The Tax Appeals Tribunal (TAT) has determined that auction sales for debt recovery are not exempted from VAT, in a landmark case between Kenya Commercial Bank (KCB) and KRA.
- •The lender had sought legal redress after the tax man hounded the bank for non-payment of VAT for commercial vehicles sold in auctions between 2018 and 2022.
- •It argued that the sale of auctioned items was not intended to garner profit but was an attempt to recoup defaulted credit.
- •KRA argued that the bank was co-registered in the vehicles’ titles with the loans and sold them to third-parties, adding that such a supply was considered taxable under the VAT act.
“The Respondent (KRA) added that the VAT Act does not expressly provide an exemption for this kind of supply and as such the supply is taxable as provided under the VAT Act,” the tribunal ruled.
KCB had wanted the tribunal to infuse debt recovery via auction in the provision that exempts loan amounts from VAT – arguing that they are inseparable elements.
“…the Appellant’s assertion that disposal of seized goods through auction is part and parcel of the provision of credit facilities amounts to stretching the provisions of Paragraph 1 (h) to areas that the Parliament did not provide for,” the tribunal concluded.
The ruling means that the law currently does not exempt lenders from paying VAT for the process of recovery. This will increase the tax obligation for loan recovery, which is likely to be passed on to debtors and might affect auction prices.