In 2019, the Tanzania Revenue Authority (TRA) conducted a tax audit of Jacks (Tanzania) Limited covering the years of income 2014–2016. Following the audit, TRA discovered that the company had allegedly claimed input VAT deductions arising from fictitious purchases involving a purported supplier known as Plug and Play International.
Consequently, on 27 September 2019, TRA issued an additional VAT assessment of TZS 225,382,272 and a penalty assessment of TZS 115,656,544, bringing the total liability to TZS 371,038,816.
The company objected to the assessments, arguing that the transactions were genuine and supported by VAT returns, the supplier's Taxpayer Identification Number (TIN), VAT Registration Number (VRN) and Electronic Fiscal Device (EFD) receipts.
TRA rejected the objection on the ground that the company had failed to establish the supplier's actual existence and the authenticity of the underlying transactions.
The company successfully appealed before the Tax Revenue Appeals Board, which found that TRA had failed to substantiate its allegations. However, upon TRA's appeal, the Tax Revenue Appeals Tribunal reversed the Board's decision and upheld the additional assessments.
Aggrieved by the Tribunal's decision, Jacks (Tanzania) Limited appealed to the Court of Appeal.
The Court considered the following principal legal issues:
1. Whether the Tribunal erred in determining the genuineness of the VAT transactions on the basis of an allegedly new issue that had not been raised before the Board.
2. Whether the Tribunal correctly applied section 8 of the Tax Administration Act, Cap. 438, concerning arrangements intended to obtain improper tax benefits.
3. Whether the Tribunal failed to consider the appellant's evidence and submissions.
4. Whether the appellant had discharged its statutory burden of proving that the additional VAT assessment was excessive or erroneous.
5. Whether TRA was justified in denying the appellant's claim for input VAT relief on account of failure to establish the genuineness of the underlying taxable supplies.
(a) On whether the Tribunal introduced a new issue
The Court dismissed this ground, holding that the genuineness of the VAT transactions was not a new issue. The central dispute before the Board had always concerned whether the appellant had dealt with a genuine or non-existent supplier.
The Tribunal therefore acted within its jurisdiction by examining the authenticity of the transactions. The Court emphasized that transactions involving fictitious or non-existent parties cannot create enforceable legal or fiscal rights, including entitlement to input VAT credit.
(b) On the application of section 8 of the Tax Administration Act
The Court upheld the Tribunal's application of section 8 of the Tax Administration Act.
It explained that section 8 empowers the Commissioner General to disregard or recharacterise transactions forming part of tax avoidance arrangements designed to obtain improper tax benefits.
However, the Court clarified that these discretionary powers are not unlimited. They must be exercised reasonably, proportionately and consistently with due process.
The provision seeks to prevent abusive tax avoidance without unnecessarily interfering with legitimate commercial transactions.
(c) On consideration of the appellant's evidence
The Court rejected the argument that the Tribunal had ignored the appellant's evidence.
It found that the Tribunal had considered the VAT returns, TIN, VRN and EFD receipts but concluded that these documents were insufficient to establish that actual taxable supplies had taken place.
TRA had specifically requested additional supporting documents, including:
Stores records.
Job cards.
Goods received notes.
The appellant neither provided these documents nor explained their absence. The Court consequently found that the Tribunal had properly evaluated the available evidence.
(d) On the burden of proof in tax disputes
The Court reaffirmed section 18(2)(b) of the Tax Revenue Appeals Act, which places the burden of proving that a tax assessment or decision is excessive or erroneous upon the taxpayer appealing against it.
Relying on Insignia Ltd v Commissioner General TRA, Civil Appeal No. 14 of 2007, the Court reiterated that taxpayers ordinarily possess better access to information concerning their commercial transactions and should therefore maintain adequate records to substantiate their tax positions.
It further held that possession of a VAT Registration Number or participation in the VAT system does not, by itself, establish the genuineness of a transaction.
(e) On entitlement to input VAT deductions
The Court held that the right to claim input VAT under section 68(1) of the Value Added Tax Act is conditional upon establishing that an actual taxable supply occurred.
The production of tax invoices, fiscal receipts and other prescribed documentation is not necessarily sufficient where the underlying transaction is reasonably questioned.
The Court adopted the principles in Kittel v Belgium (Case C-439/04) [2008] STC 1537, holding that input VAT deductions may be denied where objective factors establish that the taxpayer knew or ought to have known that the purchase was connected with fraudulent VAT evasion.
Consequently, the appellant had failed to discharge its evidential burden, and TRA was justified in denying the claimed input VAT relief.
Final decision: The Court dismissed the appeal with costs, thereby upholding the Tribunal's decision and the additional VAT and penalty assessments.
1. Substantive reality prevails over formal VAT documentation
The decision establishes that VAT compliance cannot be determined exclusively by examining invoices, EFD receipts, TINs and VRNs. Taxpayers must demonstrate the existence of actual commercial transactions and taxable supplies. This strengthens the principle that tax deductions must reflect genuine economic activities rather than merely documentary compliance.
2. Reinforcement of the taxpayer's burden of proof
The judgment reinforces section 18(2)(b) of the Tax Revenue Appeals Act by placing the responsibility upon taxpayers to demonstrate that disputed assessments are excessive or erroneous. It underscores the importance of proper accounting systems, transaction records and documentary evidence in tax administration.
3. Recognition of the Commissioner's anti-avoidance powers
The decision clarifies the scope of section 8 of the Tax Administration Act, recognizing the Commissioner's authority to disregard artificial or sham transactions designed to obtain improper tax benefits. Importantly, it also subjects the exercise of those powers to reasonableness, proportionality and due process.
4. Development of the doctrine of knowledge in fraudulent VAT transactions
By adopting the reasoning in Kittel v Belgium, the Court recognizes that a taxpayer's entitlement to input VAT deductions may be denied where objective circumstances establish that the taxpayer knew or ought to have known that the transaction was connected with VAT fraud. This introduces an important dimension of taxpayer awareness and commercial due diligence in determining entitlement to VAT deductions.
5. Clarification of the evidential requirements for input VAT claims
The Court demonstrates that where the genuineness of a transaction is challenged, taxpayers may be required to produce supplementary commercial records, including goods received notes, stores records and job cards. This places practical emphasis on maintaining verifiable transaction trails.
6. Clarification of the scope of appeals from the Tax Revenue Appeals Tribunal
The Court clarified that under section 25(2) of the Tax Revenue Appeals Act, appeals to the Court of Appeal are restricted to questions of law. However, whether a Tribunal altogether failed to consider evidence or submissions constitutes a legitimate question of law concerning the adjudicative process, as distinguished from a mere challenge to the weight or sufficiency of evidence.
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