Pearl Industries Lost Its Input VAT Claim Because Its Documents Did Not Answer KRA's Doubts
- Case
- Kenya Revenue Authority vs Pearl Industries Limited
- Decided by
- High Court of Kenya, 31 January 2022
- Citation
- HCCOMMITA/E086/2020
What happened
Pearl Industries Limited makes and sells fabrics. In November 2017, KRA began investigating whether its input VAT claims were valid. Input VAT is the VAT a business deducts for what it paid on its purchases. KRA asked for statements, invoices, delivery notes, payment vouchers and ETR receipts for a number of suppliers.
In March 2018, KRA disallowed some of the claims and issued additional assessments of KES 306,051,182 in corporation tax and KES 166,512,947 in VAT. The company objected and KRA confirmed the assessments.
The Tax Appeals Tribunal sided with the company. It held that invoices and proof of payment showed the purchases, and that KRA had to prove the company knew, or ought to have known, of any fraud. KRA appealed to the High Court.
What KRA said
KRA said the suppliers in question did not actually supply goods and were only selling invoices, and that most of them were not registered persons. It said the company had given copies of invoices and supplier statements, but not ETR receipts, signed delivery notes or payment documents. It also said the cheque withdrawals offered as proof of payment did not show who was paid.
The company’s answer was that KRA was blaming it for its suppliers’ non-compliance.
What the Court decided
Justice D. S. Majanja allowed KRA’s appeal, set aside the Tribunal’s judgment and upheld the assessments.
The Court held that section 56 of the Tax Procedures Act and section 30 of the Tax Appeals Tribunal Act put the burden on the taxpayer. In the judge’s words, “the pendulum of proof swung three times”: the company produced documents, KRA challenged them, and the burden returned to the company.
The Court said the company could have produced its suppliers’ PIN certificates, and witnesses, including from the suppliers. Because it did not counter KRA’s detailed findings with satisfactory evidence, the Court treated those findings as proven. Without proven purchases, there was no input VAT to claim and no purchase cost to deduct for corporation tax.
What this means for your business
- Keep more than the invoice. For significant purchases, hold the signed delivery note, the tax receipt and proof of payment. This dispute covered earlier years, so also read our guide to eTIMS invoices.
- Check your suppliers. Keep each supplier’s PIN certificate on file, and confirm they are registered before relying on their invoices.
- Pay in a way that shows who was paid. A withdrawal that does not name the supplier gave KRA room to question the payment.
- Answer doubts with evidence. If KRA questions a supplier, be ready to show that the goods arrived. Assertions alone also failed in the Digital Box case.
- Remember the second tax. Here, the same purchases affected both VAT and corporation tax.
These steps do not guarantee a result, because each case turns on its own evidence.
Would your records pass this test?
We go through your returns and records and show you what to fix before KRA asks, so you stay compliant.
A short summary for general information, not legal advice. Read the full decision before relying on it.