How Dinesh Construction Engaged In Tax Fraud Using ‘Missing Trader’ Scheme

Veteran contractor caught in elaborate scheme involving ghost suppliers and unexplained millions

For over four decades, Dinesh Construction Limited has built its reputation erecting offices, hospitals, and banking halls across Kenya.

But behind the concrete and steel facade, the company was allegedly constructing something far more sinister: a sophisticated tax evasion scheme that would ultimately cost it Sh773 million.

The High Court has now blown the lid off the elaborate fraud, reinstating the massive tax bill after the company tried to wiggle out through the Tax Appeals Tribunal.

The judgment exposes how one of Kenya’s established building contractors allegedly manipulated the tax system through phantom suppliers and mysterious bank deposits that investigators could not trace.

At the heart of the scam lies the notorious missing trader scheme, a tax fraud racket that has been bleeding Kenya’s coffers of billions of shillings monthly.

The scheme is deceptively simple yet devastatingly effective.

Companies create fictional business transactions with ghost suppliers who exist only on paper, issue invoices for goods that were never delivered, and then claim massive VAT refunds from the Kenya Revenue Authority.

KRA’s forensic audit of Dinesh Construction’s operations between 2016 and 2021 uncovered a web of suspicious transactions that should alarm every honest taxpayer in this country.

Investigators flagged a staggering Sh689 million in purchases allegedly made from suppliers who turned out to be missing traders.

These phantom entities issued invoices but investigators found no evidence they ever supplied actual construction materials or services.

The company also could not explain Sh187 million in bank deposits that appeared in its accounts like magic.

The money did not match declared income, raising red flags about hidden revenue streams and systematic underreporting.

When pressed for documentation proving these transactions were legitimate, Dinesh Construction came up short.

No delivery notes. No purchase orders. No transport records. Just paper invoices and electronic tax register receipts that proved absolutely nothing about whether any real goods changed hands.

The initial audit assessment hit Dinesh Construction with a Sh1.1 billion tax liability.

After negotiations, this was reduced to Sh773 million in 2022.

But rather than pay up, the company dragged KRA to the Tax Appeals Tribunal, claiming it was being unfairly targeted and could not be held responsible for the tax compliance failures of its suppliers.

The Tribunal bought this argument.

In June last year, it sided with Dinesh Construction, slashing the assessment dramatically and dismissing the missing trader allegations as unproven.

The Tribunal declared portions of the tax demand were time-barred and accepted the company’s claim that having invoices and ETR receipts was sufficient proof of legitimate transactions.

KRA’s banking analysis methodology was also questioned, giving the contractor what appeared to be a major victory.

But the taxman was not backing down. KRA appealed to the High Court, arguing that the Tribunal had ignored binding legal precedents and set a dangerous standard that would make it easier for tax cheats to operate with impunity.

The stakes were enormous, not just for this case but for the entire fight against missing trader fraud that has become Kenya’s most pernicious tax evasion scheme.

The High Court agreed with KRA in a judgment that should send shivers down the spines of companies engaged in similar schemes.

The judge tore apart Dinesh Construction’s defense piece by piece, establishing stricter evidentiary standards that will make it much harder for businesses to claim VAT deductions without proper documentation.

The ruling was brutal in its assessment of what the company failed to produce.

An invoice alone cannot prove its own validity when the supplier’s existence is disputed, the court declared.

Commercial transactions involving hundreds of millions of shillings must leave verifiable footprints beyond paper invoices.

A prudent construction business dealing in materials must maintain local purchase orders, delivery notes, weighbridge tickets, stock records, and site usage logs.

Dinesh Construction had none of these despite claiming to have received massive quantities of construction materials.

The company argued it was not legally required to keep such elaborate records or police its suppliers.

The court rejected this defense as legally unsustainable under the Tax Procedures Act and VAT Act, which clearly mandate proper record keeping to ascertain tax liability.

On the statute of limitations argument that the Tribunal had accepted, the High Court found the lower body had simply miscalculated.

The five-year assessment window actually expired on December 14, 2022, the exact same day KRA issued its final demand. Taxpayers cannot benefit from their own delays in filing returns to avoid scrutiny, the judge observed sharply.

Most significantly, the judgment established that once KRA presents credible evidence of missing trader fraud, the burden shifts entirely to the taxpayer to prove transactions were legitimate.

The right to deduct input tax under the VAT Act is premised on a valid supply actually occurring. If the supplier is a missing trader who never bought or possessed the goods they purportedly sold, then no supply took place in law.

The transaction is a fiction.

If a company cannot prove through delivery notes and transport logs that it actually received goods from specific suppliers, it cannot deduct the input VAT, regardless of whether it holds a tax invoice.

The Tribunal’s approach, the judge concluded, would make it an unwitting facilitator of the very fraud the tax system seeks to prevent.

Regarding the mysterious Sh187 million in bank deposits, the court upheld KRA’s banking analysis method as legally sound.

The judge dismissed Dinesh Construction’s explanation that these were inter-account transfers or director loans, noting the complete absence of supporting documentation like bank reconciliations or loan agreements that any legitimate business would maintain.

The missing trader scheme has become an epidemic in Kenya. KRA estimates it costs the exchequer Sh2.5 billion monthly.

In June this year, authorities placed over 5,000 businesses on a VAT Special Table, freezing their ability to file returns as part of a massive crackdown.

The taxman suspended online VAT registration entirely, reverting to a manual system requiring physical verification after discovering ghost traders had exploited the digital process.

An internal KRA audit revealed over 4,400 suspected missing traders in the system.

Some 2,080 traders sent invoices totaling Sh19.69 billion but filed nil or no VAT returns, while their supposed customers claimed purchases worth Sh13.64 billion, resulting in potential VAT losses of Sh2.14 billion.

Out of approximately 90,000 VAT obligation cases under review, over 20,000 were found to be inactive taxpayers, raising massive red flags about systematic fraud.

The scheme works like a well-oiled criminal enterprise.

Fraudsters register multiple companies using stolen identities, sometimes trapping innocent Kenyans including domestic workers in tax debt.

These shell companies issue compliant-looking invoices for fictitious supplies. Real businesses then use these invoices to claim VAT deductions.

The missing traders collect the VAT from their accomplices but disappear without remitting anything to KRA.

Meanwhile, the legitimate-looking companies get tax refunds based on phantom transactions.

KRA has been forced to take extreme measures. In May, the authority removed 475 officials from processing VAT applications, representing 74 percent of the team handling registrations.

Workers at the tax agency have been accused of colluding with evaders and taking bribes. The purge was necessary to restore integrity to a system that was clearly compromised from within.

The Dinesh Construction judgment is a watershed moment in this fight.

It establishes clear legal standards that close loopholes missing traders have been exploiting. Companies can no longer hide behind flimsy invoices when KRA raises credible fraud concerns.

They must produce hard evidence that goods actually moved, that suppliers were real entities, that transactions had commercial substance beyond paper shuffling.

For Dinesh Construction, a company that has been building structures in Kenya since 1971, the verdict is a devastating blow to its reputation.

The firm is registered with the National Construction Authority in the highest class and holds prestigious memberships.

It has worked on major projects across the country.

Yet despite its pedigree, it could not produce basic documentation to prove the legitimacy of hundreds of millions in claimed purchases.

The company can still appeal to the Court of Appeal.

But the evidence presented paints a damning picture of a contractor that either engaged directly in fraud or was spectacularly negligent in its business practices to the point of facilitating a massive tax evasion scheme. Either scenario raises serious questions about corporate governance and internal controls.

This case should serve as a warning to other businesses tempted to game the system. The days of using missing traders to inflate costs and reduce tax bills are numbered. KRA is deploying computer forensics specialists, mining data from taxpayers’ systems, and establishing strict verification protocols.

The taxman is also working with international partners to combat carousel fraud, where chains of circular transactions create the illusion of legitimate trade.

The missing trader epidemic has cost Kenya dearly at a time when the country desperately needs every shilling of revenue to fund development and services.

When companies like Dinesh Construction allegedly evade hundreds of millions in taxes, honest taxpayers bear the burden.

The informal sector struggles while well-connected firms manipulate the system. Public services suffer because the money that should build roads, hospitals, and schools disappears into private pockets.

The High Court has drawn a line in the sand.

Tax fraud will no longer be tolerated, no matter how established the company or how sophisticated the scheme. Businesses must maintain proper records, conduct due diligence on suppliers, and prove the commercial reality of their transactions. Anything less will be treated as the fraud it is.

For Dinesh Construction, the Sh773 million bill now looms large. The company must decide whether to pay what it owes or continue fighting in higher courts.

But one thing is crystal clear from this judgment: the era of missing trader impunity is ending, and those who built empires on ghost suppliers are about to face a brutal reckoning.