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Bank loses petition against KRA for tax refund

By WAHOME THUKU | April 14th 2014


Kenya; Before January 2010, there was a gap in the Kenyan law on assessment of capital deductions on computer software. The Income Tax Act did not have any specific provision allowing capital deductions on computer software.

Many taxpayers, especially in the banking sector, treated software differently; according to their own interpretation of that law.

However, the Finance Act of 2009 introduced a 20 per cent deduction claim from January 1, 2010.

Back in 2008, CFC Stanbic Bank had acquired a banking system worth Sh347.3 million, another one worth Sh156.7 million in 2009 and another worth Sh760.5 million.

The bank then claimed in its tax computations, reduction in value of software amounting to Sh102.2 million for 2008 and Sh356.8 million for 2009. They claimed the reduction at the rate of 33.3 per cent under Section 15(2) (g) of the Income Tax Act.

The Kenya Revenue Authority (KRA) disagreed, arguing that the Income Tax Act did not allow capital deduction on computer software. It referred the matter to the Nairobi Income Tax Local Committee.

In a case involving EcoBank Kenya, the committee had decided on November 11, 2010, that software should be treated as machinery. On March 24, 2011, the committee decided that the term ‘software’ was part of the term ‘machinery’ hence qualified for reduction for wear and tear at 12.5 per cent.

The KRA then carried out tax audit of the CFC Stanbic for the years 2008 and 2009. It was then agreed between the parties that the bank should pay Sh288,682,059 as the tax amount. The bank accepted and paid the amount.

On May 26, 2011, the bank paid another Sh103.1 million which included Sh87.7 million excess claim on software.

Soon after, the bank filed a petition at the High Court in Nairobi claiming the payment was based on a mistake of law.

The CFC Stanbic argued that under the Finance Act of 2009, it is entitled to a refund of Sh113,986,729.64  for the overpayment to KRA.

Null and void

The bank sought a declaration that the payment of the Sh87.7 million and the Sh52 million penalties and interests was unlawful, null and void.

It asked for an order compelling KRA to pay back the money with an 18.42 per cent interest per annum.

The bank claimed that KRA violated Article 47 of the Constitution on fair administrative justice by locking out other banks in the committee proceedings then imposing the decision on them.

The committee had contravened its right to property and principles governing imposition of taxes under Article 210 of the Constitution.

The decision of the committee had been used by KRA to deprive it the right to own property under Article 40.

The bank claimed neither itself nor the Kenya Bankers Association had been enjoined at the hearing of the Local Committee, claiming the decision was made to apply retrospectively to all banks.

The petitioner claimed that its legitimate expectation to continue paying the rate of 33.3 per cent for the periods 2008 and 2009 was sound since the law in that period was ambiguous.

The KRA opposed the petition. The taxman contended that the bank had voluntarily agreed to pay tax on excess capital deductions claimed on software.

In an affidavit, KRA Assistant Commissioner Rose Wasinda said the bank had been represented in the discussion on the subject by their senior officials from South Africa and their tax agents.

Wear and tear

The KRA argued that the software did not qualify for reduction under the Act or the wear and tear allowance under the law.

The KRA argued that the petition was an abuse of the court as the bank had willingly paid all the tax due.

Presiding Judge Isaac Lenaola acknowledged that before January 2010, the taxation on software was ambiguous as taxpayers and KRA treated it differently. A consensus was always reached between the taxpayer and the taxman in different circumstances.

“I don’t think there was a general set practice that the petitioner can use to claim legitimate expectation,” the judge held.

He pointed out that there were many channels through which the bank could have been enjoined in the committee proceedings to protect its interests.

The court held that the petitioner had not demonstrated that its right under Article 47 of the Constitution had been violated.

In the final analysis, the judge noted that the parties had engaged in intensive discussions on the matter and there was nothing to show CFC Stanbic had been deprived of its property, having paid the assessed and agreed taxes willingly.

The petitioner never made objection prescribed by the law hence was entitled to pay the assessed tax.

He concluded that the bank had willingly paid the agreed sum after seeking and getting advice from their tax consultants.

Local Committee

“It has not been shown that the respondent in any way coerced the petitioner to do so,” the judge ruled. “The payments were paid based on an agreed interpretation of the law and the petitioner has not showed why that interpretation is faulty and why the decision by the Local Committee on the subject was wrong,”

The judge said CFC Stanbic had not shown why other banks including Standard Chartered Bank and EcoBank should have paid the taxes based on that interpretation and why it should have been exempted from making payments based on that interpretation,

“Give unto Caesar what belongs to Ceasar and so it shall be,” the judge summed it up.

With that the court held that the petition had no merit and dismissed it.

The judge said the there was no doubt that the petition was filed with mischief and ordered the bank to pay the costs of the suit.


The writer is a court reporter

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