KRA on spot in Sh500 million tax dispute

The Kenya Revenue Authority (KRA) has lost its bid to demand more than Sh500 million from a rice importer accused of tax evasion.

Court of Appeal judges William Ouko, Gatembu Kairu and Fatuma Sichale have barred the taxman from pursuing Export Trading Company Limited for rice import duty after finding that KRA’s Trade and Simba system and its employees underestimated the tax to be paid in 2007.

The judges observed that by the time the firm was paying duty, it had asked for clarification from KRA, which confirmed that it was to pay Sh228 million.

Four years later, the KRA came calling and this time claiming that an error on its Trade and Simba system led to Export Trading paying less amount of tax. It slapped it with Sh378 million tax plus a Sh138 million penalty.

Unfairly slapped

“It is also not surprising that the appellant attempted to disown receipt of a letter dated July 26, 2007 from the respondent seeking clarification on the duty payable, yet the letter bore the appellant’s rubber stamp. The act of denying this letter may, regrettably, be suggestive of a lot of going-ons at the appellant’s place of business,” the judges said.

“Granted, it is possible to have technological and human errors. But does it take four (4) years to detect even after it has been pointed out by an importer?”

In the case, Export Trading complained that KRA had unfairly slapped it with a 75 per cent tax penalty four years after it had paid its dues and sold the rice.

According to the firm, it had paid 35 per cent tax in 2017 as KRA had initially demanded.

In its reply, the taxman maintained that the failure by its Trade and Simba system to capture the correct tariff rate was an error.

A KRA officer told the court that between 2008 and 2009, the system had teething problems such that it could not levy different rates simultaneously on a single tariff code.

It also emerged that the Simba system rights are owned by a Senegalese entity, hence intervention and enhancement needed time to effect.

Despite KRA admitting that it was at fault, it accused Export Trading of mis-declaring the country of origin of the rice it had imported between 2007 and 2009 and which resulted to wrong import duty.

The Appeal Court judges agreed with the firm, saying it was unfair for KRA to demand tax after four years as a taxpayer cannot store a commodity waiting to know what tax should the taxman impose.

“The amount of duty imposed on imported goods has a financial bearing that informs the sale price. The imported goods in this instance was rice and being a perishable commodity, it is unfathomable to expect that an importer, such as the respondent will keep the rice in its warehouse awaiting the expiry of the statutory period of five years within which the appellant, under the EACCMA, is permitted to carry out a post-clearance audit to ascertain the duty chargeable,” they ruled.