Musoni Microfinance Limited v Commissioner of Domestic Taxes [2024] KETAT 1250 (KLR)

Musoni Microfinance Limited v Commissioner of Domestic Taxes (Tax Appeal E125 of 2023) [2024] KETAT 1250 (KLR) (9 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1250 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E125 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

August 9, 2024

Between

Musoni Microfinance Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and a registered taxpayer whose principal activity is the provision of financial services.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent carried out tax compliance check on the Appellant and issued a notice of additional assessment for VAT, Withholding tax and Excise duty all amounting to Kshs 149,184,175. 00 through a letter dated 1st December 2022.

4. The Appellant objected to the whole assessment vide a letter dated 29th December 2022.

5. The Respondent issued its Objection decision on 24th February 2023 partially accepting the objection and confirming total assessment of Ksh 146,208,564.

6. Being aggrieved by the Respondent’s Objection decision, the Appellant filed a Notice of Appeal dated 21st March, 2023 on 22nd March 2023.

The Appeal 7. The Appellant in its Memorandum of Appeal dated 3rd April, 2023 and filed on 4th April, 2023 cited the following grounds for Appeal:i.VATa.That the architecture of the VAT Act does not contain a mechanism for accounting for VAT on imported service by non-registered persons, as required by Section 5(6) of the Act as the accounting provision in Section 44(1) applies only to “Every registered person.” That Article 210(1) of the Constitution of Kenya, provides that tax shall be imposed only as provided by legislation thus, the entire VAT assessment of Kshs 35,563,097. 00 inclusive of taxes, penalties, and interest should be vacated.b.That the Commissioner erred in its objection decision to say that the term "subject to" as used in Section 5(6) is to mean that the “Act merely serves as a guide on requirements of the law".c.That the deeming provision in Section 10(1) to treat imported services as a self-supply during the tax period 7th November 2019 to 30th June 2021 applied only to registered persons. Thus, the tax assessment for tax period 7th November, 2019 to 30th June, 2021 of Kshs 15,627,629. 00 inclusive of taxes, penalties, and interest should therefore be vacated since Musoni is not VAT registered. That however, this would not have an impact on the lack of a mechanism to account for imported services by unregistered persons as indicated in issue (a) above.d.That the Commissioner did not take into consideration the Appellant’s notice of objection submission, that the Government through Legal Notice Number 35 of 2020, reduced the rate of VAT from 16% to 14% with effect from 1st April 2020 to 31st December 2020. That however, this would not have an impact on the two issues (a) and (b) above.e.That the imported services in respect of transportation and accommodation costs incidental to foreign consultants is not taxable by dint of Section 5(6), as stated in ground (a) above. That the accommodation services were not imported services, but local supplies made by local suppliers made to Musoni and were not incurred by the foreign consultants, thus, not taxable by dint of Section 13(5). That transportation of passengers is not subject to VAT as its exempt or zero rated per 1st Schedule Part C Paragraph 7 and 2nd Schedule Part A Paragraph 5. f.That royalty charges for Musoni System are not subject to VAT on import by dint of Section 5(6), as stated in ground (a).g.That prior to the clarification under Section 10(1A) of the VAT Act by the Finance Act 2022 there was an ambiguity as to whether imported digital services (such as royalty charges for Musoni System) fell under Section 5(7) of the VAT Act (ie digital service VAT) or under Section 10 of the Act (ie imported services). That where there is ambiguity in the law the taxpayer is entitled to the benefit of the least severe of the prescribed provisions.ii.Income Taxa.That costs incidental to consultancy services ie transportation and accommodation are not subject to withholding tax per the definition of management or professional fee in Section 2 of the Income Tax Act. That under the Income Tax Act, only incidental costs associated with provision of training services are subject to withholding tax. That the Withholding tax on expenses incurred on behalf of foreign consultants of Kshs 1,495,609. 00 be set aside.b.That now that the Commissioner has clarified the basis and the specific provision of the law it taxed loan processing fees, the withholding tax on processing fees of Kshs 18,692,148. 00 be set aside and, in its place, Kshs 3,276,498. 00 be adopted as the tax payable. That in the years 2020, 2021 & 2022 no additional loans were disbursed by Musoni, and that the commissioner treated interest accrued as additional loans and that the Commissioner erroneously used 2% fee rate instead of the rate applicable to each loan.iii.Excise Dutya.That the Excise duty has not defined who is a digital lender and that Musoni is not a digital lender. That there is no dispute, that the Central Bank of Kenya licences and regulates digital lenders. That as per the (The Central Bank of Kenya (Digital Credit Providers Regulations, 2022), Musoni is neither registered nor regulated by the Central Bank of Kenya.b.That the Commissioner had misdirected itself in saying any person not listed in Section 2 of the Legal Notice 46 (The Central Bank of Kenya (Digital Credit Provider Regulations,2022) is by implication a digital lender.c.That the Commissioner had misdirected itself by saying any person not covered in Section 2 of the Legal Notice 46 is therefore an “operator in the lending space is thereby classified as a digital lender and therefore liable to the newly introduced excise duty on digital services".d.That the Commissioner had failed to consider that the Central Bank Act in Section 2 defines "digital credit provider" to mean a person licensed by The Bank to carry on digital credit business.e.That the Commissioner had failed to consider that the Central Bank Act in Section 2 defines digital credit business to mean the business of providing credit facilities or loan services through a digital channel.f.That the Commissioner had failed to consider that the Central Bank Act in Section 2 defines “digital channel" to mean the internet, mobile devices, computer devices, applications and any other digital systems as may be prescribed by the Bank.g.That the Commissioner had failed to consider that The Central Bank Act in Section 2 defines "digital credit" to mean a credit facility or arrangement where money is lent or borrowed through a digital channel.h.That Musoni was not a licensed digital lender under the Section 33S of the Banking Act.i.That Section 2 of the Legal Notice 46 cannot oust the provisions of the main act.j.That Musoni is not subject to excise duty by dint of Section 33S and Section 2 of the CBK Act.k.That Musoni had mobile app, which is not in use. That Musoni does not operate a digital lending platform or app in Kenyal.That the Commissioner erred in imposing Excise duty to all levies made by Musoni to its clients for the period 1st July 2022 to 31st October 2022m.That there was lack of public participation in enacting Paragraph 6 in Part II of the First Schedule of the Excise Duty Act, 2015. n.That the excise duties imposed by the Commissioner of KES 91,036,555 be set aside

Appellant’s Case 8. The Appellant’s case is premised on the hereunder filed documents before the Tribunal:i.The Appellant’s Statement of Facts dated 3rd April, 2023 and filed on 4th April, 2023 together with the documents attached thereto.ii.The Appellant’s written submissions dated 29th November 2023 and filed on the same date.

9. Regarding VAT, the Appellant submitted that as a backdrop to its appeal, it was important to keep in mind that it provides financial services, i.e., lending of money to borrowers. That this nature of service was exempt from Value Added Tax ("VAT") under Paragraph 1(h) of Part Il of the 1st Schedule of the VAT Act. That the Commissioner had acknowledged this in its objection decision. That the section provides as follows;“The supply of the following services shall be exempt, supplies-1. The following financial services-…(h)the making of any advances or the granting of any credit;”

10. The Appellant averred that that a taxable supply does not include exempt supplies as per Section 2 of the act which provides as follows;“"taxable supply" means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person”

11. That on the basis of the above, Musoni was not required to register for VAT for purpose of Section 5(1)(a).

12. That it also noted that KRA conceded to its first ground of objection on vat in relation to the Pre-7th November, 2019 as per Section 10(1) of the VAT Act as tabulated below;Reaffirmed Original taxes

assessment. assessment conceded by

2019 2019 KRA

VAT on Imported Services (inclusive) 1,481,844 3,878,611 2,396,766. 62

13. That during the Pre-7th November 2019, period Section 10(1) of the VAT Act applied to registered persons as follows;“10. (1)If a supply of imported taxable services is made to a registered person any person the registered person shall be deemed to have made a taxable supply to himself.(2)If a registered person referred to in subsection (1) the person referred to in subsection (1) is a registered person and is entitled to -(a)a credit for part of the amount of input tax payable, the value of the taxable supply under subsection (1) shall be reduced by an amount equal to the supply that is entitled for the input tax credit; or(b)a full input tax credit payable on the imported taxable services under subsection (1), the value of the taxable services shall be reduced to zero.(3)The output tax in respect of a deemed taxable supply under subsection (1) shall be payable by the registered person at the time of the supply.”

14. That the architecture of the VAT Act does not contain a mechanism for accounting for VAT on imported services by non-registered persons, as required by Section 5(6) of the Act since the section dealing with accounting of VAT i.e. Section. 44(1) applies only to "Every registered person." That therefore the entire VAT assessment of Ksh 35,563,097 inclusive of taxes, penalties, and interest should be vacated

15. It submitted that Section 5(6) of the VAT Act states as follows;“Tax on the supply of imported taxable services shall be a liability of any person receiving the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply"

16. That the Commissioner erred in its objection decision to say that the term "subject to" as used in Section 5(6) is to mean that the "Act merely serves as a guide on requirements of the law"

17. That the term “subject to” in Section 5(6) means “conditional to". That therefore, the provision to impose VAT on imported services under Section 10 are conditional to "the provisions of this Act relating to accounting and payment"

18. That further the provision of accounting for VAT is Section 44. (1) states as follows;“Every registered person shall submit a return, in the prescribed form and manner, in respect of each tax period not later than the twentieth day after the end of that period"

19. That Section 44(1) to date applies only to registered persons and has never been amended to delete the word "registered".

20. It averred that the provision of payment of tax is Section 19 which states that;“19. (1)Tax shall be due and payable at the time of supply. and(2)Notwithstanding the provision of subsection (1), a person may defer payment of tax due to a date not later than the twentieth day of the month succeeding that in which the tax became due”

21. That it was important to note that the Finance Act 2021, deleted the word "registered" from Section 19(2). That therefore prior to 1st July 2021 this provision read as follows:“(2)Notwithstanding the provision of subsection (1), a registered person may defer payment of tax due to a date not later than the twentieth day of the month succeeding that in which the tax became due”

22. That Section 19(2) up to 30th June 2021 applied to registered persons, before it was amended by the Finance Act 2021. That the power to impose VAT under Section 10 is therefore subject to Section 44 and Section 19 of the VAT Act.

23. It stated that where the term “subject to” is applied it means that these "was a necessary pre-condition and requirement" or “or a limitation imposed". That until that pre-condition is satisfied, the first part cannot proceed.

24. That the term “subject to” is defined in the Black's Law Dictionary (thelawdictionary.org) to mean;“1. Conditional or dependent on something.2. Being under domination as of a authority or government subject to the whims of the boss.”That the second definition would not be necessary in its context.

25. That as such, the term "subject to" cannot be reduced to mean “merely". That Article 210 of the Constitution of Kenya gives power to collect tax only as provided in law.

26. The Appellant submitted that in two other instances, the Act provides an accounting and collection mechanism i.e for digital services and imported goods.

27. That VAT on Digital services under Section 5(7) of the VAT Act, this accounted and collected under the regulations made under Section 5(8) i.e. "The Value Added Tax (Digital Marketplace Supply) Regulations, 2020.

28. That importation of taxable goods (Section 5(1)(b) - tax is accounted for under Section 22(3) i.e. “The Commissioner of Customs-shall collect tax payable under this Act on imported goods at the time of importation and shall, at that time, obtain such information as may be prescribed in respect of the importation."

29. That as a consequence of Sections 5(6) read together with Section 19 (as amended and prior to amendment by Finance Act 2021) and Section 44, it follows that Section 10 cannot apply to non-registered persons as the law does not provide for it.

30. That further, the deeming provision in Section 10(1) to treat imported services as a self-supply during the tax period 7th November 2019 to 30th June 2021 applied only to registered persons thus the tax assessment for tax period 7th November 2019 to 30th June 2021 of KES 15,627,629 inclusive of taxes, penalties, and interest should be vacated since it is not registered.

31. That the Finance Act 2019 Section 18 did the following amendment:“18. Section 5 of the Value Added Tax Act, 2013 is amended-(a)in subsection (6) by deleting the words " a registered person" and substituting therefor the words "any person";b)The opening statement of section 10. (1) during the period between the 7th of November 2019 and 30th June 2021 read as follows:If a supply of imported taxable services is made to any person, the registered person shall be deemed to have made a taxable supply to himself.”

32. That the word "registered" in Section 10(1) was deleted by finance act 2021, which amendment took effect on 1st July 2021. The amendment was as follows:”“24. Section 10 of the Value Added Tax Act, 2013 is amended-(a)in subsection (1), by deleting the word "registered".”

33. That during the period between the 7th November 2019 and 30th June 2021 the legal provision that imposed VAT on imported services i.e. Section 10(1) of the VAT Act applied to registered persons. That as such Section 10(1) did not deem non-registered persons to have made a self-supply

34. The Appellant added that non-registered persons were not subject to VAT on imported services under Section 10(1) up to 30th June 2021

35. That based on the foregoing, the Appellant noted that import VAT was not applicable to it up to 30th June 2021 amounting to Ksh 15,627,629 inclusive of taxes, penalties, and interest. That the assessment should therefore be vacated for the respective tax periods as it has no basis under the VAT Act.

36. It was the Appellant’s contention that as stated in its objection, it is worth noting that the government through Legal Notice number 35 of 2020, The Value Added Tax (Amendment of The Rate of Tax) Order, 2020, reduced the rate of VAT from 16% to 14% with effect from 1st April 2020 to 31st December 2020. The Legal Notice reducing the rate of tax provided thus;“2. Section 5(2) of the Value Added Tax Act, 2013 is amended in paragraph (b) by deleting the words "sixteen per cent" and substituting therefor the words "fourteen per cent".”

37. That Legal Notice No. 36 of 2020 was revoked by Legal Notice No. 206 of 2020 The Value Added Tax (AMENDMENT OF THE RATE OF TAX) Order, 2020 thus:“2. Section 5 of the Value Added Tax Act, 2013 is amended in paragraph (b) of subsection (2) by deleting the word "fourteen" and substituting therefor the word "sixteen".”

38. That the change affected the VAT for taxable supplies made between April 2020 to December 2020, yet this had not been considered by the KRA in its alleged assessment. That however, this would not have an impact on imported services self-supplied by unregistered persons as indicated earlier. That the Respondent in its objection decision did not address this issue.

39. The Appellant submitted that the imported services in respect of transportation and accommodation costs incidental to foreign consultants was not taxable by dint of Section 5(6). That the accommodation services were not imported services, but local supplies made by local suppliers made to it and were not incurred by the foreign consultants, thus, not taxable by dint of Section 13(5). That transportation of passengers is not subject to VAT as it is exempt or zero rated per 1st Schedule Part C Paragraph 7 and 2nd Schedule part A Paragraph 5.

40. The Appellant stated that Section 13(5) provides in calculating the value of any services any incidental costs have been incurred by the supplier of the services in the course of making the supply to the client.

41. That since the transport and accommodation services were invoiced by the providers to the Appellant, it was erroneous to say that the services were incidental to the consultancy fee.

42. That further, since the transport and accommodation were provided by local suppliers, it would be wrong to say they were imported services. To support its case, the Appellant attached some copies of the transport and accommodation invoices.

43. That in the chance that the transport and accommodation, were imported services, which were not, by dint of Section 5(6), and the deeming provision of Section 10(1) of the VAT Act on imported services cannot be imposed.

44. That as regards the accommodation costs, these relates to accommodation in local hotels, and as such imported services VAT does not arise as these are supplies from local vendors. That the VAT charged on these costs should therefore be vacated;

45. That as regards transport (flights) in respect of foreign consultants coming to Kenya it appeals to the entire amount raised in the notice as follows:Year 2021 2022 Total

Flights 781,196 1,184,942 1,966,138

46. That in relation to transportation costs the Respondent charged VAT, it noted that transportation of passengers in the context of the Appellant was either exempt or zero rated thus not subject to imported services VAT in accordance with 1st Schedule part C paragraph 7 and 2nd Schedule part A paragraph 5.

47. That on this basis and taking cognizance of its grounds of appeal, the imported services VAT applied to accommodation and transport costs of Ksh 1,196,487 including principal, interest and penalties, was not payable.

48. The Appellant submitted that the Respondent had erroneously charged VAT on payments in relation to Musoni System which was a web-based ERP system that is accessed over the internet and those made to Google Suites and Digital Ocean.

49. That Royalty charges for Musoni System were not subject to VAT on import by dint of Section 5(6) of the VAT Act.

50. That it noted that these services were taxable supplies only under Section 5(7) of the VAT Act as provided below:“5(7)The provisions of subsection (1) shall be applicable to supplies made over the internet or an electronic network or through a digital marketplace.…(9)For the purposes of this section, "digital marketplace" means an online platform which enables users to sell goods or provide services to other users.”

51. That prior to the clarification under Section 10(1A) of the VAT Act by the Finance Act 2022 there was ambiguity as to whether imported digital services (such as Royalty charges for Musoni System) fell under Section 5(7) of the VAT Act (ie digital service VAT) or under Section 10 of the Act (ie imported services)

52. That Section 10 (1A) clarified that digital services were only to be taxed under section 5(7) as follows.“10(1A)The provisions of subsection (1) shall not apply to taxable supplies made under section 5(7).”

53. That where taxability of a service falls under two tax categories, the taxpayer is at liberty to apply the provision that most favors it.

54. That where there is ambiguity in the law the taxpayer is entitled to the benefit of the least severe of the prescribed provisions.

55. That on the basis that the charges for Musoni System & payments made to Google Suites and Digital Ocean are digital services, the amounts not payable was Ksh 15,135,155. 00 including principal, interest and penalties,

56. Regarding Withholding Tax (WHT), the Appellant stated that the two costs that attract/withholding income tax were noted not to have been subjected to the tax. That the costs were local expenses incurred by the company on behalf of the consultants, which included accommodation, upkeep costs and processing fees charged by foreign lenders.

57. The Appellant explained that Withholding tax (WHT) is a tax that is levied on specified sources of income such as management or professional fees, dividends, interest, and royalties, with the rates of withholding tax being as stipulated in the ITA.

58. That costs incidental to consultancy services are not subject to withholding tax per the definition of management or professional fee in Section 2 of the Income Tax Act.

59. It further submitted that under the Income Tax Act, only incidental costs associated with provision of training services are subject to withholding tax.

60. That the services in respect of transportation and accommodation cannot and should not be construed to be part of the consultant's remuneration.

61. The Appellant pleaded that the Withholding tax on expenses incurred of Kshs 1,495,609. 00 be set aside.

62. Regarding Withholding tax on processing fees cost, the Appellant stated that in the tax decision, the Commissioner did not inform it on the specific provision of the law it relied on to impose this tax as per the table below;2018 (Ksh) 2019 Ksh 2020 (Ksh) 2021 (Kshs) Total Ksh

Additional loan received 1,430,247,214 936,755,984 1,705,313,793 399,472,354

Processing fees@2% of the loan amount 28,604,944 18,735,120 34,106,276 7,989,447

Withholding Tax of (a) 4,290,742 2,810,268 5,115,941 1,198,417 13,41,368

Penalty @5% of(a) 214,537 140,513 255,797 59,921 670,768

Interest @1% of(a) 1,973,741 955,491 1,125,507 551,272 4,606,011

Total 6,479,020 3,906,272 6,497,246 1,809,610 18,692,148

63. That this was as opposed to VAT and withholding tax heads where the provisions of law applied were stated i.e, Section 10 of VAT act and Paragraph 6 of the 1st Schedule of the Excise Duty Act. That this omission in its view was contrary to Article 47 of the Constitution.

64. The Appellant further averred that in the Respondent’s objection decision, the Commissioner clarified on the specific provision of the law it taxed loan processing fees.

65. That in the years 2020, 2021 and 2022 no additional loans were disbursed, and that the Commissioner treated interest accrued as additional loans. That additional loans were only received in 2018 and 2019. To support its argument the Appellant provided a table to demonstrate the additional loans received in the years 2018 and 2019.

66. It further averred that the Commissioner erroneously used 2% fee rate instead of the rate applicable to each loan. That the tax on the processing fee should be set aside and, in its place, Kshs 3,276,498. 00 be adopted as the tax payable.

67. Regarding Excise duty on digital lending, the Appellant submitted that the Respondent in its assessment stated that the company is a digital credit provider and therefore liable to comply with Paragraph 6 in Part Il of the First Schedule of the Excise Duty Act, 2015 which imposes "Excise duty on fees charged by digital lenders at a rate of twenty percent" effective 1st July 2022.

68. That the assessment made by the Commissioner under Excise Duty Act, 2015 for the 4 month period July 2022 to October 2022 was as follows:

69. That in its objection decision, the Commissioner stated that a review of the Finance Act 2022, Excise Duty Act,2015 & Legal Notice 46; The Central Bank of Kenya (Digital Credit Providers) Regulations, 2022, led to the following observations:a.That Legal Notice No. 46 offers guidelines for digital lenders who are identified by exclusion; Section 2 of the Legal Notice lists who is not covered by the provision of these regulations, Musoni MF Ltd is not covered by any of the excluded acts and as such by virtue of being an operator in the lending space is thereby classified as a digital lender and therefore liable for the newly introduced Excise duty charge on fees charged by digital lenders.b.That the charges Musoní MF Ltd levies to its clientele were brought to charge for Excise Duty for the period July 2022 to October 2022. c.That Musoni Microfinance Ltd has a mobile app on which borrowers can apply for loans. That Musoni Microfinance Ltd is not listed as one of the financial institutions as per the Excise Duty Act, 2015 and as such all charges levied on their clients inclusive of interest are subject to Excise duty at the prevailing rate.d.That the Commissioner having evaluated the above was of the considered view that Musoni Microfinance Ltd is a digital lender by way of operation as well as by depiction by the Legal Notice 46 and therefore the Excise duty was correctly levied on Musoni Microfinance Ltd. That in light of the above, the objection in this respect was rejected in full.

70. As regards the application of Legal Notice No 46, the Appellant asserted that the Excise Duty Act does not define who a digital lender is. That it sought a definition from The Central Bank of Kenya (Amendment) Act, 2021 No. 15. That further, the Respondent did not dispute the use of the CBK Act in seeking a definition or guidance. That further the Commissioner as anchored its argument on Section 2 of the Legal Notice No. 46 (The Central Bank of Kenya (Digital Credit Providers) Regulations,2022)

71. That the Commissioner had misdirected itself by saying any person not listed in Section 2 of the Legal Notice No. 46 is by implication a digital lender. That Section 2 states as follows:“These Regulations shall not apply to-.(a)an institution licensed under the Banking Act;(b)an institution licensed under the Microfinance Act,2006;(c)a Sacco society licensed under the Sacco Societies Act,2008;(d)the Kenya Post Office Savings Bank supervised under the Kenya Post Office Savings Bank Act;(e)credit arrangements involving the provision of credit by a person that is merely incidental to the sale of goods or provision of services by the person whose primary business is the provision of the goods or services;(f)an entity whose digital credit business is regulated under any other written law;(a) any other entity approved by the Bank.”

72. That from its reading, it noted that when enacting Section 2 of the Legal Notice 46, the Central Bank of Kenya did not seek to regulate persons who were regulated under other legal regimes, as this would create an onerous requirement to comply with two regulatory regimes in the same business.

73. That the Commissioner had misdirected itself by saying any person not covered in Section 2 of the Legal Notice 46 is therefore an "operator in the lending space is thereby classified as a digital lender and therefore liable to the newly introduced excise duty on digital services."

74. That the Commissioner had failed to consider that the Central Bank Act in Section 2 defines "digital credit provider" to mean a person licensed by the bank to carry on digital credit business;

75. That the Commissioner had failed to consider that the Central Bank Act in Section 2 defines “digital credit business" to mean the business of providing credit facilities or loan services through a digital channel.

76. That the Commissioner had failed to consider that the Central Bank Act in Section 2 which defines "digital channel" to mean the internet, mobile devices, computer devices, applications and any other digital systems as may be prescribed by the bank.

77. That the Commissioner had failed to consider that the Central Bank Act in Section 2 defines "digital credit" to mean a credit facility or arrangement where money is lent or borrowed through a digital channel.

78. That the Commissioner cannot impose an intention in Section 2 of Legal Notice No. 46 that in effect ousts the provisions of the main CBK Act.

79. Regarding levies that the Appellant charges its clientele that were brought to charge for Excise duty for the period July 2022 to October 2022 it submitted as follows:a.That the Excise Duty Act does not define who a digital lender is. That it had sought a definition from The Central Bank of Kenya (Amendment) Act, 2021 No. 15. That further, the KRA did not dispute the use of the CBK Act in seeking a definition.b.That KRA used the Central Bank of Kenya (Digital Credit Providers) Regulations,2022 to advance its arguments, in its objection decision. That as such, the use of the CBK Act for guidance is neither in dispute nor is it in contention.c.That the Central Bank of Kenya (Amendment) Act, 2021 No. 15 of 2021 date of assent was 7th December 2021 and the date of commencement was 23rd December 2021. That it provides as follows:“Sec. 4A.Other objects of the Bank1. Without prejudice to the generality of section 4 the Bank shall-(da)license and supervise digital credit providers not regulated under any other written law;Sec. Regulation of digital lenders.33R.Without prejudice to the generality of section 4A (da), The Bank shall have power to -(a)license digital credit providers.(b)approve digital channels through which digital credit business may be conducted;(c)determine parameters for pricing of digital credit;(d)supervise digital credit providers;(e)suspend or revoke a license; and(f)direct or require such changes as The Bank may consider necessary Sec.Licensing.33S.(1)A person shall not carry on any digital credit business unless that person has been licensed by The Bank under this Act or is permitted to do so under any other written law.(2)An application for a license under subsection (1) shall be made to The Bank in such form and shall be accompanied by such information and fee as may be prescribed.The CBK Act Section 2 defines the following terms:"digital credit business" means the business of providing credit facilities or loan services through a digital channel;"digital channel" means the internet, mobile devices, computer devices, applications and any other digital systems as maybe prescribed by The Bank;"digital credit" means a credit facility or arrangement where money is lent or borrowed through a digital channel;”d.That the Commissioner had failed to consider that the Central Bank Act in Section 2 defines “digital credit provider" to mean a person licensed by The Bank to carry on digital credit business;e.The cf.Commissioner had failed to consider that the Central Bank Act in Section 2 defines digital credit business" means the business of providing credit facilities or loan services through a digital channel;g.That the Commissioner had failed to consider that the Central Bank Act in Section 2 defines “digital channel" to mean the internet, mobile devices, computer devices, applications and any other digital systems as may be prescribed by The Bank.h.That the Commissioner had failed to consider that the Central Bank Act in Section 2 defines "digital credit" means a credit facility or arrangement where money is lent or borrowed through a digital channel.i.That the Appellant was not a digital lender and operates a manual system of lending. That in view of this, it submits that it is not in the digital credit business as it does not provide credit facilities or loan services through a digital channel.j.That its representatives visits the potential borrower, or the borrower visits its branch office. That it is at such meeting that the customer is requested to complete a loan application form. That therefore, the form is availed to a potential borrower at physical meeting with its representative.k.The Appellant stated that it conducts an analysis on the business and family situation, visits the potential client's business/home and guarantor(s) business premise. That the potential applicant completes a loan application form.l.That in the loan application form, the applicant states the loan that he/she wants and provides all necessary information to appraise the customer's ability to repay the loan e.g. (Bank statements, M-Pesa statements, invoices or quotations for cases that an asset is being purchased for the customer, proof of where to pay - bank account if loan is above Ksh 300,000. 00 and M-pesa number for loans below Ksh 300,000. 00).m.That the approval is done by the Branch Credit Committee and Head Office Credit Committee depending on amounts. That after approval, for Individual loans, Letter of Offer is issued stating the terms and collateral to be used. That after customer accepts the offer, perfection of collateral is usually done after which disbursement is done to the customer's Bank Account or M-Pesa depending on amount as follows;.Branch Credit Committee - Up to Ksh 500,000·Head Office Credit Committee - Ksh 500,001 and above.

80. To support its arguments, the Appellant attached sample documents for loans it extends to its clients to demonstrate the process.

81. That based on these arguments, the Appellant was not a digital lender and its income, was not subject to Excise duty. That the Appellant has mobile app, which was not in use and was yet to be rolled out to the members of the public, as per the certificate of functionality report for the client facing app (Musoni mobile app) March 2023 which it attached.

82. The Appellant insisted that it was not a licenced digital lender under the Section 33S of the Central Bank Act as can be gleaned from the CBK website ie Central Bank of Kenya directory of digital credit providers updated on March 23, 2023.

83. That it was not subject to Excise duty by dint of Section 33S and Section 2 of the CBK Act and not by application of the exclusion criteria used by the Commissioner under Section 2 of the Legal Notice No. 46. That therefore the Excise duties imposed by the Commissioner of Kshs 91,036,555. 00 be set aside.

84. On the issue of lack of public participation, the Appellant stated that Paragraph 6 in Part II of the First Schedule of the Excise Duty Act, 2015 was amended by Section 35 of the Finance Act 2022. That one will note that this provision was not contained in the Finance Bill 2022. That as such, there was no public participation which allows any person who would be affected, to give his view as required by the Constitution 2010. That this invalidates the provision as per Article 2(4)of the Constitution.

85. That on the basis of inclusion of the Excise duty on digital lenders in the Finance Act without disclosing this material item in the gazetted Finance Bill, to inform the public of an intention to enact such a draconian provision, was in total contravention of the Constitution and as such, to proceed to collect such a tax, will be in contravention of the bill of rights.

86. That in addition, Kenyans exercise their sovereign will directly, under Article 1(2) either by public participation, under Article 22(2)(c) in defending the Constitution in public interest et al, by voting in an election (Article 86) or in a referendum (Article 256). That to deny a person Article 1(2) rights, would invalidate anything done consequently including invalidating Paragraph 6 in Part II of the First Schedule of the Excise Duty Act.

Appellant’s Prayers 87. The Appellant made the following payers;a.That the assessment contained in the Respondent’s objection decision dated 24th February, 2023 be annulled and set aside.b.That the costs of the Appeal be awarded to the Appellant.

Respondent’s Case 88. The Respondent’s case is premised on the following documents filed with the Tribunal;i.The Respondent’s Statement of Facts dated 4th May, 2023 and filed on the same date together with the documents attached thereto.ii.The Respondent’s written submissions dated 16th November 2023 and filed on 20th November 2023.

89. The Respondent stated that it relied on the following provisions of the law;a.Section 3 of the Income Tax Act CAP 470, which mandates the Respondent to charge tax.b.Section 5 of the Income Tax Act CAP 470, which provides for charge of Income Tax on income from Employment.c.Section 15(1)of the Income Tax Act.d.Section 35 of the Income Tax Act which mandates for deductions of tax from certain income.e.Section 5 of the Value Added Tax Act which provides for the charge of tax.f.Section 10 of the Value Added Tax Act which provides for treatment of imported services.g.Section13 of the Value Added Tax Act which provides for the taxable value of a supply.h.The First Schedule of the Excise Duty Act, 2015.

90. The Respondent averred that, following review of the Appellant's objection grounds the Respondent's response to the ground that the architecture of the VAT Act does not contain a mechanism for collecting VAT on imported service from non-registered persons, as required by Section 5(6) of the Act, is that the VAT Act merely serves as a guide on the requirements of the law. The VAT Act thus directs the Appellant to levy and collect this specific reverse VAT from anyone consuming imported services. That the same was duly assessable and remitted vide iTax.

91. The Respondent stated that the review of statutes and other supporting data indicated that from 1st July 2022 imported services procured from digital market places were exempt from reverse VAT. That however, the Appellant did not provide a detailed breakdown of the monthly transactions with these digital marketplaces to enable it break this down accurately.

92. In regards to reverse VAT levied on transport charges and local accommodation, the Respondent noted that, as Musoni Micro Finance Ltd paid for the services, VAT on imported services was not accounted for as required by Section 10 of the VAT Act 2013.

93. The Respondent stated that the actual cost of the services rendered by the foreign consultants and the like includes the freight charges and the local accommodation incurred on their behalf and should actually have been incurred by the service providers rather than separating them as they did yet they formed part of the cost of the service. That it was for this reason then, that they were subjected to reverse VAT as they form part of the professional fee paid for services rendered and as such were not viewed in isolation as being VAT levied on otherwise exempt services as well as local services, but rather by virtue of the transaction where they form part of the cost and would thus were rightfully borne by the foreign consultants.

94. The Respondent averred that the fact that the Appellant separated these costs did not alter the fact that the cost was part of the remuneration for the service rendered. That this was the basis for this portion of the WHT additional assessment being upheld.

95. The Respondent stated that it was guided by the provisions of the Income Tax Act CAP 470 and relied on the same, while coming up with the Withholding tax charge and processing fee was defined as “...any commitment or service fee paid in respect of any loan or credit...”

96. That the Respondent in examination of the assessment vis a vis the objection is persuaded that the assessment was sound and met the requirements of the law in that the assessing team clearly stated their basis and thus were not in contravention of Article 47 of the Constitution, laws of Kenya. That the reviewed taxes were due inclusive of the excise fees.

97. That the upshot therefore is that the Appellant had failed in discharging its burden of proof contrary to Section 56 of the Tax Procedures Act, which provides that:“In any proceedings under this Part, the burden shall be on the Appellant to prove that a tax decision is incorrect.”

98. That the burden of proof is on the Appellant and until the same is discharged to the satisfaction of the Commissioner, this Appeal should be dismissed.

Respondent’s Prayers 99. The Respondent prayed that the Tribunal:a.Upholds the Respondent's Objection decision dated 24th February 2023 as proper and in conformity with the provisions of the Lawb.That this Appeal be dismissed with costs to the Respondent.

Issues for Determination 100. Having considered the parties’ pleadings, submissions and all documentation provided, the Tribunal is of the view that the issues falling for its determination are:a.Whether the Respondent erred in confirming the assessment for VAT.b.Whether the Respondent erred in confirming the assessment for Excise duty on digital lending.c.Whether the Respondent erred in its assessment for WHT.

Analysis and Findings 101. The Tribunal having identified the issues that crystallizes for its determination proceeds to analyse the same as hereunder.

a. Whether the Respondent erred in confirming the assessment for VAT. 102. It was the Appellant’s contention that it provides financial services, in the nature of lending of money to borrowers. That this nature of service was exempt from Value Added Tax ("VAT") under Paragraph 1(h) of Part Il of the 1st Schedule of the VAT Act. That the Commissioner had acknowledged this in its objection decision.

103. That the architecture of the VAT Act does not contain a mechanism for accounting for VAT on imported services by non-registered persons, as required by Section 5(6) of the Act since the Section dealing with accounting of VAT i.e. Section. 44. (1) applies only to "Every registered person." That therefore the entire VAT assessment of Ksh 35,563,097 inclusive of taxes, penalties, and interest should be vacated

104. Regarding the argument that the architecture of the VAT Act does not contain a mechanism for collecting VAT on imported service from non-registered persons, as required by Section 5(6) of the Act the Respondent submitted that the VAT Act merely serves as a guide on the requirements of the law. That the VAT Act thus directs the Appellant to levy and collect this specific reverse VAT from anyone consuming imported services. That the same was duly assessable and remitted vide iTax.

105. The Respondent stated that the review of statutes and other supporting data indicated that from 1st July 2022 imported services procured from digital market places are exempt from reverse VAT. That however, the Appellant did not provide a detailed breakdown of the monthly transactions with these digital marketplaces to enable it break this down accurately.

106. In regards to reverse VAT levied on transport charges and local accommodation, the Respondent noted that, as Musoni Micro Finance Ltd paid for the services, VAT on imported services was not accounted for as required by Section 10 of the VAT Act 2013.

107. The Tribunal notes the Appellant’s argument was that it was not registered for VAT due to its nature of business being that of offering financial services and therefore could not be expected by law to account for reverse VAT.

108. Section 2 of the VAT Act defines a registered person as follows;““registered person” means any person registered under section 34, but does not include an export processing zone enterprise or a special economic zone;”

109. The Tribunal notes that although the Appellant sought to rely on the definition of a registered person under Section 2 of the VAT Act, the Act at Section 5(6) as amended by the Finance Act 2019 provides as follows;“Tax on supply of imported taxable services shall be a liability of any person receiving the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply”

110. Further, Section 10(1) of the VAT Act provides as follows regarding treatment of imported services;“If a supply of imported taxable services is made to any person, the person shall be deemed to have made a taxable supply to himself”

111. From the above provisions of the law, it was apparent that the law provided that ‘any person receiving the supply’ was liable to account for the VAT on supply of imported taxable services. It follows therefore that the Appellant was required by law to account for VAT contrary to its averments.

112. The Tribunal reiterates the finding in Republic v Kenya Revenue Authority Exparte Bata Shoe Company (Kenya) Limited [2014] eKLR, where the Superior Court stated that:“Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more than is due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer. “

113. From the above provisions of the law and case law, Appellant ought to have accounted for the VAT and consequently, the Tribunal finds that Respondent did not err in confirming the VAT assessment.

b. Whether the Respondent erred in confirming the assessment of Excise Duty on digital lending. 114. It was the Appellant’s case that the Respondent in its assessment stated that the Company is a digital credit provider and therefore liable to comply within Paragraph 6 in Part Il of the First Schedule of the Excise Duty Act, 2015 which imposes "Excise duty on fees charged by digital lenders at a rate of twenty percent" effective 1st July 2022.

115. As regards the application of Legal Notice No 46, the Appellant asserted that the Excise Duty Act does not define who a digital lender is. That it sought a definition from The Central Bank of Kenya (Amendment) Act, 2021 No. 15. That further, the Respondent did not dispute the use of the CBK Act in seeking a definition or guidance. That further the Commissioner has anchored its argument on Section 2 of the Legal Notice No. 46 (The Central Bank of Kenya (Digital Credit Providers) Regulations,2022)

116. That the Commissioner had misdirected itself by saying any person not listed in Section 2 of the Legal Notice 46 is by implication a digital lender.

117. The Appellant insisted that it was not a digital lender and operates a manual system of lending. That in view of this, it submits that it is not in the digital credit business as it does not provide credit facilities or loan services through a digital channel.

118. The Respondent on the other hand submitted that in examination of the assessment vis a vis the objection was persuaded that the assessment was sound and met the requirements of the law in that the assessing team clearly stated their basis and thus were not in contravention of Article 47 of the Constitution and Laws of Kenya. That the reviewed taxes were due inclusive of the excise fees.

119. The Tribunal notes that in the objection decision, the Respondent while confirming the Excise duty assessment referred to Legal Notice 46; The Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 which it insisted that the Appellant was not covered by any of the excluded sections.

120. The Central Bank of Kenya Act (Digital Credit Providers) Regulations provides as follows at Paragraph 3 regarding those excluded by the regulations;“These Regulations shall not apply to —(a)an institution licensed under the Banking Act;(b)an institution licensed under the Microfinance Act;(c)a Sacco society licensed under the Sacco Societies Act;(d)Kenya Post Office Savings Bank supervised under the Kenya Post Office Savings Bank Act;(e)Credit arrangements involving the provision of credit by a person that is merely incidental to the sale of goods or provision of services by the person;(f)Any other entity approved by the Bank.”

121. The Tribunal further noted that the Respondent had stated in the objection decision that the Appellant had a mobile app which borrowers can apply for loans and was further not listed as one of the financial institutions as per the Excise Act and as such all charges levied on their client including interest were subject to Excise duty at the Prevailing rate. The Respondent in conclusion stated in part as follows;“…The Commissioner having evaluated the above is of the considered view that Musoni mf LTD is a digital lender by way of operation as well as by depiction by the Legal Notice 46 and therefore the Excise duty was correctly levied on Musoni MF. In light of the above the objection in this respect is rejected in full.…”

122. The Tribunal notes that although the Appellant in its pleadings insisted that it was not a digital lender and operates a manual system of lending where it disburses funds through either a bank account or Mpesa mobile platform, it admits that it had a digital app though not operational at the time.

123. The Tribunal further notes that the Legal Notice No 46. lists the institutions excluded by the regulations from the digital tax. Although the Appellant averred that it was a microfinance institution and therefore excluded under Legal Notice no 46, it did not provide any evidence to demonstrate the same given that the Respondent had stated in the objection decision that the Appellant was not registered as a financial institution under the Excise Duty Act.

124. It is the view of the Tribunal that the Respondent having stated that the Appellant was not excluded by Legal Notice no. 46 and further not listed under the Excise Duty Act in the objection decision, the Appellant ought to have pushed back by directly addressing this by providing its actual registration to support the exclusion under Legal Notice no 46 or listing under the Excise Duty Act. This was the position by the High Court when it agreed with the conclusion of the Tribunal in Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) when it stated thus;“A presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position.…”

125. Additionally, although the Appellant had stated that it was not registered by CBK as a digital lender, and further adduced evidence to support its averment that its lending is done manually nothing had been advanced that could demonstrate that it was registered under any other Act or it was not actually lending in the digital space. The Tribunal’s position was that it was not enough for the Appellant to aver that it was not registered as a digital lender with Central Bank, or its digital app was not active, it ought to have provided its registration documents that could demonstrate its actual status.

126. Section 56(1) of the Tax Procedures Act squarely places the burden of proof upon a taxpayer to discredit any tax assessment or decision. Section 56(1) of the Tax Procedures Act reads as follows:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

127. The Tribunal is further guided by Section 30 of the Tax Appeals Tribunal Act in determining the party that bears the burden of proof under this particular circumstance. The Section provides as follows:-“In a proceeding before the Tribunal the Appellant has the burden of proving;a)Where an appeal relates to an assessment that the assessment is excessive; orb)In any other case that the tax decision should not have been made or should have been made differently.”

128. The Tribunal accordingly holds and concludes that the Appellant did not discharge the burden of proof placed on it by law to demonstrate that it wasn’t a digital lender and therefore the Respondent did not err in confirming assessment of Excise duty on digital lending.

c. Whether the Respondent erred in its assessment for WHT. 129. The Withholding tax assessment were in respect to two aspects namely;i.Withholding tax on expenses incurred on behalf of foreign consultants and;ii.Withholding tax on processing fees.

i. Withholding tax on expenses incurred on behalf of foreign consultants 130. It was the Appellant’s case that that Withholding tax (WHT) is a tax that is levied on specified sources of income such as management or professional fees, dividends, interest, and royalties, with the rates of Withholding tax being as stipulated in the ITA.

131. That costs incidental to consultancy services are not subject to withholding tax per the definition of management or professional fee in Section 2 of the Income Tax Act.

132. It further submitted that under the Income Tax Act, only incidental costs associated with provision of training services are subject to withholding tax.

133. That the services in respect of transportation and accommodation cannot and should not be construed to be part of the consultant's remuneration.

134. The Respondent on the other hand averred that the fact that the Appellant separated these costs did not alter the fact that the cost was part of the remuneration for the service rendered. That this was the basis for this portion of the WHT additional assessment being upheld.

135. Management or professional fees is defined in Section 2 of the Income Tax Act as;“a payment made to a person, other than a payment made to an employee by an employer, as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated.”

136. Further, Section 35(1) of the Income Tax Act provides as follows regarding charging of tax;“(1)Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of—(a)a management or professional fee or training fee except—”

137. The Tribunal perused through the documents presented by the Appellant and noted that the Appellant had provided some invoices for accommodation and travel which it purported to be for the foreign consultants. However, it did not provide the contracts with the said consultants to demonstrate the terms of the contracts.

138. From the above information, the Tribunal could only conclude that these were costs that were part of the consultancy services and therefore the Appellant ought to have withheld the withholding tax as part of the services rendered.

139. The Tribunal concludes that the Respondent did not err in confirming the assessment in respect to WHT on expenses incurred on behalf of foreign consultants

ii. Withholding tax on processing fees 140. The Respondent stated that it was guided by the provisions of the Income Tax Act CAP 470 and relied on the same, while coming up with the Withholding Tax charge and processing fee was defined as “...any commitment or service fee paid in respect of any loan or credit...”

141. The Appellant on its part stated that in the tax decision, the Commissioner did not inform it on the specific provision of the law it relied on to impose this tax.

142. The Tribunal notes that Respondent in the objection decision while confirming the assessment stated in part that;“Review of the supporting documentation demonstrated that in regards to the Withholding tax on processing fees, the assessing team clearly stated that they were guided by the provisions of the Income Tax Act Cap 470 when subjecting this to WHT. Specifically, WHT was levied on the fee on the basis of the definition of the term “Interest”.…”

143. Section 3(1) of the Income Tax Act provides as follows regarding charging of tax;“Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

144. The Appellant in its pleadings has not demonstrated or provided any evidence that the Respondent was wrong in subjecting processing fees to WHT.

145. The Tribunal is guided by the decision by the court in Trust Bank Limited V Paramount Universal Bank Limited & 2 others [2009] eKLR where the court observed that:“It is trite that where a party fails to call evidence in support of its case, that party’s pleadings remain mere statements of fact since in so doing the party fails to substantiate its pleadings.”

146. Accordingly, the Tribunal finds that the Respondent did not err in its assessment of WHT on the Appellant

Final Decision 147. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:i.The Appeal be and is hereby dismissed.ii.That the Objection decision dated 24th February, 2023 be and is hereby upheld.iii.Each Party to bear its own costs.

148. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF AUGUST, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERDR. TIMOTHY B. VIKIRU - MEMBER