Kenya Revenue Authority (KRA) has won an Sh621 million tax battle against the Co-operative Bank of Kenya arising from financial transactions between 2013 and 2015.
The KRA had appealed against a decision made by the tax appeals tribunal barring it from collecting the amount.
The taxman maintained that agency fees and commissions earned from money transfer services were subject to excise duty.
Justice David Majanja said a strict interpretation of the Finance Act of 2013 and plain interpretation of the term interest meant all fees incidental to obtaining a loan such as a moratorium, loan appraisals among others, and are subject to excise duty while the interest earned from the loan would be exempted.
He said KRA was right that the fees did not interest in nature but commissions and that interest can only accrue after the loan has been 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.
KRA claimed that the lender failed to deduct excise duty for loan applications and moratoriums, commissions, fees and interest earned in the three years to 2015.
The taxman demanded the taxes on commissions paid to Co-op Bank for use of its Automated Teller Machines (ATMs) by other lenders, interest earned on loan moratoriums and salary advances and fees and commissions earned from other banking transactions.
The court heard that the taxman looked at the financial and tax affairs for the years 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.
The bank later conceded and settled the principal tax assessments totalling Sh5.4 million in respect of its PAYE, VAT and withholding tax but objected to the Sh1 billion claim.
Co-op bank opposed the assessment saying KRA relied on ambiguous clauses on the definition of ‘interest, fees and commissions to demand the arrears.
The lender contested the excise duty saying it was erroneous since KRA failed to take into account all information and explanations provided to the commissioner in order to appreciate all the issues.
The tribunal agreed with the lender saying the Finance Act 2012 was riddled with a lot of ambiguity and that it would be unjust to impose tax based on ambiguity.
The tribunal added that KRA’s decision to charge an excise tax on commissions for use of Co-op Bank’s ATMs amounts to double taxation because the withdrawal charges that are deducted at the withdrawal point are already subjected to excise duty.
The tribunal further ruled that interchange commissions and agency transfers were not in the circumstances chargeable with excise duty. Not satisfied, KRA moved to the High Court.
“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.