The Kenya Revenue Authority (KRA) has ordered the return of over Sh54 million to home appliance and electronics company Hotpoint over bad debts arising from goods delivered to retail giant Nakumatt.
The Tax Appeals Tribunal has criticized the Local Tax Commissioner for not allowing the Sh54.8 million value added tax (VAT) refund as requested by Hotpoint Appliances Ltd.
The court headed by Christine Moga said that the fact that Nakumatt Holdings' insolvency had been proven was sufficient to entitle the company to recover the funds as required under Section 31(1) of the VAT Act.
“In light of the above, the court finds that the respondent (KRA) erred in rejecting the appellant’s refund request,” the court said in its April 29 decision.
The court noted that the KRA used external reasons to justify its rejection of the application.
Hotpoint reported that the law allows taxpayers to apply for a VAT refund three years after the buyer is declared insolvent.
The company said it was only required to prove its insolvency or three years had passed to qualify for a refund, and in its case, it showed it had supplied the goods to Nakumatt, paid VAT and the supermarket was declared insolvent on 22 January 2018.
The court was told that the supplier applied for a VAT refund of Sh61.8 million in March 2018, for the period from January 2016 to July 2017.
The KRA then partially approved the claim for Sh6.9 million but rejected a claim for Sh54,896,504.
According to Hotpoint, the request was rejected in part because the refund claim was not submitted before three years after the goods were supplied.
However, the supplier emphasized that its application was based on Nakumatt's insolvency declaration and not the three-year threshold rule.
For its part, KRA stated that Section 31(1) of the VAT Act stipulates that one may file a refund claim either on the basis of the three-year rule or on the basis of insolvency.
The tax official confirmed that the application on the grounds of insolvency did not meet the minimum threshold to qualify for a refund.
According to the KRA, the law allows recovery of bad debts when the debtor is legally confirmed to be insolvent.
However, the debts owed by Nakumatt supermarkets are still under litigation, and therefore the court has not declared the debtor legally insolvent.