In the case filed by cigarette maker British American Tobacco (BAT), the taxman lost more than a half a billion shillings, where BAT was let off the hook over classification of cigarettes. The decision by High Court Judge George Odunga exonerated BAT from KRA?s wrath, saying that the Finance Act, implemented in 2008 and used to tax BAT products in the market was unclear and thus the company was entitled to use the method that was advantageous to it.

The dispute between KRA and BAT was whether cigarettes should be taxed on their retail price or product characteristics. The dispute was sparked by the Finance Act which introduced a hybrid system that provided for tax calculation based on product characteristics and retail price but was vague where cigarettes fell.

BAT in its petition told the court that the ambiguity in law posed a practical difficulty in determining the category in which some cigarettes were to be categorised. The cigarettes were divided into four categories; Plain, Soft-cup one, Soft-cup two and Hinge Lid cigarettes. Plain cigarettes are those that do not have a filter and according to that Bill they were classified under category A. Soft-cup cigarettes are those packed in a ?soft cup pack? which is a pack typically made up of three distinct layers of soft-sheet material comprising: an inner-wrap in the form of metallised paper folded at its ends to contain the cigarettes, a paper outer wrap wrapped around the inner-wrap and displaying brand specific information to the consumer, and a transparent over-wrap. The court heard that they were classified under category B and C as soft cup one and two. BAT submitted that no definition was provided in the Bill for ?soft-cup one? and ?soft-cup two?.

Justice Odunga ruled that the company was justified to make its own tax assessment on the characteristics of its products, rather than the KRA method that calculated the revenue on the retail price of each pack of cigarettes. In his ruling, Justice Odunga noted that the then Finance Minister, John Michuki, had indeed indicated that the law was unclear about cigarettes? tax. ?Even from the standpoint of the minister, the hybrid system was unclear and could not attain predictability,? the judge said. KRA had slapped BAT with a Sh346 million tax notice and later Sh594,076,450, which included a penalty for failing to remit the initial amount demanded from it. KRA had notified it that it would auction its assets in order to recover the sum.

Tax claim

In another case against a bank, the High Court barred the taxman from demanding Sh86 million. The decision ruled on by the judge saw KRA lose Sh86,424,702 in tax claims. Justice Odunga ruled that KRA ought not pursued the monies from Imperial Bank of Kenya, in which the lender had executed a Sh150 million bond for petroleum imported by Metro Petroleum Ltd. ?To expect a person who has expressly limited its liability to a certain period of time to be held liable way after the said period would in my view not only be unreasonable and irrational, but would go against that person?s legitimate expectation that his or her liability would only apply to the said period,? Justice Odunga ruled.

The dispute between KRA and Imperial Bank started in March last year when the taxman slapped the bank with a claim that it should clear the monies within seven days. According to the financial institution, in its case, the security bonds issued on behalf of Metro Petroleum Ltd expired on June 26, 2006, eight years before the demand by KRA.

The court heard that the bank did not formally hear from KRA or any other party until March 4, 2014, when it was ordered to pay the money it held on behalf of the oil company. The bank responded that it did not have any money in Metro?s account.

?I have considered the application, it is my view and I so hold that since the legal validity of the subject bonds expired, at the latest on June 26, 2006, the ex parte applicant?s (Imperial Bank) liability thereunder also disappeared and the respondent ( KRA) had no justification in falling back on the said bonds to hold the ex parte applicant liable,? Justice Odunga ruled.

KRA argued that its actions could be termed as unreasonable, manifestly unjust, contrary to the rules of natural justice, and tainted by malice and bad faith since prior to the issuance of the notice, there were a series of meetings and correspondence between the parties regarding the enforcement of the bonds. The court heard that issues of dates could not be used to deny KRA the statutory duty to collect Government revenue that was legally due.

Another firm, Eldoret Grains Limited was also let off the hook after the court ordered that it would not pay more than Sh500 million that had been slapped on it for failure to remit taxes for five years.

The company that deals in milling, selling and transporting grains got the reprieve after the High Court ordered that it should not pay the monies, being the additional taxes for the year 2005 to 2010. In the decision made by High Court judge Weldon Korir, the company had not been given chance to respond to the claims raised by a former employee that it was stashing undeclared earnings and without any reference to two bank accounts. ?At stake was a tax claim of more than Sh500 million. That tax assessment had been arrived at based on information received from a sacked employee. There are many reasons that can make an employee to give false information against the former employer,? Justice Korir said.

Other companies that have been in court over taxes are Bamburi Cement which is embroiled in Sh492 million tax claim, Kenya Re, which is challenging Sh1.2 billion tax slap, and Pwani Oil in a Sh134 million case. National Social Security Fund (NSSF) was also in court over Sh2.1 billion income tax arrears related to valuation of assets of the workers? retirement fund.

Colossal amount

In the case involving Bamburi Cement, the taxman is contesting a decision by a tribunal that exempted Sh492 million insurance refund given to the cement company from tax. This was a result of an audit of its operations between 2007 and 2011. The tribunal had in July 2014 ruled that Bamburi was entitled to the tax waiver as a refund on sales proceeds and depreciation of machinery.

In the Kenya Re case, the court heard that the taxman had demanded Sh1.2 billion allegedly accrued from commission and brokerage deducted from its clients. The re-insurer argued that the monies were not eligible for taxation adding that the commissioner of domestic taxes was breaching its rights.

On the other hand Pwani Oil Limited moved to court in a bid to stop KRA from demanding more than Sh134 million slapped on it for failure to remit tax between 2012 and 2013. The Fresh Fri cooking oil maker in its suit filed under a certificate of urgency before High Court Judge Weldon Korir said the demand by the taxman to pay Sh134,883,572 was not only unfair but in contravention of the law. The dispute between the Mombasa-based company and KRA arose over importation of crude palm oil for making oil products for exports. And for the security fund, the taxman was demanding more than Sh2 billion after evaluation that allegedly unearthed that it was owed the colossal amount.

By Kamau Muthoni, The Standard


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