Cars and other assets seized by banks for loan defaults will be subjected to Value Added Tax following a Tax Appeals Tribunal ruling. In the landmark ruling, the Tax Appeals Tribunal declared that Value Added Tax (VAT) is chargeable on the disposal of seized assets, including the sale of motor vehicles through auction by banks recovering bad debts.
The verdict comes after KCB Kenya challenged the applicability of VAT on such transactions, arguing that the process was part of credit recovery and not intended for profit-making.
The Tribunal, however, went ahead and dismissed an appeal by KCB Bank Kenya Limited against the Kenya Revenue Authority (KRA) over a disputed Value Added Tax (VAT) assessment amounting to Sh1.2 billion.
The case, KCB Bank Kenya Limited v. Commissioner Legal Services & Board Co-ordination (Tax Appeal E023 of 2024), cantered on whether VAT should be charged on the auction of vehicles seized from loan defaulters.KCB argued that VAT should not apply to the disposal of seized assets, such as vehicles, because the auction process is intrinsically linked to the provision of credit facilities, which is a VAT-exempt service under Part 2 of the First Schedule to the VAT Act.
The bank contended that the seizure and auction of vehicles are part of its risk mitigation strategy in granting loans and do not constitute a profit-making activity.
Instead, the auctions are intended to recover unpaid loans, with the reserve price set to cover the defaulted amounts.
“Any bank offers credit and seeks to mitigate the risk of default by requiring the placement of security against the credit. This same principle applies where the bank secures car loans through the holding of special rights to repossess and auction vehicles to the extent that a customer defaults,” KCB argued.
KRA, however, maintained that the primary supply in the transaction was the sale of motor vehicles to third parties by KCB, a VAT-registered entity. The Tribunal threw out KCB’s argument, holding that there exists no provision under the VAT Act that exempts sales by auction in recovery of credit from VAT.
The tax authority argued that the VAT Act does not provide an exemption for such sales, making them taxable.KRA maintained that the bank, as a creditor, had stepped into the shoes of the debtor during the auction process and was therefore obligated to discharge all tax liabilities, including VAT.
“Part 2 of the First Schedule Paragraph 1 (h) to the VAT Act exempts the loan amount from VAT. The said paragraph does not exempt from VAT the process of recovery of credit from the debtor. Therefore, KCB’s assertion that disposal of seized goods through auction is part and parcel of the provision of credit facilities amounts to stretching the provisions of Paragraph 1 (h) to areas that the Parliament did not provide for,” reads the ruling.
The taxman further says that the primary supply in this transaction is the sale of a motor vehicle to a non-related third party by the bank, a VAT-registered person.
KRA added that the VAT Act does not expressly provide an exemption for this kind of supply, and as such, the supply is taxable as provided under the VAT Act.
According to the judgment, sale by auction is referred to as ‘a hostile sale’ where the property of the debtor is sold by force.
The creditor steps in the foot
of the debtor to effect the sale for
the debtor. It then follows that the
creditor has to discharge all duties
that the debtor would have discharged, including paying taxes
and levies on the property in issue.