KENYA COMMERCIAL BANK KENYA LIMITED VS COMMISSIONER LEGAL SERVICES & BOARD CO-ORDINATION (2025) TAT 023 OF 2025

The Tax Appeals Tribunal (TAT) recently delivered its judgment in the case of Kenya Commercial Bank Kenya Limited v Commissioner Legal Services & Board Co-ordination (2025) analyzing whether a sale through an auction to recover a debt was subject to Value Added Tax (VAT) under the Value Added Tax Act, 2013.

A. Brief Facts of the case
The Kenya Revenue Authority conducted an audit on Kenya Commercial Bank (KCB) for the periods 2018 to 2022. One of the issues raised was whether the proceeds from the sale of seized motor vehicles through auction by the bank to recover bad debts was subject to VAT

According to KCB, it offered credit and sought to mitigate the risk of default by requiring the placement of security against the credit. It argued that in the Bank’s operations, the disposal of seized goods through auction was part and parcel of the provision of credit facilities and that the disposed goods were not intended to reap a profit; rather, the reserve price was specifically set in order to recover unpaid loan facilities that the bank had incurred/may incur owing to the default in the primary supply, which was the issuance of credit. Further, KCB stated that it was an internationally accepted VAT principle that where a supply is incidental to another, the incidental supply assumed the VAT treatment of the principal supply.

It was the contention of KCB that Part 2 of the First Schedule to the VAT Act, under Paragraph 1(h) exempted from the charge of VAT “the making of any advances or the granting of any credit.”

Based on the above, KCB argued that any supplies that were so closely related with a specifically exempt services so as to be indistinguishable from each other were considered to fall under the same category. It was KCB’s contention thus that debt recovery via auction was an inseparable component of the provision of credit services. It was incidental to the provision of credit and had no legs of its own to stand as a separate supply. Simply, there would not exist seizure and auction of motor vehicles on defaulting loans without the existence of the principal supply which was the advancement of credit.

To support this argument, KCB relied on the TAT’s earlier decision in Mayfair Insurance Company Limited vs. Commissioner of Domestic Taxes (TAT) No. 47 of 2016, where the TAT held that, the sale of salvages constituted part of insurance services as opposed to insurance business and, thus, could not constitute supply of goods for purposes of taxation. KCB argued that this was similar to the instant case to the extent that the Bank seized and auctioned motor vehicles to recover defaulted loans.

B. Arguments by the Kenya Revenue Authority (KRA)
The KRA argued that the bank was co-registered in the vehicle titles with the loans and that it assessed on sale of commercial vehicles. That the primary supply in the transaction was the sale of a motor vehicle to a non-related third party by the bank, who was a VAT registered person. That as per the VAT Act, the same did not expressly provide an exemption for this kind of supply and as such the supply was taxable as provided under the VAT Act. Consequently, the KRA maintained that it was right in charging VAT on the same and hence the assessment be upheld.

C. Analysis of the Legal Basis of the judgment

In its analysis, the TAT reviewed the provisions of Part 2 of the First Schedule Paragraph 1(h) of the VAT Act which provided as follows:

• “The supply of the following services shall be exempt supplies—
  The making of any advances or the granting of any credit.”

According to the TAT, the VAT Act provided for the exemption of loan amounts from VAT and that the same did not exempt from VAT the process of recovery of credit from the debtor. Therefore, KCB’s assertion that the disposal of the seized goods through auction was part of the provisions of credit facilities amounts was stretching the provisions of Paragraph 1(h) to areas that Parliament did not provide for.

That a strict interpretation of Part 2 of the First Schedule of Paragraph 1(h) simply meant that what was exempt from VAT was the making of any advances or the granting of any credit. Since methods of recovery of the credit were not listed thereunder, the TAT could not purport or deem to place them there through interpretation.

Further the TAT took note of the definition of supply of goods under Section 2 of the VAT Act. The said Section defined “supply of goods” as a sale, exchange, or other transfer of the right to dispose of the goods as owner.”

Based on the above definition, it was the TAT’s finding that the sale by auction was a hostile sale where the property of the debtor was sold by force. The creditor (KCB) stepped in the foot of the debtor to effect the sale for the debtor. It then followed that the creditor was discharged of all duties that debtor would have discharged and that included paying taxes and levies on the property in issue. The creditor then ought to recover the debt and any balance remitted to the debtor.

Further, KCB being the creditor and the vehicles being charged in its favor, it meant that the KCB had acquired the right to sale the vehicles to recover loan amounts. KCB therefore became a seller within the meaning of Section 2 (1) of VAT.

Lastly, it was TAT finding that Section 2 (1) of the VAT Act defined “taxable supply” as a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business. Pursuant to the foregoing, the TAT noted that there existed no proviso under the VAT Act that exempted sales by auction in recovery of credit from VAT. It then followed that the KCB being registered for VAT had a duty to remit VAT to KRA.

D. Implication of the Judgment
With the judgment of the TAT in effect, the same provides clarity that unless a supply has been specifically exempted from the charge of VAT under the First Schedule of the VAT Act, the same remains subject to charge for VAT at the appropriate rate.