Recently there has been disagreement between Equity Bank Kenya and authorities regarding its tax compliance resulting in significant economic ramifications for the former. After a prolonged legal battle against several government departments, including KRA (Kenya Revenue Authority), Equity Bank was ruled against by The High Court for a staggering amount- Sh1.16 billion – related to various fees charged by it covering years between 2013-2016 which authorities believed incurred an excise duty . Specifically KRA claimed that some charges Equity categorised differently , like loan and credit evaluation reviews,bill discounting ,un-cleared cheques etc., actually fall under interest category when considered under Income Tax Act (ITA).
Justice David Majanja who headed this case did agree with this viewpoint of KRA.
Earlier last year, however, Equity Bank had won at the Tax Appeals tribunal but KRA took up the matter to higher court. Justice Majanja was not impressed with how parties – particularly The tribunal -made decisions: he believed that using other statutes’ definitions of words such as “interest” seemed problematic instead of directly interpreting them based on their own intrinsic meaning.
Throughout court proceedings held recently in this matter; it emerged that Equity Bank underwent an extensive audit conducted by Kenya Revenue Authority (KRA) between 2013 and 2016 aimed at assessing tax compliance levels related to its activities during this period. It emerged after analysis conducted showed inconsistencies within Equities’ payments of their required taxation commitments; due emphasis placed on rules governing such requirements emphasized on paying tax compliant sums based on member bank activities such as loans and credits. Additionally, KRA noted that Equity Bank’s reasoning for exempting specified transactions from excise duty failed to meet the required threshold of comprehensibility and fairness, thus being insufficient.
The crux of KRA’s challenge during the proceedings centered on charges levied by Equity Bank on credit and loan transactions, including temporary overdrafts, un-cleared effects, letters of credit bank guarantees as well as invoice and bill discounting. The taxman maintained that these charges were not subject to interest or return on loan principal but instead ought to be subject to excise duty charges.
The total amount payable would come up to Sh1.16 billion inclusive of interest charged.
Additional information was also presented in court relating to a Hunger Safety Network Programme (HSNP) organization supported by donor organizations inclusive of DFID in conjunction with the government of Kenya.
However, it came out that the HSNP was not under operational duties or oversight responsibilities falling within the purview of Financial Sector Deepening Trust (FSD).
Crucially, memorandum documentation formalizing working procedures signed between government stakeholders did not contain explicit clauses absolving HSNP from taxation accountability requirements. Despite all evidence presented against them by KRA, Equity Bank rebuffed all allegations leveled against them; holding their ground arguing that their charges could not constitute excise duties since they were deemed non-interest based payments where normal interpretation rules should apply based on accepted practices.
In regards to HSNP program, Equity Bank noted an existing agreement between DFID and the Kenyan government. According to this agreement, grants-generated incomes had already been subjected to taxation in their originating countries. Furthermore, this income cannot be used for covering taxes or fiscal charges imposed by the government either directly or indirectly as stipulated in said agreement.
Upholding Equity Bank’s opinion on HSNP initiative, Justice Majanja also agreed that imposing excise duty would go contrary to Treasury-approved provisions.