National Treasury cannot lawfully approve abandonment of taxes without recommendation from the revenue authority

Brief facts

In a letter dated 15 September 2021, LDK applied to the Cabinet Secretary for National Treasury and Planning for the abandonment of KES 517,118,680 which LDK had collected as excise duty in the course of its business. National Treasury allowed the application and approved the abandonment of 80% of the outstanding principal excise duty and waived 100% of the penalties and interest.

Subsequently, the KRA wrote to LDK acknowledging the outcome of the abandonment and demanding a sum of KES 80 million, being the 20% outstanding tax arrears. The KRA and LDK agreed on the settlement of the said amount in weekly instalments of KES 7,500,000 beginning on 2 February 2022. At the time of lodging the case at the High Court, LDK had paid the instalments that were due.

On 2 March 2022, the KRA advised LDK that after consultation the approval given by National Treasury had been rescinded and the entire sum of KES 517,118,680 ought to be paid within seven days, failing which the KRA would institute enforcement measures. LDK, in rebuttal, asserted that it had not received any communication from National Treasury rescinding its approval nor was there an application or hearing for the rescission.

The KRA replied stating that LDK did a self-assessment return for January 2020 to August 2021 for taxes amounting to KES 529,278,680 but failed to remit the same. It applied for abandonment of the taxes to National Treasury, which in turn wrote to KRA seeking its advice on the application. The KRA advised National Treasury that the application was not tenable and did not meet the threshold under section 37 (1) of the Tax Procedures Act. Nevertheless, National Treasury partially allowed the abandonment.

Later, the KRA sought advice from the Attorney General. While seeking this advice, the KRA informed the Attorney General that National Treasury could not on its own abandon tax. In addition, it explained that the excise duty had already been collected by LDK on behalf of other taxpayers and abandoning the tax would amount to financing LDK. The Attorney General agreed with the KRA and advised National Treasury. Accordingly, the Cabinet Secretary for National Treasury rescinded the approval for abandonment of the taxes.

Issue for determination by High Court

The High Court found that the main issue for determination was whether the KRA’s decision to demand full taxes, despite National Treasury’s decision to abandon part of the taxes, was irrational, illegal, unreasonable, and untenable.

The High Court observed that under section 37 of the Tax Procedures Act the Commissioner (KRA) may determine if:

• it may be impossible to recover an unpaid tax;
• there is undue difficulty or expense in the recovery of an unpaid tax;
• there is hardship or inequity in relation to the recovery of an unpaid tax; or
• there is any other reason occasioning inability to recover the unpaid tax.

Upon making a determination on these grounds and with the prior written approval of the Cabinet Secretary, the KRA can refrain from assessing or recovering unpaid tax and the tax liability shall be deemed to be extinguished, abandoned, or remitted.

The High Court found that only the Commissioner can initiate an application to abandon taxes. In this case, National Treasury did not have the power to allow an application to abandon taxes without recommendation from the KRA. The purported abandonment was illegal and void ab initio. Accordingly, National Treasury’s decision to abandon the taxes did not confer any right to LDK and no legitimate expectation could arise from an illegality. Moreover, National Treasury had rescinded its decision to abandon the taxes upon receiving advice from the Attorney General.

Overall, the KRA’s decision to demand the payment of KES 517,118,680 was not illegal, irrational, or un-procedural as contended by LDK.

Comment

Indeed, the Tax Procedures Act provides that the Commissioner may, with the prior written approval of the Cabinet Secretary, refrain from assessing or recovering an unpaid tax and the tax liability shall be considered extinguished, abandoned, or remitted.

In Communications Commission of Kenya and 5 Others v Royal Media Services and 5 Others [2014] eKLR, the Supreme Court noted that:

“Legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfil. Therefore, for an expectation to be legitimate, it must be founded upon a promise or practice by public authority that is expected to fulfil the expectation.”

LDK argued that there was a legitimate expectation that the KRA would not demand the full principal tax when:

• National Treasury allowed the application and approved the abandonment of 80% of the outstanding principal excise duty and waived 100% of penalties and interest;
• the KRA had acknowledged the approval for the abandonment and demanded the sum of KES 80 million instead, being 20% of the outstanding tax arrears; and
• the KRA had agreed to the settlement of the said amount in weekly instalments of KES 7,500,000 from 2 February 2022.

The High Court rightly asserted that the decision to abandon taxes by National Treasury was illegal. National Treasury does not possess the requisite authority to abandon taxes. Only the KRA can invoke the provisions of section 37 of the Tax Procedures Act on abandonment of taxes.

The decision is a testament to the independence of the KRA, the Attorney General and the courts. The independence of Government agencies should be guarded so that the executive exercises its powers within the law.

The taxpayer in this case was caught in a disagreement between National Treasury and the KRA. The relief that National Treasury had accorded LDK quickly melted like thin ice. Perhaps, the court could have directed the KRA to re-consider the application from LDK to National Treasury and check if there were any valid grounds to abandon the taxes. Going forward, taxpayers should follow the right channel to seek abandonment of taxes, that is, through KRA. Taxpayers can still go to court for judicial review if the KRA abuses its discretion to review and recommend approval for the abandonment of taxes.