Delicate interplay between taxation and protection of rights of taxpayer

If the gates of tax avoidance were to open, who would not be tempted to slip through quietly? Hence, the need for tax enforcement. In Kenya, this duty rests with Kenya Revenue Authority.

But a question looms: how far may the hand of the collector reach before it brushes against the sacred bounds of the Constitution? This article seeks to examine the VAT Special Table as an enforcement tool and explore the extent to which its application impacts taxpayers' rights.

When KRA introduced the VAT Special Table in August 2022, its aim appeared noble; curbing VAT fraud and enforcing compliance.

Suspected fraudulent or non-compliant taxpayers would be restricted from filing VAT returns until they regularise their affairs.

However, the implications tell a different tale. KRA introduced the VAT Special Table, an administrative mechanism that suspends the VAT status of a registered taxpayer pending review. It may appear noble but trouble begins as such tools become unchecked instruments of power.

When enforcement, prosecution, and adjudication are all housed under the same authority, the potential for misuse becomes real.

The Tax Procedures Act, 2015 was crafted to guide enforcement with built-in checks and balances, ensuring regulatory zeal does not override fairness. Yet VAT Special Table operates outside the boundaries of this legal framework.

And there are consequences. When genuine businesses land on this list, by error or suspicion, their operations grind to a halt. Their VAT outputs are disallowed, even to customers who purchased from them in good faith. The result? Inflated tax burdens, eroded revenues, and a shrinking customer base. The entire value chain feels the shock-waves.

Where enforcement yields disproportionate harm, impact must be weighed above intention. The intention behind VAT special table is thus inconsequential when examined through the lens of its overall impact.

In criminal jurisprudence, the presumption of innocence is anchored in the maxim that it is better for ten guilty persons to walk free than for one innocent to be unjustly condemned. This principle, grounded in the pursuit of justice, invites reflection within the sphere of tax enforcement.

Should the same ethos not apply, that the State, in its quest to safeguard revenue, ought to exercise restraint where enforcement risks unduly prejudicing legitimate taxpayers? Isn’t it preferable to forgo some tax revenue than to cripple a bona fide enterprise through overreach?

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At least, until the tax authority devises enforcement tools that are lawful, proportionate, and procedurally fair.

It befits mention that the Honourable High Court has been moved to consider this very conundrum. In this delicate balance which prevails, the imperatives of enforcement, or the inviolability of taxpayers’ rights?

Let's first consider the mischief it targets to curb: VAT fraud and non-compliance.

VAT, as a consumption tax, is structured so that the burden falls on the final consumer. Along the value chain, each participant may reclaim the VAT incurred, termed input VAT, on their purchases.

However, since VAT is an indirect tax, each supplier must file monthly returns independently. And herein lies the mischief: enter the missing traders! These are entities that exist only on paper, duly registered for VAT, whose sole trade is in fictitious invoices.

They supply air but their invoices enable businesses to falsely claim input VAT and unlawfully reduce their tax liability.

The invoice itself becomes the commodity. On the other hand, VAT non-compliance entails a range of infractions including late filing or non-filing of returns, delayed or non-payment of tax due, and failure to register on the Electronic Tax Invoice Management System (eTIMS).

The writer is a tax consultant and partner at Mutua Mugambi and Company Advocates