Equity Bank Battles Billion Shilling Tax Evasion Against KRA

Equity Bank has moved to the High Court to challenge tax demand of Sh1.7 billion from Kenya Revenue Authority (KRA) arising from excise duty on various fees earned by the lender.

The lender wants the High Court to set aside the judgement of the Tax Appeals Tribunal delivered in March last year, directing Equity to pay the amount as demanded by KRA.

Equity says in the appeal that the Tribunal erred by applying the definition of “Interest” in the Income Tax Act.

According to Equity Bank, the nature of loan appraisal fees is the determinant factor in the dispute, and at the same time completely ignore the nature and treatment of appraisal fees vis a vis interest income as stipulated by Central bank of Kenya Prudential Guidelines.

“Tribunal erred in law and in fact in finding that Loan appraisal fees are part of “interest” under Part Ill of the First Schedule of the Excise Duty Act and Tribunal erred in law and in fact in failing to find that Loan appraisal fees are part of “Other fees” under Part Il of the First Schedule of the Excise Duty Act.

The lender further faults the tribunal on the finding that Equity had no basis for levying Excise Duty on Loan appraisal fees and that income earned on temporary overdraft facilities offered to its customers are not subject to Excise Duty.

The bank argues that the finding that income earned on advance to its customers relating to the un-cleared cheques are not subject to Excise Duty.

Equity Bank also faults the Tribunal finding that fees charged to programs run by donor organizations in conjunction with the Government of Kenya which programs are expressly exempt from taxes by virtue of a financing agreement between the Government of Kenya and the Government of the United Kingdom, are not subject to Excise Duty.

The bank further alleges that that the tribunal failed to consider the evidence it adduced in arriving at its decision.

The tribunal comprised of Josephine Maangi (chairperson) Geoffrey Karuu and Tanvir Ali upheld the KRA decision and set aside the bank objection Decision dated 19th September 2017, in respect of Excise Duty.

The tribunal heard that taxman carried out a tax compliance audit of the Bank’s records with regard to Corporation tax for the 2015 year of income, Excise Duty for the period August 2013 to December 2015 and Pay As You Earn (PAYE) for the 2016 year of income and on 21st June 2017 the taxman, pursuant to the said audit issued a tax assessment in respect of the said three tax heads amounting to Sh1,738,969,276 inclusive of penalties and interest.

Equity Bank objected to the entire assessment in a notice dated 21 July 2017 and KRA issued an objection Decision on September 9, 2017 in which it confirmed the assessment as having been properly issued and proceeded to demand the taxes.

Equity Bank being aggrieved filed the appeal, which was dismissed by the tribunal.

KRA was of the opinion that the Finance Act, 2013 is explicit on the definition of the term ‘other fees’ which includes fees, charges, and commissions charged by financial institutions and that the only incomes explicitly exempted from Excise Duty, by the Finance Act, 2013 and Excise Duty Act 2015 are interest and insurance premium or premium based on related commissions and other services under part B of the latter Act.

But the Bank argued that KRA was erroneous in charging Excise Duty on interest earned and may not have considered the underlying facts of the nature of the fees deemed to have been subject to Excise Duty.