Kenya Revenue Authority is licking its woúnds after a failure of internal systems created a loophole for businesses to enrich themselves with tax revenues. The tech oversight emerged in a tax dispute that has seen a rice importer get away with Ksh500 million in unpaid taxes.
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In a case before the Supreme Court, KRA revealed that Export Trading Company Ltd paid a preferential tax rate of 35% on imported rice instead of 75% due to ‘human and system error’ that failed to distinguish the country of origin of the company importing the rice between 2007 and 2009.
The technical error failed to distinguish imports from Pakistan, which enjoyed the lower rate compared to other countries. And so the Supreme Court dismissed KRA’s bid to claim the back taxes, criticising the taxman for failing to calibrate the Simba system, in its automated tax collection and import clearance system, to differentiate between countries of origin.
A bench of five judges of the Supreme Court said the taxpayer should not be made to suffer the consequences of the actions of the taxman of failing to input the correct rate in a system it had full control over.
It is after implementing the lower tax rate that KRA established that the rice imported from Burna, Vietnam and Thailand had higher tax rates. Following the error, KRA, therefore, wanted the court to force the importer to pay Ksh.378 million plus penalties and interest amounting to Ksh.138 million to recover the remaining taxes.
The Supreme Court, however, dismissed KRA’s request faulting the taxman for failing to calibrate the Tradex Simba System, an automated tax collection and import clearance system to distinguish countries of origin of various goods entering through the Kenyan border.
“The appellant acted unfairly in demanding for the alleged short levied duty almost 4 years after the initial assessment and payment of the duty so assessed were irrational and did not accord the respondent its right to fair administrative action,” the judges led by Deputy Chief Justice Philomena Mwilu ruled.
The judges pointed out that the importer had a legitimate expectation after the taxman failed to collect duty at the applicable rate having applied the 35% rate on the rice instead of 75%.