Whether it was mandatory for a tax payer to prove a taxable supply or importation in order to be entitled to a refund on input Value Added Tax.

Brief facts

In the tax period between July and December 2014, the respondent received supplies which were subjected to VAT payments and later claimed for input tax deduction. The appellant rejected the respondents application for input tax deduction on the grounds that one of the respondents suppliers, Harsidhi Enterprises Limited (impugned entity) was involved in illegal printing of ETR invoices. Consequently, the appellant issued an objection decision on the basis that the respondent did not receive any taxable goods from the impugned entity. Aggrieved by the objection decision, the respondent appealed against it to the Tax Appeals Tribunal (tribunal). The tribunal allowed the appeal ordering that the respondent was entitled to claim input tax.

Aggrieved by the decision of the tribunal, the appellant lodged the instant appeal arguing, among others, that the tribunal erred in holding that the respondent had discharged its burden of proof and in holding that the impugned entity that was accused of illegal profiting and selling of ETR invoices had to first be brought before it by the appellant before the appellants accusation against it could hold against the respondent. The appellant contended that some of the proof of delivery by the respondent was by a vehicle which could not have practically ferried the alleged supplied goods.

Issues

1. Whether it was mandatory for a trader to prove a taxable supply or importation in order to be entitled to a refund on input Value Added Tax.
2. Who bore the burden of proving that a tax decision was incorrect and when would that burden shift?
3. What were the documents required for a tax payer to be entitled to claim a refund?
4. Whether the Commissioner of Domestic Taxes had the discretion to ask for additional information to satisfy himself as to the self- assessment made by a tax payer.

Relevant provisions of the law

Value Added Tax Act

section 17(1):

"Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.

Held

1. Section 17(1) of the Value Added Tax Act (VAT Act) provided that input tax on a taxable supply to or importation made by a registered person could be deducted by the registered person from the tax payable on supplies but only to the extent that the supply or importation was acquired to make taxable supplies. The central issue in the instant case was whether there was proof of a taxable supply for which the respondent could base its claim for input tax refunds. According to section 56(1) of the Tax Procedures Act, the taxpayer had the burden of proving that a tax decision was incorrect.
2. The Kenyan system of taxation was based on self-assessment. The tax payer assessed self and remitted what he/it considered to be the tax due to the tax authorities. In that regard, the tax laws mandated the appellant to later on assess the tax payer in order to ascertain whether the tax remitted was proper or not. Ordinarily, the assessment was made years after the tax had fallen due and been paid or the economic activity or commercial transaction for which the tax arose had been undertaken. It was for that reason that the tax laws shouldered the tax payer with the burden of disproving the correctness of the appellants tax decision. In so doing, the law required the tax payer to keep transaction documents in safe custody for a period of 5 years so that on assessment, the tax authorities were able to access them accordingly. 
3. There was nothing untoward by those provisions as the economic activity or commercial transaction by which the tax arose was undertaken by the tax payer, the self-assessment was by the tax payer and the transactional documents were always in the possession and custody of the tax payer.
4. Since the instant case dealt with input tax deduction, it was upon the respondent to prove that it was entitled to the same contrary to the findings of the appellant.
5. Considering the wording in section 17 of the VAT Act, the important words were taxable supply to, or importation made by. In order for a trader to be entitled to a refund on input VAT, he had to prove a taxable supply or importation. The basis of the refund was not just evidence of payment of the claimed VAT, but prove that there was a taxable supply or importation for which the tax was paid and therefore input tax was claimable.
6. The court was aware of the documents required under section 17(3) of the VAT Act for one to be entitled to claim a refund. However, where the appellant was doubtful, he was entitled to ask for additional information to satisfy himself as to the self- assessment made by a tax payer. That was under section 59 of the Tax Procedures Act and section 43 of the VAT Act. The respondent produced invoices and evidence of payment to show that it had paid the impugned entity for the materials delivered. The tribunal relied on those documents in holding that the respondent had discharged its burden under section 56 of the Tax Procedures Act. 
7. Even though the respondent contended that it had production documents to show that it had consumed the raw materials supplied by the impugned entity, it did not produce any requisition orders or delivery orders corresponding with the production documents relied on. That was so because the respondent admitted that it had many suppliers of the subject raw materials and that the impugned entity was just one of the many suppliers.
8. The existence of the production records could not be proof that the materials used was the ones supplied by impugned entity. The respondent ought to have produced evidence of the supply of the taxable goods specifically by the impugned entity. The production records could as well have been in respect of the goods from the other suppliers. It was for the respondent to prove that the impugned entity supplied it with taxable goods. That was possible for a prudent trader who kept its documentation. That was what was expected of all traders. 
9. The respondent having produced the documents it did, the evidentiary burden shifted to the appellant. The appellant retorted that the impugned entity had been profiled to be selling ETR invoices and receipts and was supplying nil goods. The appellant proceeded to produce a delivery note from the respondent which glaringly cast doubt as to the alleged delivery of the raw materials in question. With that, the evidentiary burden of proof shifted to the respondent to prove that it had been supplied with taxable goods by the impugned entity. It was expected that the respondent could have provided and produced to the tribunal copies of requisition orders, delivery orders or notes, copies of stock records, details of each supply of goods in the name of the impugned entity. All those records were in the custody and possession of and special knowledge of the respondent. It chose not to produce them.
10. The appellant produced one purported delivery by the impugned entity and demonstrated to the tribunal that a vehicle purported to have made the delivery was a nissan sunny. It was common knowledge and the court took judicial notice that such a vehicle could not have made delivery of a whooping 5200kg of the subject raw material.
11. The tribunal erred in holding that the respondent had discharged its burden under section 56 of the Tax Procedures Act. The documents produced by the respondent did not prove that the impugned entity had supplied the respondent with taxable goods. That ground succeeded.
12. The profiling of entities was done by the appellant. The appellant having stated so in its statement of facts and the same not having been denied, the said fact remained uncontroverted and therefore the truth. That which was not denied or challenged was admitted. In the circumstances of the instant case, the appellant was not required to produce any further evidence of the profiling.
13. The insistence that there ought to have been proof of charging with a criminal offence or the bringing of the impugned entity before the tribunal was out of order. The issue at the tribunal was whether the respondent had been supplied with any taxable goods by the impugned entity or not. It was the respondent to prove the supply and not to shift the burden of proof to the appellant. That ground also succeeded.
14. The accusation that the tribunal failed to consider the appellants statement of facts and submissions could not be said to be groundless. The tribunal did not analyze and juxtapose the appellants case as contained in the statement of facts or as submitted against that of the respondent. The tribunal could have ignored the appellants assertions probably because it considered the appellants statement of facts to have been filed out of time and therefore not worthy to look at. That ground succeeded.