SBM Bank has escaped a Sh176.44 million tax demand by the Kenya Revenue Authority (KRA) over charges on bad loans tapped by the lender’s customers for the five years between 2018 and 2023.
The Tax Appeals Tribunal ruled that the KRA erred by assessing excise duty on amounts not subject to excise duty as per the law.
“The Tribunal holds and finds that the respondent (KRA) erred in law and fact by assessing excise duty on amounts that are not subject to excise duty under the Excise Duty Act,” the Tribunal, led by chairperson Robert Mutuma, said in its February 21, 2025 decision.
The Tribunal said the Excise Duty Act 2015 excludes interest or any returns made on loans from the list of items subject to excise duty. The dispute arose after KRA conducted an audit of SBM Bank’s tax affairs from September 2018 to September 2023.
Following the audit, the taxman issued a demand for excise duty, penalties, and interest, arguing that the bank should have charged excise duty on penal interest, the additional interest imposed on borrowers who fail to repay loans on time. KRA raised the tax assessments and demanded an additional tax of Sh176,442,491.
SBM Bank objected to the assessment, contending that penal interest is an extension of regular interest and is not a fee subject to excise duty.
However, KRA dismissed the objection, prompting the bank to appeal to the Tribunal.
SBM Bank argued that its letters of offer state that the additional charges on late loan repayments are interest, not a fee. The bank relied on Kenyan tax laws and precedents, emphasising that the Excise Duty Act excludes interest from taxable “other fees.”
However, KRA maintained that the penal interest was, in reality, a fine or fee rather than true interest. The authority argued that since it was an additional charge imposed due to default, it should be categorised as a fee and subjected to excise duty at 20 percent.
The KRA added that when a borrower misses a scheduled loan repayment, an additional charge is applied on top of the standard interest owed on the principal amount. It classified this extra charge as penal income and contended that it falls under the category of fees, making it subject to excise duty.
In its judgment, the tribunal dismissed KRA’s argument, ruling that penal interest qualifies as interest under Kenyan tax law and international accounting standards.
The Tribunal referred to similar past rulings where both the Tribunal and the High Court held that excise duty was not chargeable on late payment interest.
“The upshot of the foregoing is that the Tribunal finds that the Appeal is merited and, therefore, succeeds. The respondent’s objection decision contained in the letter dated 4th March 2024 is hereby set aside,” the Tribunal said.
