Equity Bank Kenya Loses Sh1.16 Billion Tax Dispute

Equity Bank Kenya has been ordered to pay Sh1.16 billion in a tax dispute related to various fees earned by the bank between 2013 and 2016. The High Court ruled that these fees were subject to excise duty, supporting the Kenya Revenue Authority’s (KRA) position.

Justice David Majanja agreed with the KRA’s argument that fees such as loan and credit evaluation reviews, temporary overdrafts, un-cleared cheques, letters of credit, bank guarantees, invoice and bill discounting should be considered as interest under the Income Tax Act (ITA). The Tax Appeals tribunal had previously ruled in favor of Equity Bank in March of the previous year, but the KRA appealed the decision in the High Court. Justice Majanja stated that the tribunal had erred by relying on a different statute’s definition of interest instead of interpreting the term plainly and literally.

During the tax compliance audit of Equity Bank from 2013 to 2016, the KRA found that the bank had not paid the correct amount of tax on its fees, other fees, and commission income. The bank’s explanation for not charging excise duty on certain transactions was deemed insufficient by the KRA. The KRA argued that charges imposed by the bank on loan and credit facilities, including temporary overdrafts, un-cleared effects, letters of credit, bank guarantees, and invoice and bill discounting, should attract excise duty as they do not fall within the definition of interest or return of a loan amount.

Regarding the Hunger Safety Network Programme (HSNP), which operates in conjunction with the government of Kenya and donor organizations like DFID, the KRA contended that the program was not exempt from taxation based on the Financial Sector Deepening Trust (FSD) and the MOU between the government and DFID. The KRA demanded that Equity Bank pay Sh1.16 billion, including penalties and interest.

Equity Bank disputed the assessment, stating that the charges on facilities were not subject to excise duty. The bank argued that the charges on loans provided to customers were not interest and that the KRA’s demand was incorrect and unfair. Equity Bank also claimed that the agreement between DFID and the government of Kenya recognized the income from HSNP as grants, which had already been subject to taxation in the country of origin.

The court ruled in favor of Equity Bank regarding the HSNP program, stating that charging excise duty would deviate from the agreement permitted by the Treasury.