Lecture 2 · KRA’s own letter saved Maisha Mabati KSh 1.44bn.

You are the finance director of Maisha Mabati Mills. It is the last week of 2020, and the plant and machinery for a new factory at Lukenya, in Machakos County, are about to ship. VAT at 16% on a factory’s worth of equipment is a number that changes the project’s returns.

You hold two pieces of paper. The National Treasury has written to say it will settle the VAT, because the project began two years earlier, when such imports carried none. And the Commissioner of Customs and Border Control has sent a letter headed “VAT Exemption on Importation of Plant and Machinery for Expansion of a New Plant in Lukenya, Machakos County”, backed by an exemption code in the customs system.

Do you import? Almost everyone in the room says yes. The better question is what else you do before the first container lands.

The case.

Maisha Mabati imported and cleared its machinery under the exemption code. No VAT was paid at the border, so there was no input VAT to claim. The company built the plant, financed it and ran it.

The exemption did not sit in a drawer. Customs revalidated it three times between May 2022 and May 2023. Nobody revoked it, suspended it or queried it.

Almost five years after the first letter, the Kenya Revenue Authority issued a post-clearance audit demand for KSh 1,444,409,654 in VAT, penalties and interest. The company objected the next day. The Commissioner upheld the demand in a review decision, and Maisha Mabati appealed to the Tax Appeals Tribunal.

By then one door had already shut. Input VAT can be claimed only within six months of the import. If the demand stood, every shilling of it would be a pure cost.

Exhibit 1: The paper trail

The ruling.

The Commissioner made the oldest argument in tax: tax comes from statute, not from letters. A Treasury promise to pay did not create an exemption in law, it said, and since the Treasury never paid, the importer still owed. It pointed to an earlier Tribunal case in which a Treasury undertaking had not excused an importer.

The Tribunal found the facts different. In that earlier case, the taxpayer had never received an exemption letter or a code, and the revenue authority had always said tax was due. Here the Commissioner had issued the letter, generated the code and confirmed it three times.

That, the Tribunal held, gave Maisha Mabati a legitimate expectation the Commissioner could not abandon years later. Drawing on earlier decisions including Kenya Revenue Authority v Export Trading Company and Transmara Sugar Company v Commissioner of Domestic Taxes, it also found the delay unreasonable. The Commissioner had the power, the systems and the time to collect any tax due, and did not. On 9 October 2026 the Tribunal set aside the review decision, with each side bearing its own costs.

The idea: the law of the Medes and Persians.

In Kenyan English, a rule nobody can bend is “the law of the Medes and Persians”. The phrase comes from the Book of Daniel. King Darius’s officials persuade him to seal a decree that for 30 days anyone who prays to any god or man other than the king goes to the lions. Once sealed, the decree cannot be changed, even by the king. When Darius realises it will condemn Daniel, his favourite official, he “laboured till the going down of the sun” to find a way out, and finds none.

The ancient version bound a ruler to his word at a terrible price. The modern doctrine of legitimate expectation is gentler. A tax authority can still correct a mistake. What it cannot do is put an assurance in writing, build it into its own systems, repeat it three times, watch a company commit capital on the strength of it, and then call the whole thing an error.

There is a finance lesson here as well. Every investment is a bet on what will be true in the future, and the state writes a large part of that future. When its letters can be withdrawn at will, investors price the risk into every project through a higher required return. Each time a tribunal holds the Commissioner to its word, it trims that premium for everyone who builds in Kenya.

Before the room relaxes, notice how narrow the escape was. Maisha Mabati won because its paper trail was unusually complete. Take away the code and the three revalidations, and the earlier case, which the importer lost, becomes the precedent.

What a better-run company would have done.

Run the tape again with a board that treats the letter as a risk to manage.

Its first question to counsel is short: under which section? A Treasury undertaking to settle the VAT is a promise to pay. The board wants the statutory or gazetted basis for the exemption in writing. Failing that, it applies for a private ruling under section 65 of the Tax Procedures Act, which binds the Commissioner for transactions entered into while the ruling stands.

It follows the money. If the Treasury has promised to pay, the company asks Customs, entry by entry, to confirm that the VAT has been settled or is not due.

It prices the downside. VAT skipped at the border cannot be reclaimed after six months, so a failed exemption costs the full 16% plus penalties and interest. That figure goes into the board pack as a contingent liability, reviewed every year until the five-year window for a customs post-clearance audit has closed on the last import.

And it keeps a reliance file: the letters, the code, each revalidation, and board minutes showing that the investment decision depended on them. Legitimate expectation has to be proved, and minutes are the proof.

Lessons for the boardroom

1. Know which document you hold. A letter is a promise. A statute or a gazette notice is law. Ask for the section.
2. A promise to pay your tax is not a payment. Until the cash moves, the liability sits on your balance sheet.
3. Price the asymmetry. VAT avoided at import becomes an unrecoverable cost if the exemption fails. Model that case before you rely on the letter.
4. Paper the reliance. Minutes that tie each decision to the state’s assurance turn a grievance into a legal argument.
5. Watch the clock. Customs exposure runs for five years after the last entry. Keep the file until the window closes.

Maisha Mabati kept its KSh 1.44bn, 10 months after the demand landed. The documents that saved it were ones it happened to keep. A better-run board keeps them on purpose.