Judgment summary
The Appellant, a steel manufacturer, applied for a refund of withholding VAT (WHVAT) of Kshs 13,453,254 for the tax period March 2025, having accumulated a net VAT credit position of Kshs 178,384,141 as at that date.
The Respondent rejected the refund application on 1st August 2025, stating that the Appellant did not have excess WHVAT credits for the period as these had already been fully utilised to offset output tax payable.
The Tribunal found the appeal competent, having been filed within statutory timelines when computed in accordance with Section 77(2) of the TPA. On the substantive issue, the Tribunal held that Section 17(5) of the VATA requires excess input tax to be carried forward as input tax deductible in the next tax period, and that this must be applied before any WHVAT credits are utilised or considered for refund. The Tribunal found the Respondent's approach of exhausting WHVAT credits before applying carried-forward input tax to be an error, allowed the appeal, and ordered the Respondent to process and pay the refund within 90 days.
Background
The Appellant is a private limited company engaged in steel manufacture and supply in Kenya, converting scrap metal into various steel products and offering value-added services such as cutting, bending, galvanising and borehole casings [1], [8].
Many of the Appellant's customers are appointed WHVAT agents who withheld VAT at 6%, later reduced to 2% under the Tax Procedures Act, and remitted this to the Commissioner under Section 42A of the TPA [11], [12].
For the period October 2024 to March 2025, the Appellant accumulated unutilised refundable WHVAT credits, including Kshs 13,453,254 for March 2025, evidenced by individual WHVAT certificates [13]. The Appellant filed its refund application on 7th April 2025 [14].
The Respondent rejected the claim on 1st August 2025, stating that the credits claimed had arisen from excess input VAT over output VAT and not WHVAT, and that the WHVAT had already been fully utilised to offset output tax payable for the period [4], [10], [15].
Core dispute
The dispute concerned the correct interpretation and application of Section 17(5) of the VATA, specifically the order in which WHVAT credits and input tax carried forward from previous tax periods should be utilised when computing a taxpayer's VAT position.
The Appellant argued that Section 17(5) mandates that excess input tax be carried forward and used first to offset output tax payable, with WHVAT credits considered only afterwards, and that the Respondent's practice of using WHVAT credits first before resorting to carried-forward VAT credits unlawfully deprived it of its refund entitlement [17], [18], [21], [22].
The Respondent argued that Section 17(5) does not prescribe any order of priority between WHVAT credits and credits carried forward, and that its iTax system correctly treats WHVAT credits generated in a particular month as part of that month's transactions, to be applied before adjustments for credit brought forward [31], [32], [36], [39].
A preliminary issue also arose as to whether the appeal was filed within the statutory time limits under Section 47(13) of the TPA and Section 13(1) of the TATA [47], [48].
Court findings
On competence, the Tribunal found that computing time under Section 77(2) of the TPA (excluding Saturdays, Sundays and public holidays) meant the Notice of Appeal filed on 10th September 2025, against a decision dated 1st August 2025, was within the statutory 30-day period. The appeal was therefore held to be competent [54], [55].
On the substantive issue, the Tribunal held that Section 17(5) of the VATA is mandatory in its use of the word "shall", requiring excess input tax to be carried forward as input tax deductible in the next tax period, and that this must be taken into account before considering WHVAT credits [65], [68].
The Tribunal rejected the Respondent's interpretation that Section 17(5) is silent on priority, finding that such an interpretation would render the phrase "carried forward as input tax deductible in the next tax period" redundant [66].
The Tribunal noted it was undisputed that the Appellant was in a net VAT credit position of Kshs 178,384,141 as of March 2025, part of which ought to have been carried forward as input tax deductible in the subsequent period, meaning there was no justification for the Respondent's reliance on WHVAT amounts [67].
The Tribunal found the statutory scheme requires sequential computation: deductible input tax including amounts carried forward is applied first against output tax, and only thereafter do WHVAT credits become available for offset or refund under Section 17(5) read with Section 47 of the TPA [68].
The Tribunal relied on its earlier decision in Kenya General Industries Limited v Commissioner of Domestic Taxes [2024] KETAT 717 (KLR), upheld by the High Court, which held that the Respondent could not unilaterally appropriate WHVAT to satisfy VAT liabilities while disregarding the statutory treatment of carried-forward input tax, and that Section 47 of the TPA, not an administrative sequencing methodology, was the proper mechanism where tax liabilities existed [70], [71].
The Tribunal concluded that the Respondent's approach undermined the refund mechanism created by Parliament for WHVAT and could not be adopted, as it would effectively deny refunds to taxpayers consistently in a VAT credit position [72], [73].
Outcome
The Tribunal found the Appeal to be competent and meritorious.
It allowed the Appeal, set aside the Withholding VAT Claim rejection order dated 1st August 2025, and directed the Respondent to process and pay the Appellant's WHVAT refund within 90 days from the date of delivery of the Judgment.
Each party was ordered to bear its own costs [76].
Major issues / areas of contention
- Whether the appeal was competent, given the timelines for filing under Section 47(13) of the TPA and Section 13(1) of the TATA, and the effect of Section 77(2) of the TPA on computation of time.
- Whether the Respondent erred in rejecting the Appellant's WHVAT claim of Kshs 13,453,254 for the period March 2025.
- The correct interpretation of Section 17(5) of the VATA regarding the order in which withholding VAT credits and input tax carried forward should be utilised.
- Whether the Respondent's iTax system could lawfully prioritise WHVAT credits over carried-forward input tax credits absent express statutory direction.
- Whether the Respondent's rejection of the refund claim was consistent with the statutory offset mechanism under Section 47 of the TPA.