Billionaire Narendra Raval has dodged a Sh5.4 billion tax bill after securing court victories against the Kenya Revenue Authority (KRA), shining a spotlight on a botched deal he signed with the Jubilee administration to secure duty relief for three of his companies.
In the latest of the three triumphs, Mr Raval, the Devki Group founder and chairman, won a legal fight against the KRA over Sh1.44 billion in unpaid value-added tax (VAT) that the taxman demanded from his Maisha Mabati Mills.
This added to earlier wins in which two other Devki subsidiaries—Cemtech and Devki Mills—had their tax liabilities amounting to Sh4 billion abandoned by the KRA.
In the case of Maisha Mabati, a four-member Tax Appeals Tribunal discharged it from paying Sh1,444,409,654 in taxes and penalties on machinery imported for its plant in Lukenya, Machakos, some six years ago.
The Treasury struck a deal with the firm in 2020, asking the KRA to give Maisha Mabati the green light to import machinery without paying VAT, while promising to settle the tax on behalf of the company.
However, the Treasury never kept its word, prompting the KRA to slap the manufacturer with a Sh1.44 billion tax bill, including penalties.
The latest win at the Tax Appeals Tribunal extends Mr Raval’s winning streak, after the KRA earlier abandoned a Sh4 billion tax demand against two of the businessman’s firms, which crystallised after the Jubilee administration failed to pay the taxes as agreed with the companies.
The ruling shines a spotlight on a controversial tax agreement that well-connected firms struck with the Jubilee administration to avoid paying billions in taxes.
The agreement came to light after the case involving Cale Infrastructure Construction Company—a firm linked to the Kenyatta family, which was subcontracted by Moja Expressway Company to undertake pre-construction works for the Nairobi Expressway—reached the courts.
Cale told the tribunal and the High Court that it objected to an erroneous Sh5,698,971,927 tax demand on materials consumed in the project, despite the government’s express undertaking to settle that liability.
After the KRA demanded the tax, Cale moved to the tribunal, where it lost.
In its appeal at the High Court, Cale challenged the tribunal’s finding that, although the Treasury had undertaken to bear the tax liability on certain materials consumed in the project, the primary obligation to pay the taxes nonetheless rested with the contractor.
The tribunal had held that, in the event of default by the government in honouring its commitment, the KRA was entitled to recover the taxes from the contractor, since the taxman was not a party to the agreement embodying the undertaking to provide tax relief.
The High Court upheld the tribunal’s position that an undertaking by the Treasury, or any third party, cannot exempt a taxpayer from its tax liabilities.
However, Maisha Mabati escaped this verdict, with the tribunal noting that the KRA Commissioner, which had entered into a binding tripartite agreement with the Treasury and the iron-sheet company, “opted not to collect tax that it was entitled to collect.”
“Nevertheless, in situations like this appeal, where the Commissioner has opted not to collect tax that it was entitled to collect; and where it has additionally gone ahead and issued the taxpayer with writs/letters of tax exemption under its letterhead based on its understanding of a letter drafted by the relevant Cabinet Secretary, is distinguishable from the Cale case,” said the tribunal.
The tribunal added that the KRA went ahead and revalidated the exemption code issued to Maisha Mabati, giving the company the confidence to proceed with importing machinery for the Sh11 billion Lukenya plant.
According to the tribunal, the KRA had approved and repeatedly revalidated the exemption under a tripartite arrangement in which Maisha Mabati proceeded with the imports after the Treasury gave the policy undertaking, while taxman evaluated the project, issued written approval and operationalised it through the exemption code.
Consequently, the KRA, which issued the tax demand towards the end of December, could not go back on its word after failing to collect the tax when it had the opportunity, the tribunal said in its ruling of October 9.
Earlier, the KRA had also sought Sh4 billion from Guru, as Mr Raval is known because of his priestly background, following Treasury Cabinet Secretary John Mbadi’s refusal to use taxpayers’ money to settle the bill.
Mr Mbadi, in his letter dated October 2, 2024, which was presented before the High Court, informed Devki Steel Mills and Cemtech Group Commercial Director Lokesh Kumar that it would be illegal to pay the taxes for the two firms from government coffers.
The Cabinet Secretary revoked the promise made by the Uhuru administration to Mr Raval that his companies would be exempt from paying the 16 percent VAT on machinery and a clinker plant in West Pokot in 2015, as well as on Devki machinery and plant in 2020, saying the arrangement was not supported by tax law or other legislation.
However, in the ruling, Maisha Mabati cited a “documentary record” showing that the KRA had previously abandoned taxes owed by Cemtech, including accrued VAT arrears, under Section 37F of the Tax Procedures Act.
The iron sheets maker wanted the same treatment extended to it, a move that would have seen Mr Raval escape a total tax liability of Sh5.4 billion.
Section 37F of Kenya’s Tax Procedures Act gives the Commissioner power to refrain from assessing or recovering unpaid tax on specified grounds, including doubt or difficulty in recovery. It was introduced through the Tax Procedures (Amendment) Act, 2024.
While Maisha Mabati did not have its tax demand abandoned, it won its case at the tribunal.
The abandonment of the other companies’ tax liabilities, together with the tribunal victory, means that Mr Raval has escaped payment of Sh5.44 billion in taxes, dealing a blow to the KRA, which is under pressure to collect revenue to meet its targets.
Tax experts have, however, raised questions about the legal basis on which the Jubilee administration offered the tax relief.
Michael Mburugu, PKF Eastern Africa’s regional tax partner, said every tax exemption must have a legal basis, noting that the Treasury Cabinet Secretary cannot exercise powers beyond those conferred by law.
“Under the law, a minister could not give an exemption,” said Mr Mburugu, arguing that the agreement was an attempt to circumvent the law.
He added that the Treasury’s undertaking to pay the taxes also raised questions about the availability of public funds, since there was no budgetary allocation for such expenditure. This, he said, helps explain why the Treasury failed to honour its promises.
“It is an illegal agreement, and nothing can render an illegality to be proper,” added Mr Mburugu.
