On 25 March 2020, a little over two weeks since Kenya reported its first case of COVID-19, President Uhuru Kenyatta publicly addressed the nation. In his address, he announced new measures as a cautionary response to the adverse economic effects that would be brought on by the unprecedented global pandemic. These measures included tax interventions that were designed with the intention of cushioning Kenyans and Kenyan businesses from these effects.
One of the measures announced was a directive to the Kenya Revenue Authority (KRA) to "expedite the payment of all verified VAT refund claims amounting to KES 10 Billion within 3 weeks; or in the alternative, allow for offsetting of Withholding VAT, in order to improve cash flows for businesses." This directive was intended to ensure that businesses remained afloat at a time when the world was grappling with an uncertain economic future that had already foretold negative outlooks on the global economy.
Changes in the VAT regime post-COVID 19
Shortly after the Presidential directive on processing of VAT refunds, the Finance Act, 2020 (which was then the Finance Bill, 2020) was published (the Finance Act). The Finance Act introduced new amendments in relation to the processing of VAT refunds. The amendment has increased compliance requirements for taxpayers lodging VAT input claims. Taxpayers are now required to provide proof that their suppliers declared the amount of input VAT being claimed, and that VAT returns of their suppliers have been filed with the KRA. Prior to the amendment, taxpayers were only required to provide documentation to support their input VAT refund claims, such as original tax invoices or customs entries.
VAT refund claims in practice
In the recent past, we have seen several disputes at the Tax Appeals Tribunal (TAT) between taxpayers and the KRA as a result of KRA disallowing VAT refund claims. In analysing the facts presented by both the taxpayer and the KRA, the TAT in Tax Appeal No. 127 of 2017, underscored the importance of clear communication by KRA when engaging with taxpayers.
More so, the TAT highlighted that when it comes to decisions in relation to rejecting VAT refund claims, KRA should provide unambiguous decisions with justifiable reasons which must find a basis in law. It is not sufficient for KRA to merely express its opinion on the matter. Such decisions have far-reaching ramifications on taxpayers' businesses and the taxpayer should clearly understand the impact of KRA's decision to inform their next course of action.
Further, the TAT in the Tax Appeal No. 127 of 2017 and Tax Appeal No. 156 of 2017, held that where a taxpayer has met the statutory requirements governing refund of input VAT claims, then the taxpayer is entitled to have a legitimate expectation that the input VAT claim will be processed, approved and paid.
Whilst it may be the case that the additional requirement brought about by the Finance Act may be onerous on businesses, it is becoming increasingly evident that a higher threshold will seemingly be imposed on the KRA when they are considering applications for VAT refund claims. It remains to be seen how the balance will be achieved between the onerous requirements now placed on taxpayers by the Finance Act vis-à-vis the requirement for KRA to provide reasons with a basis in law when disallowing VAT refund claims.
A&K successfully represented the taxpayers in both cases mentioned above. We would be pleased to assist you in making applications to the KRA for VAT refund claims or to support you in lodging any appeals to the TAT in regard to any negative refund decisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.