Judgment summary
The Tribunal heard an appeal by Vidic Holding Limited, a VAT-registered supplier of pharmaceutical packing products, against a Kenya Revenue Authority objection decision dated 19th September 2025 confirming a VAT assessment of Kshs. 4,768,229.00 for 2020 to 2023, together with penalties and interest (paras 4, 8).
The assessment arose from a variance between the Appellant's declared VAT sales, its income tax returns and third party purchase data (para 3). The Appellant attributed the variance to zero rated sales made under directives issued by the Respondent itself authorising specific customers to be charged VAT at zero percent (paras 5, 12-13).
The Tribunal found that zero rating under Paragraph 11 of Part A of the Second Schedule to the VAT Act requires four cumulative conditions, including Cabinet Secretary approval, and that the Respondent had erred by focusing only on whether the supplies were 'raw materials' while ignoring the word 'inputs' and the approval letters themselves (paras 47-53, 55).
The Tribunal held that the approval letters precluded the Respondent from charging VAT only to the extent that supplies matched the customer, proforma invoice, value and validity period specified in each letter, and that the Appellant failed to produce approvals or adequate documentation for several customers and transactions (paras 61-69, 76).
The appeal was partially allowed, the objection decision was varied in respect of supplies falling within the specified approvals, and the matter was remitted for recomputation on production of further documents, with the balance of the objection decision upheld (paras 81-82).
Background
Vidic Holding Limited is a private limited liability company incorporated in Kenya, registered for VAT, trading in pharmaceutical packing products, principally pre-printed literature and inserts supplied to pharmaceutical and allied entities (para 1).
The Kenya Revenue Authority conducted a compliance check on the Appellant's operations for January 2020 to December 2024 and identified a variance between sales declared in VAT returns, income tax returns and purchases claimed from the Appellant's PIN by third parties (para 3).
By a demand notice dated 11th February 2025, the Respondent brought to charge VAT of Kshs. 4,768,229.00 for 2020 to 2023 and income tax of Kshs. 30,398.00 for 2023, totalling Kshs. 4,798,626.00 (para 4). The Appellant conceded the income tax assessment and paid the uncontested tax on 11th April 2025, but by letter dated 12th March 2025 contested the VAT demand, attributing the variance to zero rated sales to ten named customers, supported by a reconciliation, proforma invoices, zero rating approval letters and account statements (paras 5-6).
Following an extension of time, the Respondent, by an objection decision dated 19th September 2025, rejected the objection and confirmed the assessment, finding that the supplies related to pre-printed literature not qualifying as raw material for manufacturing medicaments, and that invoices had not been availed (paras 7-8). The Appellant, aggrieved, filed the appeal, having been granted leave to file out of time on 13th February 2026 (para 9).
Core dispute
The Appellant argued that the Respondent had, through directives issued between 17th July 2020 and 10th July 2024, authorised it to charge VAT at zero percent on supplies to specific pharmaceutical customers, and that having relied on those directives in good faith, it should not now be assessed VAT, penalties and interest on the same supplies (paras 12-16).
The Appellant contended the Respondent was estopped from reversing its own directives years later, and that the packaging and pre-printed literature formed part of the end pharmaceutical product (paras 16-17).
The Respondent maintained that pre-printed literature is not a raw material or input used directly in the manufacture of medicaments under Paragraph 11 of Part A of the Second Schedule to the VAT Act, that VAT is a consumption tax chargeable on taxable supplies regardless of connection between supplier and recipient, and that the Appellant had failed to produce invoices and documentation required to validate the zero rating claims (paras 28-36).
The Tribunal distilled three issues: whether the supplies qualified for zero rating under Paragraph 11 of Part A of the Second Schedule to the VAT Act; whether the Respondent's zero rating approval letters precluded it from raising the assessment; and whether the Respondent was justified in confirming the assessment in the objection decision (para 42).
Court findings
The Tribunal held that zero rating under Paragraph 11 of Part A of the Second Schedule to the VAT Act requires four cumulative conditions: the supply must be of inputs or raw materials; made to a pharmaceutical manufacturer in Kenya; for manufacturing medicaments; and approved from time to time by the Cabinet Secretary in consultation with the Cabinet Secretary responsible for health (para 47).
It found the Respondent's decision defective for addressing only whether the supplies were 'raw materials', ignoring the word 'inputs', and importing qualifiers such as 'used directly in manufacture' that do not appear in the statute (paras 48-49). The Tribunal also found the Respondent's reliance on Telewest Communications plc misplaced, as that case concerned aggregation of supplies from different suppliers, not the present single-supplier scenario (para 50).
On the approval letters, the Tribunal held that the Respondent could not treat them as irrelevant having acknowledged their existence, and that the Appellant's plea amounted to a legitimate expectation that was well founded where a supply matched the customer, proforma invoice, value and validity period in a subsisting approval (paras 55-59). However, the expectation could not extend beyond the terms of the representations, which were customer-specific, invoice-specific, value-specific and time-limited (para 60).
Measuring the reconciliation against the evidence, the Tribunal found approvals existed only for Laboratory and Allied Limited, Sphinx Pharmaceuticals Limited and Comet Healthcare Limited, and that no approvals were produced for several other customers, some of which were hospitals or connected to agricultural pest control products rather than pharmaceutical manufacturers (paras 62-65). Even for the three approved customers, claimed zero rated amounts exceeded the value and validity periods specified in the approval letters, and supporting proof of payment and purchaser certificates required by the letters were not produced (paras 66-68).
On the burden of proof, the Tribunal found that the Appellant, against a declared turnover exceeding Kshs. 34,000,000.00 over four years, produced only three proforma invoices and no tax invoices, sales ledger or audited financial statements (para 71). It held the Respondent's computation was not arbitrary, being based on the Appellant's own returns and third party PIN data, but that the Respondent had failed to test the reconciliation and approval letters against its variance computation (paras 74-75).
Outcome
The Tribunal held that the Objection Decision dated 19th September 2025 was justified only in part. It was not justified in confirming VAT on supplies falling within the Respondent's own subsisting approvals, but was justified in confirming the assessment on supplies for which no approval was produced, supplies to non-pharmaceutical-manufacturer customers, and supplies lacking supporting documentation (paras 77-78).
The appeal was partially allowed. The Objection Decision was varied so that supplies to Sphinx Pharmaceuticals Limited, Comet Healthcare Limited and Laboratory and Allied Limited falling within the customer, proforma invoice, value and validity period specified in the approval letters are to be treated as zero rated.
The Appellant was ordered to furnish, within thirty days, the tax invoices, statements of supply, proof of payment and purchaser certificates contemplated by the approval letters. The Respondent was ordered to review and recompute the VAT assessment for 2020 to 2023, together with consequential penalties and interest, within sixty days of receiving those documents. The balance of the Objection Decision was upheld, and each party was ordered to bear its own costs (para 81).
Major issues / areas of contention
- Whether the Appellant's supplies of pre-printed literature and inserts qualified for zero rating under Paragraph 11 of Part A of the Second Schedule to the VAT Act.
- Whether the Respondent's own zero rating approval letters precluded it from raising a VAT assessment on the supplies covered by them.
- Whether the Respondent was justified in confirming the assessment, including penalties and interest, in its objection decision.
- Whether the Appellant discharged its burden under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act to show the assessment was incorrect.
- Whether a plea of legitimate expectation arising from the Respondent's own directives could limit the scope of the assessment.