1. The Appellant is a principal officer appointed under section 13 of the Kenya Revenue Authority Act cap 469 Laws of Kenya. The Kenya Revenue Authority (KRA) is an agency of the Government of Kenya whose mandate is the collection and receipting of all tax revenue and the administration and ion enforcement of all tax laws set out section 5 which describes it as an agency of the Government for the collection and receipt of all revenue. 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.
2. The Respondent is a private limited company incorporated in Kenya and its principal activity is the importation, production, trading and supply of steel products within Kenya.
3. The genesis of the dispute was the Respondent’s application for a refund of Withholding VAT (WHVAT) on the basis of section 17(5) of the Value Added Tax Act (2013). The Appellant reacted by conducting a validation exercise and issuing Credit Adjustment Vouchers which kept the Respondent in a continuous credit position. In March 2023, the Appellant informed the Respondent that they could reapply for the refund, noting however, that most credits had already been utilized.
4. The Respondent appointed Westminster Trade and Tax LLP to facilitate the refund process which culminated in a meeting in May 2023. Afterwards, the Respondent sought further guidance on WHVAT credit utilization and the Appellant acknowledged the request but did not provide a timely response. Further follow-ups and meetings failed to resolve the issue and there was no conclusive guidance from the Appellant. Consequently, the Respondent appealed to the honorable Tribunal for resolution.
Appeal before the Tax Appeals Tribunal
5. The Respondent (Appellant in the Tribunal) raised the following grounds;
a) The Respondent erred in law and fact by misinterpreting and misapplying section 17(5) of the VAT Act, 2013 particularly by failing to appreciate that where an input/output analysis places the tax payer in a VAT credit position, the VAT credits accrued should be first utilized to offset the tax liability in the next tax period prior to utilization of WHVAT.
b) The Respondent erred in law and fact in declining to utilize the credits brought forward as input tax deductible in the next tax period as intended by section 17(5) of the Value Added Tax Act 2013.
c) The Respondent erred in fact and law by utilizing WHVAT credits to offset VAT payable instead of utilizing the accrued input tax carried forward thus denying the Appellant an opportunity to rightfully claim its Withholding VAT refund.
d) The Respondent erred in law and fact by failing to respond to the Appellant’s letter dated 31st May 2023 requesting for the Respondent’s basis for the utilization of Withholding VAT credits as opposed to input tax credits carried forward in line with section 17(5) of the Value Added Tax Act, 2013.
e) The Respondent erred in law and fact by issuing credit adjustment vouchers to the outstanding Withholding VAT refund amounts and subsequently refusing to explain its actions to the Appellant.
f) The Respondent’s iTax systems are similarly erroneously configured to offset the WHVAT first before considering the input tax brought forward. This is despite the law setting that the input tax (input tax for the month and input brought forward) be offset against the output in the determination of the tax payable for the month.
g) The Respondent erred in law and fact by failing to appreciate that its actions and decisions constitute a breach of the Appellant’s right to fair administrative action as enshrined under Article 47 of the Constitution of Kenya.
h) The Respondent’s application of section 17(5) of the VAT Act 2013 is unlawful and is based on questionable facts of the law.
6. The Tribunal found merit in the appeal and gave the following orders;
a) The Appeal be and is hereby allowed.
b) The Respondent’s decision to utilize the Appellant’s WHVAT credits to offset its VAT payables be and is hereby set aside.
c) The Respondent is directed to reverse all the credits adjustments for the periods September 2017 to December 2017, January 2018 to October 2018, June 2019, September 2019, October 2019 and November 2019 within Ninety (90) days from the date of delivery of this judgment.
d) The Respondent is directed to process and pay the Appellant’s WHVAT refunds within 90 days from the date of delivery of this judgment.
e) Each party to bear its own costs.
7. Aggrieved by that judgment, the Appellant lodged this appeal vide the Memorandum of Appeal dated 17/07/2024, on the following grounds;
a) The Tax Appeals Tribunal misdirected itself in relying on section 47 (1) to (3) of the Tax Procedures Act instead of section 17(5) of the Valued Added Tax Act thereby arriving at erroneous decision.
b) The Tribunal erred in law and fact in failing to appreciate section 2(2) of the Tax Procedures Act which provides a distinction between the procedural laws and the laws guiding the administration of taxes.
c) The Tribunal erred in fact and law in retrospectively applying the amendment of section 47(3) of the Tax Procedures Act introduced by the Finance Act 2023 for a claim lodged on 6th November 2020.
d) The Tribunal erred in law and fact by failing to consider the VAT refund process under section 17(5) of the VAT Act thus arriving at an erroneous determination.
8. Parties took directions to canvas the appeal through written submissions.
9. The only submissions on record are for the Respondent.
Respondent’s Submissions
10. The Respondent submitted that from the submissions made by both parties before the Honorable Tribunal, it is evident that the parties have differing interpretations of section 17(5) of the VAT Act, 2013 and that the disagreement has led to the Respondent being denied the opportunity to rightfully claim its Withholding VAT refund.
11. It was submitted that Section 17 of the VAT Act clearly states that VAT is calculated by deducting input tax from output tax, which results in either a credit or VAT payable position for the taxpayer. That, If the input tax exceeds the output tax, the excess credit balance is carried forward as input tax deductible in the next tax period to offset VAT payable. It was contended that the Appellant has adopted a procedure where the VAT payable is first determined by deducting the input tax incurred in the month from the output tax for the month and then utilizing the withholding VAT for the month without consideration to any input tax brought forward from the previous month. That, it is only after these withholding VAT credits are fully utilized that the Appellant applies the accumulated input tax credits brought forward. That, according to the Appellant’s argument, their method of computation is justified because section 17(5) of the VAT Act, 2013 does not specify a particular order or priority for utilizing credits when a taxpayer has both Withholding VAT Credits Certificates from the current month and input tax credits brought forward from previous periods.
12. It was submitted that the Appellant's reasoning is misguided and assertion made that section 17(5) of the VAT Act clearly outlines the order of utilization for input tax credits brought forward and WHVAT credits accrued in the current month. That, the honorable tribunal rightfully determined that the Appellant acted in error when it opted to utilize the Respondent’s WHVAT credit. That however, the honorable tribunal did not provide clarity on the order in which input tax credits brought forward and accrued Withholding VAT credits should be utilized.
13. It was submitted that the Tribunal’s judgment was centered on the second issue in relation to the credit adjustment vouchers where they rightfully determined that the decision to effect credit adjustment vouchers and other similar offset measures can only be enforced by the Appellant after it has issued its formal refund decision in line section 47 (1) to (3) of the Tax Procedures Act, which provides the manner in which overpaid tax should be treated by the Commissioner. The Respondent believes that it would have been beneficial if the Tribunal had provided guidance on the proper interpretation of section 17(5) of the VAT Act 2013, specifically regarding which of the two—input tax credits carried forward or WHVAT credits accrued in the current month—should be offset against the output tax or tax payable first.
14. Consequently, the Respondent identified the following to be the issues for determination;
a) Whether the Appellant applied the correct interpretation of Section 17(5) of the VAT Act, 2013.
b) Whether the Appellant acted unlawfully by issuing credit vouchers, thereby transferring refundable amounts to other periods already in a credit position without any justified reason.
c) Whether the Tax Appeals Tribunal erred in law and fact by misapplying Section 2(2) of the Tax Procedures Act and retrospectively applying the 2023 amendment to Section 47(3) for a refund claim lodged on November 6, 2020.
d) Whether the Appellant has created uncertainty in law in its current interpretation of 17(5) of the VAT Act, 2013.
e) Whether the Appellant breached the Respondent’s right to Fair Administrative Action.
15. On whether the Appellant applied the correct interpretation of Section 17(5) of the VAT Act, 2013, it was submitted that the parties are in dispute over the most appropriate order of utilizing credits when a taxpayer has both Withholding VAT Credits Certificates from the current month and input tax credits brought forward from previous periods pursuant to section 17(5) of the VAT Act. That, the issue is which between the two should be offset against the output or tax payable first. It was contended that the position taken by the Appellant lacks a substantive foundation because of the wording of section 17(5).
16. It was submitted that under section 17 (5) (b) & (c), it is clearly stated that any excess input tax should be refunded to the registered person by the Commissioner if it results from tax withheld by appointed withholding agents. That, this excess can either be applied against other taxes owed under the VAT Act or other laws or refunded in accordance with section 47(4) of the Tax Procedures Act 2015. That, in contrast to the clear interpretation, the Appellant is opting to use WHVAT credits to offset VAT payable instead of first utilizing accrued input tax credits brought forward, as guided by section 17(5). That, this approach denies the Respondent the opportunity to rightfully claim its withholding VAT refund.
17. It was submitted that the Appellant's interpretation of section 17(5) is flawed in two key ways. Firstly, the Appellant claims that the section does not specify the order or priority for utilizing credits when a taxpayer has both Withholding VAT Credits from the current month and input tax credits brought forward from previous periods. However, it was submitted that, the section clearly indicates that input tax credits from the previous month become input tax for the following month. That, in any period, the input tax consists of the input tax brought forward from the previous period combined with the input tax incurred in the current month. That, these are then deducted from the output tax as the first step before making any other adjustments. That, VAT operates on the principle that input tax is deducted from the output tax before any other credits are applied. Secondly, it was submitted that, despite this clear guidance from the law, the Appellant has chosen to ignore it and has instead utilized the Respondent's WHVAT credits before deducting the input tax credits brought forward from previous period. That, the Appellant has failed to provide any justification for its chosen approach in applying section 17 (5) in its tax computation.
18. It was submitted that an analysis of section 17 is clear that it establishes the fundamental right of the taxpayer to deduct input tax, at the end of the tax period in which the supply occurred which is central to the operation of VAT. That, the use of the word shall in section 17(5) makes it mandatory and the commissioner cannot vary or deny the taxpayer this right. That the proviso to the section specifies that any excess input tax carried forward may be refunded to the taxpayer by the Commissioner under certain specific conditions, such as when the excess tax results from zero-rated sales or when it arises from tax withheld by appointed withholding agents.
19. It was submitted that the law is explicit in its language, stating that when the taxpayer is in a VAT refundable position, the input tax credit is to be carried forward to the next tax period as input tax deductible. That, the carried forward input tax credit cannot be refunded but is meant to be utilized initially to offset the output VAT in the subsequent month.
20. It was submitted that the Appellant is assuming an authoritative stance as the ultimate authority in the issuance of tax refunds and is mistakenly adopting a laissez-faire approach to Section 17(5) of the VAT Act, neglecting the fact that the statute explicitly and unequivocally delineates the prescribed order for processing VAT refunds. Reliance was placed on Equity Group Holdings Limited -vs- Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax) (23 August 2021) (Judgment) where the court stated;
i. “Parliament in its wisdom deployed the word “shall” twice in section 51(11) of the Tax Procedures Act. The classification of statutes as mandatory and directory was useful in analyzing and solving the problem of the effect to be given to their directions. There was a distinction between a case where the directions of the Legislature were imperative and a case where they were directory. The real question in all such cases was whether, a thing, had been not done. The general rule was that an absolute enactment had to be obeyed or fulfilled substantially. Some rules were vital and went to the root of the matter, they could not be broken; others were only directory, and a breach could be overlooked provided there was substantial compliance
ii. The word shall, when used in a statutory provision imported a form of command or mandate. It was not permissive, it was mandatory. The word shall in its ordinary meaning was a word of command which was normally given a compulsory meaning as it was intended to denote obligation. Shall was used to express a command or exhortation or what was legally mandatory.”
21. Consequently, it was submitted that the term "shall" within the act is not a mere suggestion to the Appellant but it carries the weight of a clear command or mandate. That, it serves as an imperative directive, leaving little room for discretionary interpretation. It was contended that the Appellant’s role should be one of devotion to the law as written without introducing subjective interpretations. That, in statutory interpretation, the emphasis should be on comprehending and faithfully executing the legislative will rather than attempting to shape or redefine it.
22. On the second issue of whether the Appellant acted illegally in issuing credit vouchers in place of refunds, it was submitted that the Respondent applied to the Commissioner for a refund in line with section 47(1)(b) of the TPA Act and that it never applied to the Commissioner to offset its overpaid tax against its future tax liabilities. That, having established that the Respondent applied for a refund, section 47(5) prescribes that when a taxpayer applies for a refund, the Commissioner must first use the overpaid amount to settle any other taxes owed by the taxpayer under the same tax law, then any taxes owed under other tax laws, and finally, refund any remaining balance to the taxpayer.
23. It was contended that while the Commissioner has powers under section 47(5) to apply the overpaid tax to settle any other tax liabilities owed by the taxpayer, the section does not allow the Commissioner to transfer the overpaid taxes to other periods which are already in a credit position without any basis or justification.
24. It was submitted that the Appellant’s entire process of issuing credit adjustment vouchers is unlawful and flawed for the following reasons:
a) The Appellant transferred refundable amounts to periods already in a net credit position, contrary to Section 47(5) of the TPA Act, which does not permit such transfers without justification. For instance, in October 2018, it is apparent that the Respondent was in a payable (output-input) position of Ksh.5,039,672.81. The WHTVAT in the same month was Kshs.5,554,360, thus the Respondent ended up being in a credit position for the month. Therefore, there was no justification whatsoever for the Appellant to issue credit adjustment vouchers.
b) Even in periods where the Respondent was in a payable position, the Appellant issued credit adjustment vouchers for significantly lower amounts, highlighting the flaws in their system. For instance, in June 2020, the Respondent had a payable position of Kshs. 10,672,844.44, yet the Appellant issued credit adjustment vouchers totaling only Kshs. 2,275,007.
c) By arbitrarily issuing credit adjustment vouchers, the Appellant effectively utilized the refund amount claimed without properly processing it as mandated under Section 47 of the Tax Procedures Act
25. It was submitted that the Honorable tribunal rightfully stated that section 47 (3) of the Tax Procedures Act anticipates that the Appellant is required to issue a decision to the Appellant’s application. That, such a decision must be clear that it is a response to the Appellant’s refund application. That, the decision cannot be camouflaged in a credit adjustment voucher and must be a clear and express decision addressed to the Appellant and stating in plain terms whether the refund has been allowed and if it has been declined, the reason for such refusal ought to be provided. This court was requested to find that the Appellant acted unlawfully and improperly by issuing credit adjustment vouchers instead of providing the WHVAT refund owed to the Respondent.
26. On the third issue of whether the Tax Appeals Tribunal erred in law and fact by misapplying Section 2(2) of the Tax Procedures Act and retrospectively applying the 2023 amendment to Section 47(3) for a refund claim lodged on November 6, 2020, it was submitted that the Tax Appeal Tribunal did not err in law or fact by failing to fully consider section 2(2) of the Tax Procedures Act, which clearly differentiates between procedural laws and those governing the administration of taxes. That according to section 2(2) of the Tax Procedures Act (TPA), unless a tax law specifies a unique procedure for the administration of a particular tax, the general procedures outlined in the TPA should apply. That in our case, section 17(5) of the VAT Act provides a specific procedure for the utilization of input tax credits carried forward and WHVAT credits when a taxpayer has both withholding VAT credits from the current month and input credits carried forward from previous period.
27. It was submitted that the Tribunal was alive to the fact that section 17(5) of the VAT Act provides a specific procedure for the utilization of input credits carried forward and WHVAT credits, but it did not provide guidance on the most appropriate order of utilizing credits when a taxpayer has both Withholding VAT Credits Certificates from the current month and input tax credits brought forward from previous periods.
28. It was submitted that the Tribunal correctly applied section 47 of the TPA which deals with the general procedures for tax refunds, in determining the unlawfulness of the issuance of credit voucher in place of a refund, by the Appellant. Consequently, it was submitted that the Appellant’s ground of appeal is flawed and misplaced.
29. On the issue of whether the Appellant breached the Respondent’s right to Fair Administrative Action, it was submitted that the Respondent’s letter dated May 31, 2023 -seeking clarification regarding the reasoning behind the Appellant’s utilization of carried-forward input tax credits and WHVAT- did not get a response from the Appellant. That, subsequently, there were multiple follow-ups through emails and meetings where the Appellant, instead of providing guidance to the Respondent on the matter in question, consistently communicated that they had referred the issue to various internal offices for consultation.
30. It was submitted that in a blatant violation of the Respondent’s right to Fair Administrative Action, the Appellant consistently neglected addressing the refund applications promptly and reasonably. That, the Appellant rejected the Respondent's VAT refund requests from the year 2020 more than two years later, in 2022. It was contended that the Appellant’s conduct represents a significant breach of Section 47 of the TPA which obligates the Appellant to provide a written decision on a refund claim within ninety days of receiving the application. Reliance was placed on Kenya Data Networks Limited -vs- Kenya Revenue Authority as quoted in the case of Tata Chemicals Magadi Limited -vs- Commissioner of Domestic Taxes (Large Taxpayers) [2014] eKLR where was stated that:
“The respondent had a duty to act on the petitioner’s VAT refunds timeously. While recognizing that it is mandated by statute to collect taxes, and while appreciating the pivotal role that collection of taxes plays in a country's economic development and provision of services for citizens, KRA must also be always cognizant of the possible ramifications of its actions or omissions in dealing with taxpayers, and the impact on investment, revenue collection and the general welfare of the country. While there is no statutory period within which KRA ought to make good tax refund claims, it cannot have any basis for failing to process tax refund claims several months, and in some cases several years after they were made. It is no answer to the petitioner’s claim for tax refund for the respondent to demand in turn that the petitioner pays arrears of tax.”
31. Reliance was also placed on Article 47 of the Constitution of Kenya which provides that; “Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair”.
32. It was submitted that the Appellant's actions constitute an unreasonable delay in meeting its statutory obligations, thereby constituting a significant breach of the Respondent’s constitutional right to fair administrative action. That, the prolonged delay has inflicted considerable prejudice upon the Respondent, as their working capital remained tied up throughout the entirety of this period. Reliance was placed on Intersplav -vs- Ukraine, Application No. 803/02 before the European Court of Human Rights [Ruling delivered at Strasbourg on 9th January 2007, as quoted in the case of Republic -vs- Kenya Revenue Authority Ex-parte L.A.B. International Kenya Limited (2011) eKLR where it was held (p.6):
“The Court observes that, having met the criteria and requirements established by the domestic legislation, the applicant could reasonably expect the refund of the VAT it had paid in the course of its business activities, as well as compensation for any delay.”
33. Further reliance was placed on Judicial Service Commission -vs- Mbalu Mutava & Anor (2015) eKLR where the Court of Appeal stated that:
“[23] …Article 47(1) marks an important and transformative development of administrative justice for, it not only lays a constitutional foundation for control of the powers of state organs and other administrative bodies, but also entrenches the right to fair administrative action in the Bill of Rights. The right to fair administrative action is a reflection of some of the national values in article 10 such as the rule of law, human dignity, social justice, good governance, transparency and accountability. The administrative actions of public officers, state organs and other administrative bodies are now subjected by article 47(1) to the principle of constitutionality rather than to the doctrine of ultra vires from which administrative law under the common law was developed.”
34. On the issue of whether the Appellant is creating uncertainty and ambiguity in law, it was submitted that the Appellant has done so by opting for an erroneous interpretation of Section 17(5) regarding the order in which credits carried forward and withholding VAT should be applied. It was contended that it is a fundamental and essential aspect of a taxation system that the tax laws of a country be clear and devoid of ambiguity. Reliance was placed on Waweru & 3 others (suing as officials of Kitengela Bar Owners Association) & Anor -vs- National Assembly & 2 others; Institute of Certified Public Accountants of Kenya (ICPAK) & 2 others (Interested parties) (Constitutional Petition E005 & E001 (Consolidated) of 2021) [2021] KEHC 58 (KLR) where it was stated that:
“Article 10 (1) (b) and (c) of the Constitution provides that the National values and principles of governance bind all State organs, State officers, public officers, and all persons whenever any of them enacts, applies, interprets any law, makes, or implements public policy decisions. The said national values and principles of governance are provided for under Article 10 (2) and include the rule of law, equality, and non-discrimination. The fundamental principle of rule of law as encapsulated in Article 10 of the Constitution is that the law must be certain. Certainty of the law is especially more critical in legislation that imposes taxes on members of the public.”
35. It was submitted that the provisions of Section 17 of the VAT Act 2013 are clear and unambiguous but the Appellant is introducing an air of ambiguity and uncertainty by adopting an interpretation contrary to the ordinary and literal understanding of the provision. Reliance was placed on Republic -vs- Kenya Revenue Authority Ex Parte Universal Corporation Ltd [2016] eKLR which relied on the reasoning of the court in Cape Brandy Syndicate -vs- Inland Revenue Commissioner (1921) 1 KB 64 where it was held that:
“In a taxing Act one has to look merely at what is clearly stated. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”
36. It was submitted that the undeniable importance of tax certainty as a crucial component of a well-functioning tax system cannot be overstated. That, it serves to align the expectations of taxpayers and governments fostering an environment conducive to growth and foreign direct investment. That, in light of the Appellant’s actions, the question of what happens when a law is uncertain or ambiguous arises.
37. It was submitted that where the law is uncertain, indeterminate or ambiguous, it should be interpreted in favor of the citizen or in this case the taxpayer. That, these sentiments were stated, inter alia, in Republic -vs- Kenya Revenue Authority Ex Parte Cooper K-Brands Limited [2016] eKLR while citing the case of Commissioner of Income Tax -vs- Westmont Power (K) Ltd Nairobi High Court Income Tax Appeal No. 626 of 2002 thus;
“Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no room for ambiguity…any ambiguity in such a law must be resolved in favour of the taxpayer and not the Public Revenue Authorities which are responsible for their implementation.”
38. In conclusion, it was submitted that the Respondent has demonstrated; incorrect interpretation of section 17(5), unlawful issuance of credit vouchers, violation of fair administrative action and creation of legal ambiguity and uncertainty.
Duty of Court
39. 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 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.”
40. I have carefully considered the appellants statement of facts, the grounds of appeal, the respondents , submissions and the record. The main issue for determination is whether the Tax Tribunal erred in its interpretation of s. 17(5) of the VAT Act. There are attendant issues that arise to be determined together with this .
a) What is the correct interpretation of section 17(5) of the Value Added Tax Act, Cap 476 of the Laws of Kenya when a tax payer has both WHVAT credits and credits brought forward from previous months.
b) Whether the Tribunal failed to appreciate section 2(2) of the Tax Procedures Act which provides a distincti
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2. The Respondent is a private limited company incorporated in Kenya and its principal activity is the importation, production, trading and supply of steel products within Kenya.
3. The genesis of the dispute was the Respondent’s application for a refund of Withholding VAT (WHVAT) on the basis of section 17(5) of the Value Added Tax Act (2013). The Appellant reacted by conducting a validation exercise and issuing Credit Adjustment Vouchers which kept the Respondent in a continuous credit position. In March 2023, the Appellant informed the Respondent that they could reapply for the refund, noting however, that most credits had already been utilized.
4. The Respondent appointed Westminster Trade and Tax LLP to facilitate the refund process which culminated in a meeting in May 2023. Afterwards, the Respondent sought further guidance on WHVAT credit utilization and the Appellant acknowledged the request but did not provide a timely response. Further follow-ups and meetings failed to resolve the issue and there was no conclusive guidance from the Appellant. Consequently, the Respondent appealed to the honorable Tribunal for resolution.
Appeal before the Tax Appeals Tribunal
5. The Respondent (Appellant in the Tribunal) raised the following grounds;
a) The Respondent erred in law and fact by misinterpreting and misapplying section 17(5) of the VAT Act, 2013 particularly by failing to appreciate that where an input/output analysis places the tax payer in a VAT credit position, the VAT credits accrued should be first utilized to offset the tax liability in the next tax period prior to utilization of WHVAT.
b) The Respondent erred in law and fact in declining to utilize the credits brought forward as input tax deductible in the next tax period as intended by section 17(5) of the Value Added Tax Act 2013.
c) The Respondent erred in fact and law by utilizing WHVAT credits to offset VAT payable instead of utilizing the accrued input tax carried forward thus denying the Appellant an opportunity to rightfully claim its Withholding VAT refund.
d) The Respondent erred in law and fact by failing to respond to the Appellant’s letter dated 31st May 2023 requesting for the Respondent’s basis for the utilization of Withholding VAT credits as opposed to input tax credits carried forward in line with section 17(5) of the Value Added Tax Act, 2013.
e) The Respondent erred in law and fact by issuing credit adjustment vouchers to the outstanding Withholding VAT refund amounts and subsequently refusing to explain its actions to the Appellant.
f) The Respondent’s iTax systems are similarly erroneously configured to offset the WHVAT first before considering the input tax brought forward. This is despite the law setting that the input tax (input tax for the month and input brought forward) be offset against the output in the determination of the tax payable for the month.
g) The Respondent erred in law and fact by failing to appreciate that its actions and decisions constitute a breach of the Appellant’s right to fair administrative action as enshrined under Article 47 of the Constitution of Kenya.
h) The Respondent’s application of section 17(5) of the VAT Act 2013 is unlawful and is based on questionable facts of the law.
6. The Tribunal found merit in the appeal and gave the following orders;
a) The Appeal be and is hereby allowed.
b) The Respondent’s decision to utilize the Appellant’s WHVAT credits to offset its VAT payables be and is hereby set aside.
c) The Respondent is directed to reverse all the credits adjustments for the periods September 2017 to December 2017, January 2018 to October 2018, June 2019, September 2019, October 2019 and November 2019 within Ninety (90) days from the date of delivery of this judgment.
d) The Respondent is directed to process and pay the Appellant’s WHVAT refunds within 90 days from the date of delivery of this judgment.
e) Each party to bear its own costs.
7. Aggrieved by that judgment, the Appellant lodged this appeal vide the Memorandum of Appeal dated 17/07/2024, on the following grounds;
a) The Tax Appeals Tribunal misdirected itself in relying on section 47 (1) to (3) of the Tax Procedures Act instead of section 17(5) of the Valued Added Tax Act thereby arriving at erroneous decision.
b) The Tribunal erred in law and fact in failing to appreciate section 2(2) of the Tax Procedures Act which provides a distinction between the procedural laws and the laws guiding the administration of taxes.
c) The Tribunal erred in fact and law in retrospectively applying the amendment of section 47(3) of the Tax Procedures Act introduced by the Finance Act 2023 for a claim lodged on 6th November 2020.
d) The Tribunal erred in law and fact by failing to consider the VAT refund process under section 17(5) of the VAT Act thus arriving at an erroneous determination.
8. Parties took directions to canvas the appeal through written submissions.
9. The only submissions on record are for the Respondent.
Respondent’s Submissions
10. The Respondent submitted that from the submissions made by both parties before the Honorable Tribunal, it is evident that the parties have differing interpretations of section 17(5) of the VAT Act, 2013 and that the disagreement has led to the Respondent being denied the opportunity to rightfully claim its Withholding VAT refund.
11. It was submitted that Section 17 of the VAT Act clearly states that VAT is calculated by deducting input tax from output tax, which results in either a credit or VAT payable position for the taxpayer. That, If the input tax exceeds the output tax, the excess credit balance is carried forward as input tax deductible in the next tax period to offset VAT payable. It was contended that the Appellant has adopted a procedure where the VAT payable is first determined by deducting the input tax incurred in the month from the output tax for the month and then utilizing the withholding VAT for the month without consideration to any input tax brought forward from the previous month. That, it is only after these withholding VAT credits are fully utilized that the Appellant applies the accumulated input tax credits brought forward. That, according to the Appellant’s argument, their method of computation is justified because section 17(5) of the VAT Act, 2013 does not specify a particular order or priority for utilizing credits when a taxpayer has both Withholding VAT Credits Certificates from the current month and input tax credits brought forward from previous periods.
12. It was submitted that the Appellant's reasoning is misguided and assertion made that section 17(5) of the VAT Act clearly outlines the order of utilization for input tax credits brought forward and WHVAT credits accrued in the current month. That, the honorable tribunal rightfully determined that the Appellant acted in error when it opted to utilize the Respondent’s WHVAT credit. That however, the honorable tribunal did not provide clarity on the order in which input tax credits brought forward and accrued Withholding VAT credits should be utilized.
13. It was submitted that the Tribunal’s judgment was centered on the second issue in relation to the credit adjustment vouchers where they rightfully determined that the decision to effect credit adjustment vouchers and other similar offset measures can only be enforced by the Appellant after it has issued its formal refund decision in line section 47 (1) to (3) of the Tax Procedures Act, which provides the manner in which overpaid tax should be treated by the Commissioner. The Respondent believes that it would have been beneficial if the Tribunal had provided guidance on the proper interpretation of section 17(5) of the VAT Act 2013, specifically regarding which of the two—input tax credits carried forward or WHVAT credits accrued in the current month—should be offset against the output tax or tax payable first.
14. Consequently, the Respondent identified the following to be the issues for determination;
a) Whether the Appellant applied the correct interpretation of Section 17(5) of the VAT Act, 2013.
b) Whether the Appellant acted unlawfully by issuing credit vouchers, thereby transferring refundable amounts to other periods already in a credit position without any justified reason.
c) Whether the Tax Appeals Tribunal erred in law and fact by misapplying Section 2(2) of the Tax Procedures Act and retrospectively applying the 2023 amendment to Section 47(3) for a refund claim lodged on November 6, 2020.
d) Whether the Appellant has created uncertainty in law in its current interpretation of 17(5) of the VAT Act, 2013.
e) Whether the Appellant breached the Respondent’s right to Fair Administrative Action.
15. On whether the Appellant applied the correct interpretation of Section 17(5) of the VAT Act, 2013, it was submitted that the parties are in dispute over the most appropriate order of utilizing credits when a taxpayer has both Withholding VAT Credits Certificates from the current month and input tax credits brought forward from previous periods pursuant to section 17(5) of the VAT Act. That, the issue is which between the two should be offset against the output or tax payable first. It was contended that the position taken by the Appellant lacks a substantive foundation because of the wording of section 17(5).
16. It was submitted that under section 17 (5) (b) & (c), it is clearly stated that any excess input tax should be refunded to the registered person by the Commissioner if it results from tax withheld by appointed withholding agents. That, this excess can either be applied against other taxes owed under the VAT Act or other laws or refunded in accordance with section 47(4) of the Tax Procedures Act 2015. That, in contrast to the clear interpretation, the Appellant is opting to use WHVAT credits to offset VAT payable instead of first utilizing accrued input tax credits brought forward, as guided by section 17(5). That, this approach denies the Respondent the opportunity to rightfully claim its withholding VAT refund.
17. It was submitted that the Appellant's interpretation of section 17(5) is flawed in two key ways. Firstly, the Appellant claims that the section does not specify the order or priority for utilizing credits when a taxpayer has both Withholding VAT Credits from the current month and input tax credits brought forward from previous periods. However, it was submitted that, the section clearly indicates that input tax credits from the previous month become input tax for the following month. That, in any period, the input tax consists of the input tax brought forward from the previous period combined with the input tax incurred in the current month. That, these are then deducted from the output tax as the first step before making any other adjustments. That, VAT operates on the principle that input tax is deducted from the output tax before any other credits are applied. Secondly, it was submitted that, despite this clear guidance from the law, the Appellant has chosen to ignore it and has instead utilized the Respondent's WHVAT credits before deducting the input tax credits brought forward from previous period. That, the Appellant has failed to provide any justification for its chosen approach in applying section 17 (5) in its tax computation.
18. It was submitted that an analysis of section 17 is clear that it establishes the fundamental right of the taxpayer to deduct input tax, at the end of the tax period in which the supply occurred which is central to the operation of VAT. That, the use of the word shall in section 17(5) makes it mandatory and the commissioner cannot vary or deny the taxpayer this right. That the proviso to the section specifies that any excess input tax carried forward may be refunded to the taxpayer by the Commissioner under certain specific conditions, such as when the excess tax results from zero-rated sales or when it arises from tax withheld by appointed withholding agents.
19. It was submitted that the law is explicit in its language, stating that when the taxpayer is in a VAT refundable position, the input tax credit is to be carried forward to the next tax period as input tax deductible. That, the carried forward input tax credit cannot be refunded but is meant to be utilized initially to offset the output VAT in the subsequent month.
20. It was submitted that the Appellant is assuming an authoritative stance as the ultimate authority in the issuance of tax refunds and is mistakenly adopting a laissez-faire approach to Section 17(5) of the VAT Act, neglecting the fact that the statute explicitly and unequivocally delineates the prescribed order for processing VAT refunds. Reliance was placed on Equity Group Holdings Limited -vs- Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax) (23 August 2021) (Judgment) where the court stated;
i. “Parliament in its wisdom deployed the word “shall” twice in section 51(11) of the Tax Procedures Act. The classification of statutes as mandatory and directory was useful in analyzing and solving the problem of the effect to be given to their directions. There was a distinction between a case where the directions of the Legislature were imperative and a case where they were directory. The real question in all such cases was whether, a thing, had been not done. The general rule was that an absolute enactment had to be obeyed or fulfilled substantially. Some rules were vital and went to the root of the matter, they could not be broken; others were only directory, and a breach could be overlooked provided there was substantial compliance
ii. The word shall, when used in a statutory provision imported a form of command or mandate. It was not permissive, it was mandatory. The word shall in its ordinary meaning was a word of command which was normally given a compulsory meaning as it was intended to denote obligation. Shall was used to express a command or exhortation or what was legally mandatory.”
21. Consequently, it was submitted that the term "shall" within the act is not a mere suggestion to the Appellant but it carries the weight of a clear command or mandate. That, it serves as an imperative directive, leaving little room for discretionary interpretation. It was contended that the Appellant’s role should be one of devotion to the law as written without introducing subjective interpretations. That, in statutory interpretation, the emphasis should be on comprehending and faithfully executing the legislative will rather than attempting to shape or redefine it.
22. On the second issue of whether the Appellant acted illegally in issuing credit vouchers in place of refunds, it was submitted that the Respondent applied to the Commissioner for a refund in line with section 47(1)(b) of the TPA Act and that it never applied to the Commissioner to offset its overpaid tax against its future tax liabilities. That, having established that the Respondent applied for a refund, section 47(5) prescribes that when a taxpayer applies for a refund, the Commissioner must first use the overpaid amount to settle any other taxes owed by the taxpayer under the same tax law, then any taxes owed under other tax laws, and finally, refund any remaining balance to the taxpayer.
23. It was contended that while the Commissioner has powers under section 47(5) to apply the overpaid tax to settle any other tax liabilities owed by the taxpayer, the section does not allow the Commissioner to transfer the overpaid taxes to other periods which are already in a credit position without any basis or justification.
24. It was submitted that the Appellant’s entire process of issuing credit adjustment vouchers is unlawful and flawed for the following reasons:
a) The Appellant transferred refundable amounts to periods already in a net credit position, contrary to Section 47(5) of the TPA Act, which does not permit such transfers without justification. For instance, in October 2018, it is apparent that the Respondent was in a payable (output-input) position of Ksh.5,039,672.81. The WHTVAT in the same month was Kshs.5,554,360, thus the Respondent ended up being in a credit position for the month. Therefore, there was no justification whatsoever for the Appellant to issue credit adjustment vouchers.
b) Even in periods where the Respondent was in a payable position, the Appellant issued credit adjustment vouchers for significantly lower amounts, highlighting the flaws in their system. For instance, in June 2020, the Respondent had a payable position of Kshs. 10,672,844.44, yet the Appellant issued credit adjustment vouchers totaling only Kshs. 2,275,007.
c) By arbitrarily issuing credit adjustment vouchers, the Appellant effectively utilized the refund amount claimed without properly processing it as mandated under Section 47 of the Tax Procedures Act
25. It was submitted that the Honorable tribunal rightfully stated that section 47 (3) of the Tax Procedures Act anticipates that the Appellant is required to issue a decision to the Appellant’s application. That, such a decision must be clear that it is a response to the Appellant’s refund application. That, the decision cannot be camouflaged in a credit adjustment voucher and must be a clear and express decision addressed to the Appellant and stating in plain terms whether the refund has been allowed and if it has been declined, the reason for such refusal ought to be provided. This court was requested to find that the Appellant acted unlawfully and improperly by issuing credit adjustment vouchers instead of providing the WHVAT refund owed to the Respondent.
26. On the third issue of whether the Tax Appeals Tribunal erred in law and fact by misapplying Section 2(2) of the Tax Procedures Act and retrospectively applying the 2023 amendment to Section 47(3) for a refund claim lodged on November 6, 2020, it was submitted that the Tax Appeal Tribunal did not err in law or fact by failing to fully consider section 2(2) of the Tax Procedures Act, which clearly differentiates between procedural laws and those governing the administration of taxes. That according to section 2(2) of the Tax Procedures Act (TPA), unless a tax law specifies a unique procedure for the administration of a particular tax, the general procedures outlined in the TPA should apply. That in our case, section 17(5) of the VAT Act provides a specific procedure for the utilization of input tax credits carried forward and WHVAT credits when a taxpayer has both withholding VAT credits from the current month and input credits carried forward from previous period.
27. It was submitted that the Tribunal was alive to the fact that section 17(5) of the VAT Act provides a specific procedure for the utilization of input credits carried forward and WHVAT credits, but it did not provide guidance on the most appropriate order of utilizing credits when a taxpayer has both Withholding VAT Credits Certificates from the current month and input tax credits brought forward from previous periods.
28. It was submitted that the Tribunal correctly applied section 47 of the TPA which deals with the general procedures for tax refunds, in determining the unlawfulness of the issuance of credit voucher in place of a refund, by the Appellant. Consequently, it was submitted that the Appellant’s ground of appeal is flawed and misplaced.
29. On the issue of whether the Appellant breached the Respondent’s right to Fair Administrative Action, it was submitted that the Respondent’s letter dated May 31, 2023 -seeking clarification regarding the reasoning behind the Appellant’s utilization of carried-forward input tax credits and WHVAT- did not get a response from the Appellant. That, subsequently, there were multiple follow-ups through emails and meetings where the Appellant, instead of providing guidance to the Respondent on the matter in question, consistently communicated that they had referred the issue to various internal offices for consultation.
30. It was submitted that in a blatant violation of the Respondent’s right to Fair Administrative Action, the Appellant consistently neglected addressing the refund applications promptly and reasonably. That, the Appellant rejected the Respondent's VAT refund requests from the year 2020 more than two years later, in 2022. It was contended that the Appellant’s conduct represents a significant breach of Section 47 of the TPA which obligates the Appellant to provide a written decision on a refund claim within ninety days of receiving the application. Reliance was placed on Kenya Data Networks Limited -vs- Kenya Revenue Authority as quoted in the case of Tata Chemicals Magadi Limited -vs- Commissioner of Domestic Taxes (Large Taxpayers) [2014] eKLR where was stated that:
“The respondent had a duty to act on the petitioner’s VAT refunds timeously. While recognizing that it is mandated by statute to collect taxes, and while appreciating the pivotal role that collection of taxes plays in a country's economic development and provision of services for citizens, KRA must also be always cognizant of the possible ramifications of its actions or omissions in dealing with taxpayers, and the impact on investment, revenue collection and the general welfare of the country. While there is no statutory period within which KRA ought to make good tax refund claims, it cannot have any basis for failing to process tax refund claims several months, and in some cases several years after they were made. It is no answer to the petitioner’s claim for tax refund for the respondent to demand in turn that the petitioner pays arrears of tax.”
31. Reliance was also placed on Article 47 of the Constitution of Kenya which provides that; “Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair”.
32. It was submitted that the Appellant's actions constitute an unreasonable delay in meeting its statutory obligations, thereby constituting a significant breach of the Respondent’s constitutional right to fair administrative action. That, the prolonged delay has inflicted considerable prejudice upon the Respondent, as their working capital remained tied up throughout the entirety of this period. Reliance was placed on Intersplav -vs- Ukraine, Application No. 803/02 before the European Court of Human Rights [Ruling delivered at Strasbourg on 9th January 2007, as quoted in the case of Republic -vs- Kenya Revenue Authority Ex-parte L.A.B. International Kenya Limited (2011) eKLR where it was held (p.6):
“The Court observes that, having met the criteria and requirements established by the domestic legislation, the applicant could reasonably expect the refund of the VAT it had paid in the course of its business activities, as well as compensation for any delay.”
33. Further reliance was placed on Judicial Service Commission -vs- Mbalu Mutava & Anor (2015) eKLR where the Court of Appeal stated that:
“[23] …Article 47(1) marks an important and transformative development of administrative justice for, it not only lays a constitutional foundation for control of the powers of state organs and other administrative bodies, but also entrenches the right to fair administrative action in the Bill of Rights. The right to fair administrative action is a reflection of some of the national values in article 10 such as the rule of law, human dignity, social justice, good governance, transparency and accountability. The administrative actions of public officers, state organs and other administrative bodies are now subjected by article 47(1) to the principle of constitutionality rather than to the doctrine of ultra vires from which administrative law under the common law was developed.”
34. On the issue of whether the Appellant is creating uncertainty and ambiguity in law, it was submitted that the Appellant has done so by opting for an erroneous interpretation of Section 17(5) regarding the order in which credits carried forward and withholding VAT should be applied. It was contended that it is a fundamental and essential aspect of a taxation system that the tax laws of a country be clear and devoid of ambiguity. Reliance was placed on Waweru & 3 others (suing as officials of Kitengela Bar Owners Association) & Anor -vs- National Assembly & 2 others; Institute of Certified Public Accountants of Kenya (ICPAK) & 2 others (Interested parties) (Constitutional Petition E005 & E001 (Consolidated) of 2021) [2021] KEHC 58 (KLR) where it was stated that:
“Article 10 (1) (b) and (c) of the Constitution provides that the National values and principles of governance bind all State organs, State officers, public officers, and all persons whenever any of them enacts, applies, interprets any law, makes, or implements public policy decisions. The said national values and principles of governance are provided for under Article 10 (2) and include the rule of law, equality, and non-discrimination. The fundamental principle of rule of law as encapsulated in Article 10 of the Constitution is that the law must be certain. Certainty of the law is especially more critical in legislation that imposes taxes on members of the public.”
35. It was submitted that the provisions of Section 17 of the VAT Act 2013 are clear and unambiguous but the Appellant is introducing an air of ambiguity and uncertainty by adopting an interpretation contrary to the ordinary and literal understanding of the provision. Reliance was placed on Republic -vs- Kenya Revenue Authority Ex Parte Universal Corporation Ltd [2016] eKLR which relied on the reasoning of the court in Cape Brandy Syndicate -vs- Inland Revenue Commissioner (1921) 1 KB 64 where it was held that:
“In a taxing Act one has to look merely at what is clearly stated. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”
36. It was submitted that the undeniable importance of tax certainty as a crucial component of a well-functioning tax system cannot be overstated. That, it serves to align the expectations of taxpayers and governments fostering an environment conducive to growth and foreign direct investment. That, in light of the Appellant’s actions, the question of what happens when a law is uncertain or ambiguous arises.
37. It was submitted that where the law is uncertain, indeterminate or ambiguous, it should be interpreted in favor of the citizen or in this case the taxpayer. That, these sentiments were stated, inter alia, in Republic -vs- Kenya Revenue Authority Ex Parte Cooper K-Brands Limited [2016] eKLR while citing the case of Commissioner of Income Tax -vs- Westmont Power (K) Ltd Nairobi High Court Income Tax Appeal No. 626 of 2002 thus;
“Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no room for ambiguity…any ambiguity in such a law must be resolved in favour of the taxpayer and not the Public Revenue Authorities which are responsible for their implementation.”
38. In conclusion, it was submitted that the Respondent has demonstrated; incorrect interpretation of section 17(5), unlawful issuance of credit vouchers, violation of fair administrative action and creation of legal ambiguity and uncertainty.
Duty of Court
39. 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 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.”
40. I have carefully considered the appellants statement of facts, the grounds of appeal, the respondents , submissions and the record. The main issue for determination is whether the Tax Tribunal erred in its interpretation of s. 17(5) of the VAT Act. There are attendant issues that arise to be determined together with this .
a) What is the correct interpretation of section 17(5) of the Value Added Tax Act, Cap 476 of the Laws of Kenya when a tax payer has both WHVAT credits and credits brought forward from previous months.
b) Whether the Tribunal failed to appreciate section 2(2) of the Tax Procedures Act which provides a distincti
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