was charged at the time of supply.
7. The Tribunal found that the Appeal had no merit and gave the following orders;
a) The Appeal be and is hereby dismissed.
b) The Respondent’s objection decision dated 21st December 2023 be and is hereby upheld.
c) Each party to bear its own costs.
8. Aggrieved by that judgment, the Appellant herein appealed to this court, via a Memorandum of Appeal dated 02/01/2025 and raised the following grounds;
a) That the Tribunal erred in law and fact by disregarding the submissions of the Appellant on the question of payment of VAT.
b) That the Tribunal disregarded the provisions of the VAT Act 2013 on the applicable time of supply of the goods in question for purposes of determining the VAT rate applicable.
c) That the Tribunal erred in disregarding the tax-exempt status of the Appellant’s goods established at contract inception and payment for the supply, which rendered the demand for VAT remittance to KRA factually and legally unsustainable.
9. Directions were given that the appeal be canvassed through written submissions. Consequently, the parties complied and filed their respective submissions.
Appellant’s Submissions
10. The Appellant identified the issues for determination to be;
a) Whether the contract sum was VAT inclusive,
b) Whether the Finance Act, 2020 applied retroactively,
c) Whether VAT is legally payable and if the demand from the Respondent divests vested rights.
11. As to whether the contract sum was VAT inclusive, it was submitted that the contractual consideration for the transaction included VAT hence the Appellant was obligated to charge VAT on the goods supplied and remit the same on time. That, the Appellant has extensively shown that the amount remitted by the Ministry did not as a matter of fact include VAT and despite the centrality of this argument to the dispute, the Tribunal failed to adjudicate on it in its judgment, even though it was raised, contested, and integral to the resolution of the matter.
12. It was acknowledged that, this being a second appeal, the scope for raising and considering issues is ordinarily restricted to questions of law. However, it was submitted that, this Honourable Court retains the authority to address issues of fact where it can be demonstrated that the lower courts either considered matters beyond their purview, failed to address matters they ought to have considered or rendered a decision so perverse that it defies reason and justice. It was submitted that the omission by the Tribunal amounts to a failure to address a critical aspect of the dispute, directly impacting the determination of the appeal. Reliance was placed on the decision of the Court of Appeal in Kenya Breweries Ltd -vs- Godfrey Odoyo [2010] KECA 498 (KLR) and cited with approval in Ndungu & Anor -vs- Ndegwa & Anor (Civil Appeal E120 of 2022) [2025] KECA 33 (KLR) (17 January 2025) (Judgment).
13. It was submitted that on one hand, the Appellant maintains that the contract sum was exclusive of VAT while on the other hand, the Respondent asserts that the contract sum included VAT and argues that the absence of an express provision within the contract indicating VAT exclusion supports this position. However, it was submitted, that it is undisputed and universally acknowledged between the Appellant and the Respondent that at the time the contract was executed, the goods to be supplied under the agreement were expressly exempt from VAT by prevailing law. That, given this statutory exemption, it would have been redundant and illogical to explicitly state, within the contract, that the consideration excluded VAT. That, the exemption was already codified in law hence no basis for VAT to be charged against the contract sum.
14. It was contended that the Respondent''s argument disregards the clear legal context at the time of the contract’s execution which occurred on 22/06/2020.That, the exemption from VAT was definitive and unambiguous, removing any legal or contractual obligation to factor VAT into the agreed consideration which was clearly noted in the contract as 100,000,000/=. That, as such, any assertion that the consideration was inclusive of VAT undermines the principles of statutory clarity and contractual certainty that parties rely upon in entering binding agreements.
15. As to whether the Finance Act 2020 applied retroactively, it was submitted that Section 13(a)(vi) of the Finance Act No. 8 of 2020 amended the VAT Act by deleting paragraph 65 of the First Schedule. That, the amendment resulted in LPG tabletop cookers which were previously tax exempt, being subjected to VAT at 14%. That, it is essential to note the provisions of Section 1(c) of the Finance Act, which explicitly state that all sections of the Act, except those specified in Section 1(a) and (b), would come into effect on the date of assent. That, the Act was assented to on 30/06/2020.
16. It was submitted that the Finance Act, 2020, contains no express provision that would apply its amendments retroactively to transactions entered into before its commencement. That, in the absence of such explicit statutory language, the principle of non-retroactivity applies. That, this principle safeguards the integrity of transactions made and rights accrued and vested under previous legal frameworks, ensuring that parties are not unfairly subjected to tax liabilities arising from legislative changes not in force at the time of the transaction.
17. As to whether VAT is legally payable and if the demand from the Respondent divests vested rights, it was submitted that at the heart of this matter is whether a legislative change, occurring after the execution of a binding contract for the supply of goods exempted from VAT, can lawfully revoke the entitlement already conferred upon and enjoyed by the parties to that contract. That, the doctrine of vested entitlements safeguards rights and benefits that have been lawfully acquired, ensuring they are protected from arbitrary or retroactive deprivation. That, having established that the contract sum was VAT exempt and that the Finance Act, 2020 was a forward-looking prospective statute, it is clear that the Appellant accrued and enjoyed a benefit vested and protected under the prevailing law at the point and upon execution of the contract.
18. Reliance was placed on Macharia & Another -vs- Kenya Commercial Bank Limited & 2 Others (Application 2 of 2011) [2012] KESC 8 (KLR) (23 October 2012) (Ruling) where the Supreme Court firmly established that non-criminal statutes are generally presumed to operate prospectively. That, retrospective application is only permissible where the legislature explicitly indicates such intent through express words or necessary implication. That, in the absence of clear legislative direction, non-criminal statutes are confined to future transactions and cannot be applied retroactively. That, this principle ensures legal certainty and protects individuals and entities from unexpected liabilities arising from past actions. That, the reasoning of the Supreme Court was subsequently affirmed by the Court of Appeal in Commissioner of Income Tax -vs- Pan African Paper Mills (E.A) Limited [2018] KECA 585 (KLR), reinforcing the foundational principle that retrospective legislation must respect vested entitlements
19. Further reliance was placed on Said Hemed Saidi -vs- Emmanuel Karisa Maitha & Anor Mombasa HCEP No. 1 of 1998 where the court stated;
“The general rule is that when the law is altered during the pendency of an action or proceeding, the rights of the parties are to be decided according to the law as it existed when the action or proceeding was begun unless the new statute shows a clear intention to vary or affect such rights and such intention may be even by implication”
20. Consequently, it was submitted that the Commissioner’s Application of the VAT Act, as amended by the Finance Act, 2020, unjustly interferes with the Appellant''s vested rights. That, the application of the amendment retrospectively imposes obligations that effectively divest the Appellant of entitlements that had already accrued under the legal framework prevailing at the time the contract was executed. Reliance was placed on RMM -vs-BAM (Civil Appeal 267 of 2011) [2015] KECA 1013 (KLR) where the Court emphasized the necessity of preserving the rights and benefits vested under the legal framework that existed before subsequent legislative changes. This court was urged to adopt the same reasoning and exclude the application of the amended VAT Act in this matter, ensuring justice and fairness in adjudicating.
Submissions by the Respondent
21. The Respondent identified the issues for determination to be;
a) Whether the contract sum was VAT-inclusive;
b) Whether the Finance Act, 2020, applied retroactively;
c) Whether the VAT was legally payable and whether the demand divested vested rights.
22. As to whether the contract sum was VAT inclusive, it was submitted in the affirmative for the reasons that; firstly, the goods were VAT-exempt at the time of contract execution (May 2020) and secondly, the contract did not explicitly exclude VAT and the parties operated under the assumption of exemption.
23. Relying on section 13 of the VAT Act, it was submitted that every price quoted or consideration for a supply of taxable goods or services shall be deemed to be inclusive of tax, unless otherwise expressly stated. That, the contract between the Appellant and the Ministry of Petroleum and Mining did not expressly exclude VAT or contain any provision indicating that VAT was to be added separately to the Kshs. 100,000,000/= contract sum.
24. It was submitted that in the absence of an express VAT exclusion clause, the statutory presumption of VAT inclusion applies, binding the Appellant to treat the Kshs. 100,000,000/= as a tax inclusive sum. That, this statutory presumption ensures that VAT is not circumvented by private arrangements that are silent on tax treatment, particularly where the supplier is a registered taxpayer, as the Appellant was and remain. Relying on section 5 of the VAT Act, it was submitted that, the Appellant misplaces emphasis on the date of contract execution (May 2020), while ignoring the statutory trigger for VAT liability; which in this case was the date of supply.
25. It was submitted that the actual supply of goods took place in November 2020, several months after the Finance Act, 2020 had come into operation on 30/06/2020 which fact has not been denied by the Appellant. Consequently, it was submitted that, the VAT liability did not arise from the contract date, but from the time of supply, which indisputably fell under the amended legal regime.
26. It was submitted that the Tribunal rightly relied on Commissioner of Domestic Taxes -vs- Integrated Payment Solutions Limited [2023] KEHC 3556 (KLR) where the court stated;
“In determining the above issue it is important to establish whether the Respondent supplied a taxable supply to the Members of KBA. It is not disputed that VAT is a consumption tax payable by the end consumer. However, Section 5(3) of the VAT Act places the burden of accounting for VAT in the Supplier of the service and hence the responsibility to collect and remit the said tax in the particular case was one to be borne by the Respondent; Section 5(3) Provides as follows; “(3) Tax on a taxable supply shall be a liability of the registered person making the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply…..Accordingly, I am persuaded that according to the VAT Act, 2013, VAT being a consumption tax, is chargeable at the instance where there is a supply of service to any person, regardless of the connection the person has with the service provider or supplier. It matters not the relationship between the respondent and KBA and its members in the affairs of the Respondent. The determinant factor is that once the Respondent supplied a taxable service, then VAT became due and payable on the same.”
27. It was submitted that the Appellant''s claim of operating under an assumption of exemption is legally irrelevant because tax exemptions are creatures of statute, not contractual agreements. Reliance was placed Commissioner of Domestic Taxes -vs- Barclays Bank of Kenya Limited (Now ABSA Bank Kenya PLC) (Income Tax Appeal E107 of 2021) [2023] KEHC 24807 (KLR) where the court stated;
“The TAT expressed the position that “a tax authority is permitted to collect taxes expressly levied by statute” and there is no room for intendments or implications in tax laws. The TAT reasoned, relying on the decision in Keroche Industries Ltd v Kenya Revenue Authority & 5 others [2007] eKLR that taxation can only be done on clear words and not on intendment.”
28. As to whether the Finance Act, 2020 applied retroactively, it was submitted that this principle does not apply where the legal obligation such as VAT liability arises after the new law has come into effect. That, the Act was clear and unambiguous and section 1(c) provided that it came into operation on 30/06/2022. That, what is in issue is the timing of the supply for purposes of VAT and the Appellant would have this Court believe that the date the contract was signed (in May 2020) somehow immunized them from future changes in tax law but VAT law does not operate that way.
29. It was submitted that under Section 12 of the VAT Act, VAT liability attaches not at contract formation but at the time of supply, which is defined as the earliest of the following events:
“Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of;
(a) the date on which the goods are delivered or services performed;
(b) the date a certificate is issued by an architect, surveyor or any
other person acting as a consultant in a supervisory capacity;
(c) the date on which the invoice for the supply is issued; or
(d) the date on which payment for the supply is received, in whole or in part.”
30. It was submitted that there is no dispute that the supply of goods occurred in November 2020, several months after the Finance Act, 2020 came into force hence the applicable law was the amended VAT Act. That, it was not a case of retrospective taxation but a straightforward application of tax law to a taxable event that occurred under a new legal regime. That, the decisions of Macharia -vs- Kenya Commercial Bank and Pan African Paper Mills which have been relied on by the Appellant to resist this conclusion address very different legal questions relating to retroactive constitutional or criminal liability. That, in the Macharia case, the Supreme Court was interpreting transitional provisions of the 2010 Constitution and not revenue law while in Pan African Paper Mills, the issue was whether criminal sanctions could be applied retroactively and the courts rightly held that such retroactive application was impermissible. It was contended that those contexts are not connected to the matter at hand.
31. It was submitted that unlike criminal law, VAT is concerned with events specifically, the supply of goods or services. That, once that supply occurs, VAT becomes chargeable under the law prevailing at the time of the supply, not at the time of negotiation or contract signing. That, the Appellant’s position would mean that parties could indefinitely lock themselves into tax-free arrangements simply by signing contracts before a law change which is neither logical nor supported by any law.
32. As to whether the VAT was legally payable and whether the demand divested rights, it was submitted that there is no such thing as a vested contractual right to a tax exemption. That, under our legal framework, tax exemptions are creatures of statute and do not arise from private agreements. That, they are conferred by Parliament through express provisions in law, and equally, they can be amended or revoked by Parliament through legislative action.
33. It was submitted that; it is true that the supply of LPG cookers may not have attracted VAT in May 2020 when the contract was signed but this status changed with the enactment of the Finance Act, 2020, which lawfully reclassified those supplies as taxable with effect from 30/06/2020. That, from that point onward, any supplies falling within that category became subject to VAT by operation of law. That, the Appellant’s belief that its contract could somehow freeze the tax law as it existed at the time of signing is wholly untenable.
34. It was submitted that the Appellant’s attempt to frame this matter in the language of double jeopardy is erroneous because VAT demand is not a penalty but a lawful assessment arising from the Appellant’s failure to account for output tax under a new tax regime. That, it is not a second charge for a prior offence but a consequence of a current and enforceable statutory obligation. It was contended that the Appellant was under no illusion about the applicable law at the time of supply and had every opportunity to adjust its invoicing and pricing structure accordingly but failed to do so.
35. In conclusion, it was submitted that the VAT demand did not infringe upon any vested right as no such right existed. That, the Appellant’s obligations arose squarely from a change in the law that was validly enacted and appropriately applied. That, the Tribunal, having correctly appreciated these facts and the governing legal framework, rightly rejected the Appellant’s argument.
Duty of Court
36. Section 56(2) of the Tax Procedures Act provides that an appeal to the High Court from the decision of the Tax Appeals Tribunal or to the Court of Appeal is on a question of law only. In the case of John Munuve Mati -vs- Returning Officer Mwingi North Constituency & 2 others [2018] eKLR, the Court of Appeal summarized what amounts to “matters of law” as follows;
“The interpretation or construction of the Constitution, statute or regulations made thereunder or their application to the sets of facts established by the trial Court. As far as facts are concerned, our engagement with them is limited to background and context and to satisfy ourselves, when the issue is raised, whether the conclusions of the trial judge are based on the evidence on record or whether they are so perverse that no reasonable tribunal would have arrived at them. We cannot be drawn into considerations of the credibility of witnesses or which witnesses are more believable than others; by law that is the province of the trial court.”
37. I have carefully considered the grounds of appeal, statement of facts, rival submissions and the entire record, and adopt the issues for determination as identified by the parties i.e;
a) Whether the contract sum was VAT inclusive,
b) Whether the Finance Act, 2020 applied retroactively,
c) Whether VAT is legally payable and if the demand from the Respondent divests vested rights.
Analysis & Determination
Whether the contract sum was VAT inclusive
38. It is not in dispute that the award to supply and deliver LPG tabletop cookers (the goods) was awarded to the Respondent by the Ministry on 15/05/2020 and the contract was subsequently executed on 22/06/2020. It is also not in dispute that at the time of contract execution, the goods were VAT exempt. Further, it is not in dispute that the Finance Bill 2020 came into effect and amended the VAT Act as a result of which the VAT exemption on the goods was removed.
39. The Appellant’s position is that the contract sum of kshs 100,000,000/= was not inclusive of VAT whereas the Respondent’s position is that it was inclusive as the contract did not explicitly exclude VAT.
40. The Respondent relied on section 13 of the VAT Act to buttress the point that every price quoted or consideration for a supply of taxable goods or services shall be deemed to be inclusive of tax, unless otherwise expressly stated. The section provides as follows;
“Subject to this Act, the taxable value of a supply, including a supply of
imported services, shall be—
(a)the consideration for the supply; or
(b)if the supplier and recipient are related, the open market value of
the supply.”
41. At this juncture, it is important to look at the meaning of the phrases ‘taxable supply’ and ‘taxable value’ and according to section 2 of the VAT Act, ‘taxable supply’ means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business. On the other hand, ‘taxable value’ means the value determined in accordance with section 13 and 14.
42. Consequently, the goods were not taxable supplies and as such, section 13 of the Act cannot be used to argue that the APPELLANT RESpondent ought to have included VAT in the contract sum. Respectfully, I am not sure as to how the Appellant was supposed to convince the Ministry to pay a contract sum inclusive of VAT when the law clearly stated that the goods were VAT exempt.
43. The argument by the Respondent about the contract not having an express VAT exclusion clause does not hold because; what was the point of including it when the prevailing law at the time was very clear that the goods were VAT exempt? I am in agreement with the Respondent that the definitive and unambiguous VAT exemption removed any legal or contractual obligation from it to factor VAT into the agreed consideration.
44. The upshot, in my view, is that the contract sum was VAT exclusive and it was an error for the Tribunal not to make a determination on this issue.
Whether the Finance Act, 2020 applied retroactively
45. The Respondent relied on section 5 of the VAT Act to argue that the statutory trigger for VAT liability was the date of supply in November 2020 and not the date of contract execution in June 2020. Section 5 provides that;
“(1) A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on;
(a)a taxable supply made by a registered person in Kenya;
(b)the importation of taxable goods; and(c)a supply of imported taxable services.
(3) Tax on a taxable supply shall be a liability of the registered person making the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply.”
46. Having established that the goods were not taxable supplies and that the contract sum was exclusive of VAT, it automatically follows that section 5(3)-supra- was not applicable to the Appellant. For any tax to be due as dictated by that section, the concerned goods had to be taxable supplies from the very beginning when parties entered into binding contractual relations. I am unable to agree with the Respondent that the statutory trigger for VAT liability was the date of supply in November 2020.
47. The rule against retroactive application of legislation is intended for situations just like this due to the resultant hardship that would be occasioned on the taxpayer by such application. Further, it is trite that Tax Statutes are to be strictly interpreted and there is no room for imputing that which has not been legislated into statute by Parliament [Commissioner of Investigations and Enforcement -vs- Libya Oil Kenya Ltd (Income Tax Appeal E104 of 2021) [2024] KEHC 3624(KLR) (Commercial and Tax) (15 April 2024)].
48. In Daniel Shumari Njiroine -vs- Naliaka Maroro, SC Motion No 5 of 2013; [2014] eKLR the Supreme Court observed that;
“(36) … it is a general principle that laws, where enacted or promulgated, are progressive in nature. Where the legislature intends a law to apply retrospectively, it will expressly say so. While the Constitution is not, in its essence, to be interpreted like a statute, if and where it intends a particular provision to apply retrospectively, the makers will expressly have stated so.”
49. Further, the Halsbury’s Laws of England, 4th Edition, Re-Issue Volume 44(i) para 1433 states as follows on enactments;
“It is a principle of legal policy that an amending enactment should be generally presumed to change the relevant law only from the time of the enactment’s commencement.”
50. Consequently, in the absence of an express provision in the Finance Act 2020 stating that the removal of VAT exemption would apply retroactively, the rule against retroactive application of legislation works in favor of the Appellant.
51. The upshot is that the Finance Act 2020 did not apply retroactively hence the Tribunal’s finding to the contrary was erroneous.
Whether VAT is legally payable and if the demand from the Respondent divests vested rights.
52. In this case the demand of VAT by the Respondent arose from the retroactive application of the Finance Act 2020. It is noteworthy that ‘retroactive’ and ‘retrospective’ are terms that are used interchangeably but they have a similar meaning. The Black’s Law Dictionary (6th Edition), defines retrospective law as;
“A law which looks backward or contemplates the past; one which is made to affect acts or facts occurring, or rights accruing, before it came into force. Every statute which takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability in respect of transactions or considerations already past. One that relates back to a previous transaction and gives it a different legal effect from that which it had under the new law when it occurred.”
53. It Is not in dispute that at the time the appellant entered into the contract to supply the LPG table tops the tax regime was different. The contractual rights and obligations that accrued at that time were depended on the existing tax regime, and how would they have known that the tax regime would be different at the time of supply of the goods in order to factor the same? While taxes must be paid, an unpredictable, changing tax regime can end up being punitive and causing hardship to the taxpayer, The argument by the respondent that taxpayers can ‘contract’ themselves out of paying taxes is not tenable because that is not possible. No private arrangements can overthrow statutory provisions, but again statutory provisions will not be applied retroactively unless they expressly say so. Here the law stated when it was coming into force and its application would have had a backward looking, shifting effect on the rights and obligations of the appellant not envisaged when the contract was entered into.
54. Hence from the foregoing definition and the foregoing discussion, the inevitable conclusion in my view is that the VAT demanded by the Respondent was not justifiable in the circumstances as it amounted to divesting rights which were conferred on the parties by the existing law at the time of execution of contract.
55. I find that the appeal has merit on the following grounds and the same is allowed.
a. The contract sum was not VAT inclusive,
b. The Finance Act, 2020did not apply retroactively,
c. VAT was not legally payable
d. The demand fr
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1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act, Cap 486 Laws of Kenya.
2. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority (KRA) is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue and the administration and enforcement of all tax laws set out in parts 1 & 2 of the first schedule to the Act, for purposes of assessing, collecting and accounting for all tax revenues in accordance with those laws.
3. The Appellant entered into a contractual agreement with the Ministry of Petroleum and Mining (the Ministry) to supply and deliver LPG tabletop cookers valued at Kshs. 100,000,000/=. At the time of execution of the contract, LPG tabletop cookers were exempt from VAT but prior to the delivery of the goods, the Finance Bill 2020 came into effect and amended the VAT Act, rendering the goods subject to VAT at the rate of 14%. Consequently, the Respondent issued a tax assessment against the Appellant, demanding Kshs. 14,000,000/= as VAT on the goods supplied.
4. Upon receiving the assessment, the Appellant challenged the tax liability through an objection dated 29/11/2023 and the Respondent issued its objection decision vide a letter dated 21/12/2023 where it not only upheld the assessment but also increased the amount demanded to Kshs. 17,315,790/=.
5. Aggrieved by that decision, the Appellant appealed to the Tax Appeals Tribunal.
Appeal before the Tax Appeals Tribunal
6. The Appellant raised the following grounds;
a) The Respondent erred in fact and law by holding that the payment of kshs 100,000,000/= to the Appellant by the Ministry of Petroleum and Mining was inclusive of VAT.
b) The Respondent erred by disregarding the tax-exempt status of the Appellant’s goods, established at contract inception, which renders the demand for VAT remittance to the Respondent factually unsustainable.
c) The Respondent erred in holding that the VAT assessment of kshs 17,315,790/= (inclusive of interest and penalties) is due and payable.
d) The Respondent erred in fact and law in finding that the additional assessments were duly raised.
e) The Respondent erred in fact and law in disregarding the unique circumstances of the supply made by the Appellant that involved exempt goods tendered by a government institution.
f) The Respondent erred in fact and law in disregarding the loss suffered by the Appellant and the subsequent double jeopardy by imposing VAT that was charged at the time of supply.
7. The Tribunal found that the Appeal had no merit and gave the following orders;
a) The Appeal be and is hereby dismissed.
b) The Respondent’s objection decision dated 21st December 2023 be and is hereby upheld.
c) Each party to bear its own costs.
8. Aggrieved by that judgment, the Appellant herein appealed to this court, via a Memorandum of Appeal dated 02/01/2025 and raised the following grounds;
a) That the Tribunal erred in law and fact by disregarding the submissions of the Appellant on the question of payment of VAT.
b) That the Tribunal disregarded the provisions of the VAT Act 2013 on the applicable time of supply of the goods in question for purposes of determining the VAT rate applicable.
c) That the Tribunal erred in disregarding the tax-exempt status of the Appellant’s goods established at contract inception and payment for the supply, which rendered the demand for VAT remittance to KRA factually and legally unsustainable.
9. Directions were given that the appeal be canvassed through written submissions. Consequently, the parties complied and filed their respective submissions.
Appellant’s Submissions
10. The Appellant identified the issues for determination to be;
a) Whether the contract sum was VAT inclusive,
b) Whether the Finance Act, 2020 applied retroactively,
c) Whether VAT is legally payable and if the demand from the Respondent divests vested rights.
11. As to whether the contract sum was VAT inclusive, it was submitted that the contractual consideration for the transaction included VAT hence the Appellant was obligated to charge VAT on the goods supplied and remit the same on time. That, the Appellant has extensively shown that the amount remitted by the Ministry did not as a matter of fact include VAT and despite the centrality of this argument to the dispute, the Tribunal failed to adjudicate on it in its judgment, even though it was raised, contested, and integral to the resolution of the matter.
12. It was acknowledged that, this being a second appeal, the scope for raising and considering issues is ordinarily restricted to questions of law. However, it was submitted that, this Honourable Court retains the authority to address issues of fact where it can be demonstrated that the lower courts either considered matters beyond their purview, failed to address matters they ought to have considered or rendered a decision so perverse that it defies reason and justice. It was submitted that the omission by the Tribunal amounts to a failure to address a critical aspect of the dispute, directly impacting the determination of the appeal. Reliance was placed on the decision of the Court of Appeal in Kenya Breweries Ltd -vs- Godfrey Odoyo [2010] KECA 498 (KLR) and cited with approval in Ndungu & Anor -vs- Ndegwa & Anor (Civil Appeal E120 of 2022) [2025] KECA 33 (KLR) (17 January 2025) (Judgment).
13. It was submitted that on one hand, the Appellant maintains that the contract sum was exclusive of VAT while on the other hand, the Respondent asserts that the contract sum included VAT and argues that the absence of an express provision within the contract indicating VAT exclusion supports this position. However, it was submitted, that it is undisputed and universally acknowledged between the Appellant and the Respondent that at the time the contract was executed, the goods to be supplied under the agreement were expressly exempt from VAT by prevailing law. That, given this statutory exemption, it would have been redundant and illogical to explicitly state, within the contract, that the consideration excluded VAT. That, the exemption was already codified in law hence no basis for VAT to be charged against the contract sum.
14. It was contended that the Respondent''s argument disregards the clear legal context at the time of the contract’s execution which occurred on 22/06/2020.That, the exemption from VAT was definitive and unambiguous, removing any legal or contractual obligation to factor VAT into the agreed consideration which was clearly noted in the contract as 100,000,000/=. That, as such, any assertion that the consideration was inclusive of VAT undermines the principles of statutory clarity and contractual certainty that parties rely upon in entering binding agreements.
15. As to whether the Finance Act 2020 applied retroactively, it was submitted that Section 13(a)(vi) of the Finance Act No. 8 of 2020 amended the VAT Act by deleting paragraph 65 of the First Schedule. That, the amendment resulted in LPG tabletop cookers which were previously tax exempt, being subjected to VAT at 14%. That, it is essential to note the provisions of Section 1(c) of the Finance Act, which explicitly state that all sections of the Act, except those specified in Section 1(a) and (b), would come into effect on the date of assent. That, the Act was assented to on 30/06/2020.
16. It was submitted that the Finance Act, 2020, contains no express provision that would apply its amendments retroactively to transactions entered into before its commencement. That, in the absence of such explicit statutory language, the principle of non-retroactivity applies. That, this principle safeguards the integrity of transactions made and rights accrued and vested under previous legal frameworks, ensuring that parties are not unfairly subjected to tax liabilities arising from legislative changes not in force at the time of the transaction.
17. As to whether VAT is legally payable and if the demand from the Respondent divests vested rights, it was submitted that at the heart of this matter is whether a legislative change, occurring after the execution of a binding contract for the supply of goods exempted from VAT, can lawfully revoke the entitlement already conferred upon and enjoyed by the parties to that contract. That, the doctrine of vested entitlements safeguards rights and benefits that have been lawfully acquired, ensuring they are protected from arbitrary or retroactive deprivation. That, having established that the contract sum was VAT exempt and that the Finance Act, 2020 was a forward-looking prospective statute, it is clear that the Appellant accrued and enjoyed a benefit vested and protected under the prevailing law at the point and upon execution of the contract.
18. Reliance was placed on Macharia & Another -vs- Kenya Commercial Bank Limited & 2 Others (Application 2 of 2011) [2012] KESC 8 (KLR) (23 October 2012) (Ruling) where the Supreme Court firmly established that non-criminal statutes are generally presumed to operate prospectively. That, retrospective application is only permissible where the legislature explicitly indicates such intent through express words or necessary implication. That, in the absence of clear legislative direction, non-criminal statutes are confined to future transactions and cannot be applied retroactively. That, this principle ensures legal certainty and protects individuals and entities from unexpected liabilities arising from past actions. That, the reasoning of the Supreme Court was subsequently affirmed by the Court of Appeal in Commissioner of Income Tax -vs- Pan African Paper Mills (E.A) Limited [2018] KECA 585 (KLR), reinforcing the foundational principle that retrospective legislation must respect vested entitlements
19. Further reliance was placed on Said Hemed Saidi -vs- Emmanuel Karisa Maitha & Anor Mombasa HCEP No. 1 of 1998 where the court stated;
“The general rule is that when the law is altered during the pendency of an action or proceeding, the rights of the parties are to be decided according to the law as it existed when the action or proceeding was begun unless the new statute shows a clear intention to vary or affect such rights and such intention may be even by implication”
20. Consequently, it was submitted that the Commissioner’s Application of the VAT Act, as amended by the Finance Act, 2020, unjustly interferes with the Appellant''s vested rights. That, the application of the amendment retrospectively imposes obligations that effectively divest the Appellant of entitlements that had already accrued under the legal framework prevailing at the time the contract was executed. Reliance was placed on RMM -vs-BAM (Civil Appeal 267 of 2011) [2015] KECA 1013 (KLR) where the Court emphasized the necessity of preserving the rights and benefits vested under the legal framework that existed before subsequent legislative changes. This court was urged to adopt the same reasoning and exclude the application of the amended VAT Act in this matter, ensuring justice and fairness in adjudicating.
Submissions by the Respondent
21. The Respondent identified the issues for determination to be;
a) Whether the contract sum was VAT-inclusive;
b) Whether the Finance Act, 2020, applied retroactively;
c) Whether the VAT was legally payable and whether the demand divested vested rights.
22. As to whether the contract sum was VAT inclusive, it was submitted in the affirmative for the reasons that; firstly, the goods were VAT-exempt at the time of contract execution (May 2020) and secondly, the contract did not explicitly exclude VAT and the parties operated under the assumption of exemption.
23. Relying on section 13 of the VAT Act, it was submitted that every price quoted or consideration for a supply of taxable goods or services shall be deemed to be inclusive of tax, unless otherwise expressly stated. That, the contract between the Appellant and the Ministry of Petroleum and Mining did not expressly exclude VAT or contain any provision indicating that VAT was to be added separately to the Kshs. 100,000,000/= contract sum.
24. It was submitted that in the absence of an express VAT exclusion clause, the statutory presumption of VAT inclusion applies, binding the Appellant to treat the Kshs. 100,000,000/= as a tax inclusive sum. That, this statutory presumption ensures that VAT is not circumvented by private arrangements that are silent on tax treatment, particularly where the supplier is a registered taxpayer, as the Appellant was and remain. Relying on section 5 of the VAT Act, it was submitted that, the Appellant misplaces emphasis on the date of contract execution (May 2020), while ignoring the statutory trigger for VAT liability; which in this case was the date of supply.
25. It was submitted that the actual supply of goods took place in November 2020, several months after the Finance Act, 2020 had come into operation on 30/06/2020 which fact has not been denied by the Appellant. Consequently, it was submitted that, the VAT liability did not arise from the contract date, but from the time of supply, which indisputably fell under the amended legal regime.
26. It was submitted that the Tribunal rightly relied on Commissioner of Domestic Taxes -vs- Integrated Payment Solutions Limited [2023] KEHC 3556 (KLR) where the court stated;
“In determining the above issue it is important to establish whether the Respondent supplied a taxable supply to the Members of KBA. It is not disputed that VAT is a consumption tax payable by the end consumer. However, Section 5(3) of the VAT Act places the burden of accounting for VAT in the Supplier of the service and hence the responsibility to collect and remit the said tax in the particular case was one to be borne by the Respondent; Section 5(3) Provides as follows; “(3) Tax on a taxable supply shall be a liability of the registered person making the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply…..Accordingly, I am persuaded that according to the VAT Act, 2013, VAT being a consumption tax, is chargeable at the instance where there is a supply of service to any person, regardless of the connection the person has with the service provider or supplier. It matters not the relationship between the respondent and KBA and its members in the affairs of the Respondent. The determinant factor is that once the Respondent supplied a taxable service, then VAT became due and payable on the same.”
27. It was submitted that the Appellant''s claim of operating under an assumption of exemption is legally irrelevant because tax exemptions are creatures of statute, not contractual agreements. Reliance was placed Commissioner of Domestic Taxes -vs- Barclays Bank of Kenya Limited (Now ABSA Bank Kenya PLC) (Income Tax Appeal E107 of 2021) [2023] KEHC 24807 (KLR) where the court stated;
“The TAT expressed the position that “a tax authority is permitted to collect taxes expressly levied by statute” and there is no room for intendments or implications in tax laws. The TAT reasoned, relying on the decision in Keroche Industries Ltd v Kenya Revenue Authority & 5 others [2007] eKLR that taxation can only be done on clear words and not on intendment.”
28. As to whether the Finance Act, 2020 applied retroactively, it was submitted that this principle does not apply where the legal obligation such as VAT liability arises after the new law has come into effect. That, the Act was clear and unambiguous and section 1(c) provided that it came into operation on 30/06/2022. That, what is in issue is the timing of the supply for purposes of VAT and the Appellant would have this Court believe that the date the contract was signed (in May 2020) somehow immunized them from future changes in tax law but VAT law does not operate that way.
29. It was submitted that under Section 12 of the VAT Act, VAT liability attaches not at contract formation but at the time of supply, which is defined as the earliest of the following events:
“Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of;
(a) the date on which the goods are delivered or services performed;
(b) the date a certificate is issued by an architect, surveyor or any
other person acting as a consultant in a supervisory capacity;
(c) the date on which the invoice for the supply is issued; or
(d) the date on which payment for the supply is received, in whole or in part.”
30. It was submitted that there is no dispute that the supply of goods occurred in November 2020, several months after the Finance Act, 2020 came into force hence the applicable law was the amended VAT Act. That, it was not a case of retrospective taxation but a straightforward application of tax law to a taxable event that occurred under a new legal regime. That, the decisions of Macharia -vs- Kenya Commercial Bank and Pan African Paper Mills which have been relied on by the Appellant to resist this conclusion address very different legal questions relating to retroactive constitutional or criminal liability. That, in the Macharia case, the Supreme Court was interpreting transitional provisions of the 2010 Constitution and not revenue law while in Pan African Paper Mills, the issue was whether criminal sanctions could be applied retroactively and the courts rightly held that such retroactive application was impermissible. It was contended that those contexts are not connected to the matter at hand.
31. It was submitted that unlike criminal law, VAT is concerned with events specifically, the supply of goods or services. That, once that supply occurs, VAT becomes chargeable under the law prevailing at the time of the supply, not at the time of negotiation or contract signing. That, the Appellant’s position would mean that parties could indefinitely lock themselves into tax-free arrangements simply by signing contracts before a law change which is neither logical nor supported by any law.
32. As to whether the VAT was legally payable and whether the demand divested rights, it was submitted that there is no such thing as a vested contractual right to a tax exemption. That, under our legal framework, tax exemptions are creatures of statute and do not arise from private agreements. That, they are conferred by Parliament through express provisions in law, and equally, they can be amended or revoked by Parliament through legislative action.
33. It was submitted that; it is true that the supply of LPG cookers may not have attracted VAT in May 2020 when the contract was signed but this status changed with the enactment of the Finance Act, 2020, which lawfully reclassified those supplies as taxable with effect from 30/06/2020. That, from that point onward, any supplies falling within that category became subject to VAT by operation of law. That, the Appellant’s belief that its contract could somehow freeze the tax law as it existed at the time of signing is wholly untenable.
34. It was submitted that the Appellant’s attempt to frame this matter in the language of double jeopardy is erroneous because VAT demand is not a penalty but a lawful assessment arising from the Appellant’s failure to account for output tax under a new tax regime. That, it is not a second charge for a prior offence but a consequence of a current and enforceable statutory obligation. It was contended that the Appellant was under no illusion about the applicable law at the time of supply and had every opportunity to adjust its invoicing and pricing structure accordingly but failed to do so.
35. In conclusion, it was submitted that the VAT demand did not infringe upon any vested right as no such right existed. That, the Appellant’s obligations arose squarely from a change in the law that was validly enacted and appropriately applied. That, the Tribunal, having correctly appreciated these facts and the governing legal framework, rightly rejected the Appellant’s argument.
Duty of Court
36. Section 56(2) of the Tax Procedures Act provides that an appeal to the High Court from the decision of the Tax Appeals Tribunal or to the Court of Appeal is on a question of law only. In the case of John Munuve Mati -vs- Returning Officer Mwingi North Constituency & 2 others [2018] eKLR, the Court of Appeal summarized what amounts to “matters of law” as follows;
“The interpretation or construction of the Constitution, statute or regulations made thereunder or their application to the sets of facts established by the trial Court. As far as facts are concerned, our engagement with them is limited to background and context and to satisfy ourselves, when the issue is raised, whether the conclusions of the trial judge are based on the evidence on record or whether they are so perverse that no reasonable tribunal would have arrived at them. We cannot be drawn into considerations of the credibility of witnesses or which witnesses are more believable than others; by law that is the province of the trial court.”
37. I have carefully considered the grounds of appeal, statement of facts, rival submissions and the entire record, and adopt the issues for determination as identified by the parties i.e;
a) Whether the contract sum was VAT inclusive,
b) Whether the Finance Act, 2020 applied retroactively,
c) Whether VAT is legally payable and if the demand from the Respondent divests vested rights.
Analysis & Determination
Whether the contract sum was VAT inclusive
38. It is not in dispute that the award to supply and deliver LPG tabletop cookers (the goods) was awarded to the Respondent by the Ministry on 15/05/2020 and the contract was subsequently executed on 22/06/2020. It is also not in dispute that at the time of contract execution, the goods were VAT exempt. Further, it is not in dispute that the Finance Bill 2020 came into effect and amended the VAT Act as a result of which the VAT exemption on the goods was removed.
39. The Appellant’s position is that the contract sum of kshs 100,000,000/= was not inclusive of VAT whereas the Respondent’s position is that it was inclusive as the contract did not explicitly exclude VAT.
40. The Respondent relied on section 13 of the VAT Act to buttress the point that every price quoted or consideration for a supply of taxable goods or services shall be deemed to be inclusive of tax, unless otherwise expressly stated. The section provides as follows;
“Subject to this Act, the taxable value of a supply, including a supply of
imported services, shall be—
(a)the consideration for the supply; or
(b)if the supplier and recipient are related, the open market value of
the supply.”
41. At this juncture, it is important to look at the meaning of the phrases ‘taxable supply’ and ‘taxable value’ and according to section 2 of the VAT Act, ‘taxable supply’ means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business. On the other hand, ‘taxable value’ means the value determined in accordance with section 13 and 14.
42. Consequently, the goods were not taxable supplies and as such, section 13 of the Act cannot be used to argue that the APPELLANT RESpondent ought to have included VAT in the contract sum. Respectfully, I am not sure as to how the Appellant was supposed to convince the Ministry to pay a contract sum inclusive of VAT when the law clearly stated that the goods were VAT exempt.
43. The argument by the Respondent about the contract not having an express VAT exclusion clause does not hold because; what was the point of including it when the prevailing law at the time was very clear that the goods were VAT exempt? I am in agreement with the Respondent that the definitive and unambiguous VAT exemption removed any legal or contractual obligation from it to factor VAT into the agreed consideration.
44. The upshot, in my view, is that the contract sum was VAT exclusive and it was an error for the Tribunal not to make a determination on this issue.
Whether the Finance Act, 2020 applied retroactively
45. The Respondent relied on section 5 of the VAT Act to argue that the statutory trigger for VAT liability was the date of supply in November 2020 and not the date of contract execution in June 2020. Section 5 provides that;
“(1) A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on;
(a)a taxable supply made by a registered person in Kenya;
(b)the importation of taxable goods; and(c)a supply of imported taxable services.
(3) Tax on a taxable supply shall be a liability of the registered person making the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply.”
46. Having established that the goods were not taxable supplies and that the contract sum was exclusive of VAT, it automatically follows that section 5(3)-supra- was not applicable to the Appellant. For any tax to be due as dictated by that section, the concerned goods had to be taxable supplies from the very beginning when parties entered into binding contractual relations. I am unable to agree with the Respondent that the statutory trigger for VAT liability was the date of supply in November 2020.
47. The rule against retroactive application of legislation is intended for situations just like this due to the resultant hardship that would be occasioned on the taxpayer by such application. Further, it is trite that Tax Statutes are to be strictly interpreted and there is no room for imputing that which has not been legislated into statute by Parliament [Commissioner of Investigations and Enforcement -vs- Libya Oil Kenya Ltd (Income Tax Appeal E104 of 2021) [2024] KEHC 3624(KLR) (Commercial and Tax) (15 April 2024)].
48. In Daniel Shumari Njiroine -vs- Naliaka Maroro, SC Motion No 5 of 2013; [2014] eKLR the Supreme Court observed that;
“(36) … it is a general principle that laws, where enacted or promulgated, are progressive in nature. Where the legislature intends a law to apply retrospectively, it will expressly say so. While the Constitution is not, in its essence, to be interpreted like a statute, if and where it intends a particular provision to apply retrospectively, the makers will expressly have stated so.”
49. Further, the Halsbury’s Laws of England, 4th Edition, Re-Issue Volume 44(i) para 1433 states as follows on enactments;
“It is a principle of legal policy that an amending enactment should be generally presumed to change the relevant law only from the time of the enactment’s commencement.”
50. Consequently, in the absence of an express provision in the Finance Act 2020 stating that the removal of VAT exemption would apply retroactively, the rule against retroactive application of legislation works in favor of the Appellant.
51. The upshot is that the Finance Act 2020 did not apply retroactively hence the Tribunal’s finding to the contrary was erroneous.
Whether VAT is legally payable and if the demand from the Respondent divests vested rights.
52. In this case the demand of VAT by the Respondent arose from the retroactive application of the Finance Act 2020. It is noteworthy that ‘retroactive’ and ‘retrospective’ are terms that are used interchangeably but they have a similar meaning. The Black’s Law Dictionary (6th Edition), defines retrospective law as;
“A law which looks backward or contemplates the past; one which is made to affect acts or facts occurring, or rights accruing, before it came into force. Every statute which takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability in respect of transactions or considerations already past. One that relates back to a previous transaction and gives it a different legal effect from that which it had under the new law when it occurred.”
53. It Is not in dispute that at the time the appellant entered into the contract to supply the LPG table tops the tax regime was different. The contractual rights and obligations that accrued at that time were depended on the existing tax regime, and how would they have known that the tax regime would be different at the time of supply of the goods in order to factor the same? While taxes must be paid, an unpredictable, changing tax regime can end up being punitive and causing hardship to the taxpayer, The argument by the respondent that taxpayers can ‘contract’ themselves out of paying taxes is not tenable because that is not possible. No private arrangements can overthrow statutory provisions, but again statutory provisions will not be applied retroactively unless they expressly say so. Here the law stated when it was coming into force and its application would have had a backward looking, shifting effect on the rights and obligations of the appellant not envisaged when the contract was entered into.
54. Hence from the foregoing definition and the foregoing discussion, the inevitable conclusion in my view is that the VAT demanded by the Respondent was not justifiable in the circumstances as it amounted to divesting rights which were conferred on the parties by the existing law at the time of execution of contract.
55. I find that the appeal has merit on the following grounds and the same is allowed.
a. The contract sum was not VAT inclusive,
b. The Finance Act, 2020did not apply retroactively,
c. VAT was not legally payable
d. The demand fr
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