The Kenya Commercial Bank (KCB) Group has suffered a major blow after the tax tribunal dismissed its appeal seeking to overturn a tax demand of Sh436million arising from VAT assessments for the period 2018 to 2021 and withholding tax on card business interchange fees.
The Tax Appeals Tribunal chaired by Robert Mutuma dismissed KCB’s appeal and affirmed that the taxman, the Kenya Revenue Authority (KRA) was justified in its assessment of the taxes.
“The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is not meritorious and makes the following orders; a. The partial consent signed and dated 9th May 2024, filed and adopted as an order of this Tribunal on 6th June 2024 be and is hereby confirmed. b. The Appeal on the outstanding issues for determination thereof, be and is hereby dismissed; and, c.Each party to bear its own cost,” Mutuma ruled.
The lender had disputed the classification of interchange fees paid to local banks on the basis that there was no relationship between the bank and the issuers in card transactions.
KCB had also faulted the commissioner, legal services and board co-ordination for rejecting its objection after charging VAT on the disposal of seized motor vehicles.
The lender argued that the seizure and auction was linked to the making of advances and the granting of credit, which was a VAT exempt financial service.
At the tribunal proceedings, the bank maintained that KRA erred by failing to appreciate that penalties arising from agreements between it and its transacting counterparts, namely MasterCard and Visa, were as a result of private contractual agreements necessary for conducting banking business.
KCB further argued that the penalties constitute allowable expenditure wholly and exclusively incurred in the production of its income.
On its part, the taxman said the payment of interchange fees to local issuer banks for facilitation, authorisation and clearing services “falls under management or professional fees and subject to withholding tax as per Section 35 (1) (a) and 35 (3) of Income Tax Act (ITA).”
However, the tribunal held that KRA was justified in assessing withholding tax on Card Business Interchange fees for the period 2019 to 2021 amounting to Sh369,023,956.00.
The tribunal also said the bank failed to discharge its burden of proof to demonstrate that the KRA erred in its VAT assessments for the periods 2018 to 2021 amounting to Sh67.5 million (inclusive of penalties and interest).
The withholding tax on Card Business Interchange fees of Sh369million and VAT assessments of Sh67.5million brought the total tax payable by the bank to Sh436 million.
Evidence tabled before the tribunal showed that the taxman carried out an audit for the period 2018 to 2022 and issued assessments for corporate tax, VAT, PAYE and Withholding Tax.
KRA then issued a notice of assessment on August 31, 2023, demanding Sh1.19billion, which KCB objected to. However, the taxman then revised the assessment upwards to Sh1.21billion.
The lender then moved to the tribunal faulting the taxman of making errors in the assessment and disallowing its objection.
KCB also took the Commissioner, legal services and board co-ordination to task for rejecting its objection after charging VAT on the disposal of seized motor vehicles.
The lender argued that no supply of goods was present between the loan defaulters and the bank throughout the transaction, but rather the bank only exercised a special right of repossession.
KRA stated that the logbooks indicated that KCB and the debtors owned the vehicle jointly, and that the lender was registered for VAT.
“Pursuant to the foregoing, the tribunal noted that there exists no proviso under the VAT Act that exempts sales by auction in recovery of credit from VAT. “Therefore, KCB had a duty to remit the tax to KRA,” ruled the tribunal.
The tribunal further noted that KCB did not file documentary evidence to demonstrate how the properties were sold and under what terms.
“KCB did not file any document to demonstrate that the auction complied with Section 21 of the Auctioneers Act, therefore, the tribunal was not able to examine terms and conditions of the sale,” noted the tribunal.
The disposed goods, KCB said, “are not intended to reap a profit, rather, the reserve price is specifically set to recover unpaid loan facilities that the bank has incurred or may incur owing to the default.”
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