Introduction

Article 47 of the Constitution of Kenya, 2010 (the Constitution) guarantees that every person shall enjoy the right to fair administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair. An inherent aspect of this right is the obligation placed on the government to provide written reasons for adminis- trative action that is likely to adversely affect any person. This is what is referred to as the duty to give reasons for administrative actions or decisions.

In the arena of taxation, the duty to give reasons for tax-related decisions made by the Kenya Revenue Authority (KRA) is crucial if the Government of Kenya is to establish a public finance system that promotes an equitable society where the tax burden is shared equally as required by Article 201 of the Constitution.

However, in practice, this duty to give reasons is not always adhered to. Frequently, taxpayers find themselves at a loss when faced with KRA’s decisions that fail to elaborate the reasons upon which tax assessments or other decisions have been made.

Fortunately, the High Court has considered and made its determination on KRA’s duty to provide reasons in a recent tax decision. In this article, we analyse a recent Judgment of the High Court (Majanja J) delivered in Joseph Muriithi Ndirangu t/a Ndirangu Hardware v Commissioner of Domestic Taxes (2023) KEHC 19357 (KLR).

Background to the Case

In this instance, the appeal to the Court arose from a Judgment of the Tax Appeals Tribunal (the Tribunal) in Joseph Muriithi Ndirangu t/a Ndirangu Hardware v Commissioner of Domestic Taxes (Tax Appeals Tribunal, Tax Appeal No. 202 of 2018) setting aside an assessment on the grounds that KRA failed to give written reasons for its decision to issue a Value Added Tax (VAT) assessment of KES 8,576,321 to Ndirangu Hardware (the Appellant).

Ordinarily, when a taxpayer lodges an objection from a tax assessment with KRA, KRA is obligated to consider the objection and respond in writing with an objection decision detailing the reasons for either accepting or rejecting the objection. This was the Tribunal’s previous finding in Local Productions Kenya Limited v Commissioner of Domestic Taxes (Tax Appeals Tribunal, Tax Appeal No. 50 of 2017).

By providing a detailed and reasoned decision as required by the Constitution and the law, a taxpayer is better equipped to challenge such a decision whether through an appeal to the Tribunal or by way of an application to the High Court for judicial review of the decision. However, these statutory avenues to challenge KRA’s decisions are meaningless in circumstances where taxpayers do not under- stand the basis or reasoning for tax assessments or other decisions taken by KRA and therefore cannot easily ascertain whether such assessments or decisions are inaccurate or unlawful.

The genesis of this dispute was KRA’s selection of the Appellant’s case as part of its Revenue Enhancement Initiatives (REI) flowing from data collected under the Government’s Integrated Financial Management Information System (IFMIS) in the year 2015.

KRA issued additional assessments on the taxpayer for the years 2015 and 2016 based on a verification exercise of the Appellant’s VAT declarations, which exercise elicited a finding that the Appellant had not declared VAT charged on taxable supplies to the Kenya Forest Service (KFS).

The Appellant objected to the additional assessments, following which KRA issued an objection decision affirming the assessments on 14th August 2018 (the Objection Decision).

Aggrieved by the Objection Decision, the Appellant lodged an ap- peal to the Tribunal against the Objection Decision on the grounds that KRA rendered the Objection Decision without giving reasons. In response, KRA contended that the Appellant had made taxable supplies to the KFS in the year 2015 for which VAT was not declared. KRA further contended that the Appellant did not discharge its bur- den of proof by availing evidence to support its claim of having remit- ted VAT for the taxable supplies to KFS.

Having heard all the parties, the Tribunal found that the Appellant’s claim of having remitted VAT for the taxable supplies to KFS was not supported by evidence. Consequently, the Tribunal held that KRA was well within the law to raise the additional assessments.

High Court Decision

At the High Court, it was found that the issues raised on appeal were similar to those raised at the Tribunal. The Court reconsidered KRA’s Objection Decision and found that KRA did not provide adequate reasons for rejecting the Appellant’s objection as required by the Constitution and statute.

The Court opined that the requirement to give reasons for an Objection Decision under the Constitution and section 51(10) of the Tax Procedures Act, 2015 (TP Act) was couched in mandatory terms. Consequently, the Court agreed with the Appellant’s contention that the purported Objection Decision was inadequate for failure to give reasons and did not amount to a valid Objection Decision as contemplated by law.

In the Court’s view, the duty to give reasons was not a trifling requirement as it is a Constitutional mandate embedded in the right to fair administrative action guaranteed by Article 47 of the Constitution. Further, the Court held that the right to fair administrative action as protected by the Fair Administrative Action Act, 2015 (the FAA Act) requires administrative bodies to provide reasons for an administrative action as a matter of course where a right under the Bill of Rights has been or is likely to be adversely affected by administrative action.

The Court’s conclusion was that the Objection Decision was inadequate for not providing adequate written reasons for the decision. As such, the Objection Decision was null and void ab initio. The Tribunal’s Judgment was set aside with the Appellant’s objection to the tax assessment being consequently allowed.

The High Court’s decision in Joseph Muriithi Ndirangu t/a Ndirangu Hardware v Commissioner of Domestic Taxes largely affirms the earlier decision by the Tribunal in Local Productions Kenya Limited v Commissioner of Domestic Taxes (Tax Appeals Tribunal, Tax Appeal No. 50 of 2017). In this case, the Tribunal also held that taxpayers have a constitutioal right to be given reasons for tax decisions made by KRA in line with the Constitution, the TP Act and the FAA Act. The case concerned an appeal lodged by Local Production Kenya Limited (LPK) against a tax decision by the KRA. LPK was engaged in the business of producing and commissioning production of television content as well as provision of quality review and control services for television content and sought input VAT refunds based on its supply of zero-rated exported services to its non-resident customers. Following negotiations between LPK and KRA, it was agreed that KRA would disallow a portion of the refund claims.

By providing a detailed and reasoned decision as required by the Constitution and the law, a taxpayer is better equipped to challenge such a decision whether through an appeal to the Tribunal or by way of an application to the High Court for judicial review of the decision. However, these statutory avenues to challenge KRA’s decisions are meaningless in circumstances where taxpayers do not understand the basis or reasoning for tax assessments…

However, KRA disallowed the entirety of the refund claim through a notice uploaded on LPK’s account on KRA’s iTax web portal, which notice did not give reasons for the tax decision rejecting LPK’s re- fund claim. Following this notice, LPK was aggrieved and filed an objection, providing supplementary information which KRA had failed to consider in arriving at its tax decision. LPK thereafter appealed to the Tribunal.

LPK’s position was that KRA acted in complete disregard of section 49 of the TP Act as well as section 4 of the FAA Act by failing to give reasons for its decision to reject LPK’s tax refund claim. The law requires KRA to provide written reasons where it refuses a taxpayer’s application under any tax law.

KRA’s position was that there were no procedural lapses in rejecting the LPK’s input VAT refund. KRA claimed that the refund was rejected because LPK failed to separate its own export services from those performed on behalf of its clients.

The Tribunal held that section 49 of the TP Act imposes a mandatory duty on KRA to provide a statement of reasons for tax decisions. The Tribunal further observed that the duty to give reasons for tax deci- sions is interpreted through the lens of the right to fair administrative action as enshrined under Article 47 of the Constitution.

In light of the above reasoning, the Tribunal found that KRA acted in violation of LPK’s right to fair administrative action contrary to section 4 of the FAA Act which requires written reasons be given for administrative actions taken by public authorities that negatively affect individuals.

Key Takeaway

From the foregoing cases, it clearly emerges that KRA is under a duty to provide reasons for tax assessments and its other tax decisions. This is a crucial aspect of maintaining a fair, just and transparent tax dispute resolution regime. The provision of reasons for tax decisions ensures that taxpayers understand and have access to the rationale behind tax assessments and other KRA decisions, facilitating their right to challenge any inaccurate tax assessments or unlawful decisions made by KRA. This can only promote the fundamental constitutional values of justice, fairness, transparency, and accountability.

At any rate, as the maker of the decision, KRA should have no difficulty explaining the reasoning behind the decision, failure to which it may be inferred that the decision lacked any reasoning in the first place. Giving reasons for the decision is thus beneficial for both KRA and the taxpayer.