Court: Only Unsold Stock Qualifies For VAT Refunds

by Lawyer Alex
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Manufacturers can only get Value Added Tax (VAT) refunds on unsold stock. This follows a High Court ruling against a petition by three drug manufacturers.

High Court Judge Weldon Korir, while dismissing the petition, noted that the manufacturers had not indicated the unsold stock on which they claimed a refund of VAT input tax. Previously known as sales tax, VAT is levied at consumption at a maximum rate of 16 per cent.

“They merely indicated figures which may have included sold stock and this may be unfair and unjust enrichment on their part since the inclusion of sold stock in the figures would mean that the petitioners would benefit by getting input tax relief from the first respondent – Kenya Revenue Authority (KRA) – for tax already passed on to consumers,” said Justice Korir in his May 31 ruling.

Refunding VAT paid for raw materials has been a subject of numerous litigation between the taxman and taxpayers, with the government allocating Sh10 billion for the payment of “verified” VAT refund claims.

Universal Corporation Ltd, Elys Chemical Industries Ltd and Dawa Ltd had on December 5, 2017, petitioned the court to declare that they were entitled to VAT refunds, which they had paid for the raw materials bought for their supplies that had until September 2015 had been tax-exempt.

Input tax

A tax-exempt item is not part of any tax calculations, which is why the manufacturers could not claim input tax. If a good or business is “exempt”, the government doesn’t tax the sale of the good, but producers cannot claim a credit for the VAT they pay on inputs to produce it.

For a zero-rated good, the government does not tax its sale, but allows credits for the value-added paid on inputs.

However, the Finance Act of 2015 moved these supplies from a tax-exempt status to zero-rated. A section of the VAT Act, 2013 stipulated that wherein future legislation the exempt supplies become taxable after a person had incurred input VAT, the person could claim VAT as long as the claim is lodged within three months from the date the exempt supply become zero-rated.

“Parliament was clear that it did not want taxpayers to recover reliefs from supplies that had already been made and which were previously exempt supplies,” said Justice Korir. “It is noted that zero-rated products are cheaper for consumers since the suppliers are allowed to claim the cost of input tax and not pass it to consumers as is the case with exempt supplies.”

KRA had rejected the petitioners’ claim because they lodged it outside of the right period, which is three months since the law took effect on June 15, 2015.

The petitioners had argued that the provisions came in place on September 17 when the Finance Act 2015 was gazetted and that it imposed retroactive criminality.


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