Alcohol manufacturer London Distillers (K) Ltd (LDKL) has lost its bid to avoid paying Sh517 million in excise taxes after the Court of Appeal backed the Kenya Revenue Authority's (KRA) decision to reject a directive by the National Treasury to abandon 80 percent of the tax liability.

The appellate court ruled that the Treasury Cabinet Secretary had no legal authority to advise the KRA to abandon taxes already collected from consumers by a manufacturer for remittance to the government.

The three-judge bench said KRA acted lawfully by declining to implement the directive, which had been issued despite legal objections from both the tax authority and the Attorney-General.

"We agree with the trial court that he had no such powers. That abandonment was illegal, and the respondent was not bound to act on it," the judges said.

The court said there can be no discretion to abandon that which has been collected by a tax agent from third parties for onward transmission to public coffers.

The ruling settles a dispute over whether the CS Treasury can unilaterally waive taxes that have already been collected from consumers but not remitted to KRA.

According to the court, KRA is only required to implement lawful directives issued by the Cabinet Secretary under Section 37(3) of the Tax Procedures Act.

"It would be dangerous to hold otherwise. It would breed uncertainty in tax administration and collection, completely obliterate objectivity in the process of abandonment of tax, interest and penalty, and undermine the inbuilt checks and balances that ensure transparency in tax administration," the judges said.

The dispute arose after LDKL conducted a self-assessment for the period between January 2020 and August 2021 and declared excise duty amounting to about Sh895 million. The company paid part of the amount, leaving an outstanding balance of about Sh529 million.

After KRA demanded payment, the distiller challenged the claim before the Tax Appeals Tribunal. The parties later recorded a consent allowing the company to clear the debt through agreed instalments, but alcohol manufacturer failed to honour the payment plan.

The company subsequently appealed directly to the National Treasury, seeking abandonment of the outstanding tax.

In September 2021, the Treasury considered the request and, on January 20, 2022, informed KRA that then Cabinet Secretary Ukur Yatani had approved the abandonment of 80 percent of the principal tax and a full waiver of penalties and interest under Sections 37 and 89 of the Tax Procedures Act.

Following the decision, KRA acknowledged the Treasury's communication and demanded payment of about Sh80 million, representing the remaining 20 percent of the tax. London Distillers agreed to settle the amount through weekly instalments of Sh7.5 million and began making payments.

However, KRA later sought legal advice from the Attorney-General, arguing that the Cabinet Secretary's decision was contrary to the law because the taxes in question had already been collected from consumers.

The Attorney-General advised that the decision be rescinded. Following consultations involving the Treasury, the Attorney-General's office and KRA, the Cabinet Secretary's directive was withdrawn.

On March 2, 2022, KRA informed London Distillers that the tax abandonment had been rescinded and demanded payment of the full outstanding balance of Sh517.1 million within seven days, warning that enforcement measures would follow.

The company moved to the High Court seeking orders to quash KRA's decision, prohibit enforcement of the tax demand, and compel the authority to implement the Cabinet Secretary's earlier approval.

London Distillers argued that KRA had acted arbitrarily and unlawfully by disregarding the Treasury's directive. It maintained that it had never received any communication from the Cabinet Secretary withdrawing the decision and accused KRA of usurping powers reserved for the National Treasury.

The petition was dismissed by the High Court, forcing London Distillers to escalate the matter to the Court of Appeal.

The judges observed that if KRA were required to implement every directive from the Cabinet Secretary, including those issued contrary to the law, tax collection would become vulnerable to abuse.

"If the Commissioner were to comply with all directives, including those that are contra statute, then the Government will never collect any revenues because all that taxpayers would require to escape from their tax obligations is to know someone at the National Treasury and their taxes would be abandoned," the court said.

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