Kenya Revenue Authority (KRA) has won a Kes621 million tax battle against the Co-operative Bank of Kenya arising from financial transactions between 2013 and 2015.
The tax appeals tribunal’s decision to prevent the KRA from collecting the money was challenged by the KRA.
According to the taxman, commissions and agency fees from money transfer services are liable to excise tax.
A strict interpretation of the Finance Act of 2013 and a plain interpretation of the term interest, according to Justice David Majanja, would mean that all fees incidental to obtaining a loan, such as a moratorium and loan appraisals, among other things, are subject to excise duty while the interest earned from the loan would be exempt.
He agreed with KRA that the fees were commissions rather than interest, and that interest could only accrue after the loan was granted.
“Consequently, the part of the tribunal’s judgment holding that the fees charged by the respondent that are ancillary to the loans it grants to its customers are in the ambit of interest and therefore exempt from excise duty be and is hereby set aside,” he said
According to KRA, the lender failed to deduct excise duty on loan applications and moratoriums, commissions, fees, and interest earned in the three years leading up to 2015.
Other lenders demanded taxes on commissions paid to Co-op Bank for use of its Automated Teller Machines (ATMs), interest earned on loan moratoriums and salary advances, and fees and commissions earned from other banking transactions.
The taxman examined the financial and tax affairs from 2013 to 2015 and issued a tax assessment of Sh1 billion arising from VAT, Pay As You Earn, withholding tax, and excise duty, plus interest and penalties, according to the court.
Later, the bank conceded and settled the principal tax assessments totalling Kes 5.4 million for its PAYE, VAT, and withholding tax but objected to the kes 1 billion claims.
The cooperative bank objected to the assessment, claiming that the KRA used ambiguous clauses on the definition of “interest, fees, and commissions” to demand the arrears.
The lender challenged the excise duty, claiming it was incorrect because KRA failed to consider all information and explanations provided to the commissioner in order to appreciate all issues.
The tribunal agreed with the lender, stating that the Finance Act of 2012 was riddled with ambiguity and that imposing tax based on ambiguity would be unjust.
The tribunal also stated that KRA’s decision to charge an excise tax on commissions for using Co-op Bank’s ATMs amounts to double taxation because withdrawal charges are already subject to excise duty at the withdrawal point.
The tribunal also ruled that interchange commissions and agency transfers were not subject to excise duty in the circumstances. KRA took the matter to the High Court after being dissatisfied.
“The Commissioner’s objection decision on its assessment of the respondent’s excise duty liability on the said fees earned after 18th June 2013 is upheld,” the Judge said.