KRA wins Sh3.5bn tax dispute with Fourways Junction developer

Justice David Majanja Muga Developers- the owners of Suraya property to table the documents within 60 days failure to which KRA will enforce the demand of the billions.

The company constructed a total of 756 housing units known as Fourways Junction, off Kiambu Road. Out of the 756 Units of Phase 1 and 2, 695 units were completed and sold while phase 3 had ongoing off-plan sales for 152 units. Documents filed in court show that each unit was being sold for Sh30 million. “From the parties’ correspondence, more so the Objection Decision, it is clear the Respondent (Muga Developers) never furnished the Commissioner with all the documents requested and it is on this basis that the Commissioner reaffirmed its earlier position on the additional assessments,” the judge said.

Justice Majanja added that Tax laws impose the burden of proof on the taxpayer to prove that an assessment made by KRA is excessive or a tax decision is incorrect.  “Once the Commissioner made the additional assessments based on the returns filed by the Respondent, then it was incumbent on the Respondent to disprove the Commissioner,” he said.

The court heard that the developer only provided 330 sale agreements whereas the KRA was expecting 695 agreements for the sold units, which would have assisted in ascertaining the developer’s claim. An audit by KRA revealed that the developer failed to declare income from the unit sales, under-declared gross turnover, and failed to file corporate income tax returns for the period 2014 to 2017. 

Following a request by the developer, KRA allowed the taxpayer to file the returns, and based on the tax returns filed, KRA assessed additional tax for the period amounting to Sh2.9 billion. 

Suraya later objected to the additional assessment but was required to provide tax records including all the tax computations and all trial balances in respect of the management and final accounts. 

KRA also demanded from the developer, all gross revenue accounts, debtors accounts and creditors accounts ledgers, all the cash books, all revenue recognition accounts, and any other important records, documents, accounts, and reconciliations. The taxman concluded that in the absence of the documents requested to demonstrate that the additional assessments were incorrect, the tax due amounted to Sh3.5 billion.

The matter was referred to the tax appeals tribunal ruled that KRA should have used industry figures from a review of the tax compliance status of the said top fifteen real estate developers which according to the Tribunal, would have been considered more appropriate.

The developer argued that its principal shareholder, Suraya had been experiencing serious financial challenges based mainly on the fact of heavy indebtedness to Equity Bank Limited and that all monies received between 2014 and 2018, went into a joint account controlled by the lender. But Justice Majanja overturned the tribunal’s decision, ruling that the developer failed to discharge the burden of disproving KRA. Read the original story here

There are two levels of property tax in kenya that every developer should know about. Other than that ,there are other taxes charged by both national and county government relating to land. Read all real estate taxes including land Rates, land rent, income tax, capital gain VAT  etc