High Court Blocks Treasury’s Tax Demand In Dispute With NCBA

The High Court has stopped the National Treasury from collecting an estimated KSh900 million from NCBA Bank as it considers a petition by the bank against the Cabinet Secretary for the National Treasury and the Attorney General.

The order was given by Lady Justice Mugure Thande after the bank petitioned the court High Court to intervene in a dispute between it and the National Treasury after the current Cabinet Secretary for the National Treasury recently revoked an exemption granted when the bank merged in 2019.

Lady Justice Thande said: “I am satisfied that the application has met the test for the grant of conservatory orders at this ex parte stage. Accordingly, Prayer 2 of the application (for conservatory orders) is hereby granted.”

The judge also certified the case as urgent and asked the bank to serve the Attorney General and Cabinet Secretary by May 5, responses be filed by May 19, further affidavits by June 2, and for the matter to be mentioned on June 6 for directions.

In the case filed today at the Constitutional Division, NCBA has said that the revocation and any subsequent demand for the tax go against its legitimate expectation that decisions granted by a Government institution are final as outlined in Article 47 of the Constitution.

The purported revocation was issued via a letter by the Cabinet Secretary for the National Treasury to NCBA and the Kenya Revenue Authority on March 24th, 2023. In the letter, the Cabinet Secretary directed the Kenya Revenue Authority to collect the exempted taxes from the bank.

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In its filing, the bank asked the court to issue conservatory orders stopping the Kenya Revenue Authority from collecting the capital gains taxes that were previously exempted on behalf of the National Treasury. It is estimated that the amount in dispute is approximately KES 900 million.

“The purported revocation is in breach of basic rules of natural justice as envisaged by the provisions of Article 47 of the Constitution, especially since the Petitioner (NCBA) was not given an opportunity to be heard before such an unprecedented reversal of an earlier decision was made,” said Senior Counsel Kamau Karori, the lawyer representing the bank in the case.

NCBA argued that by arbitrarily revoking a justified exemption granted through due process, the action could damage the confidence of investors and the general public in the finality of decisions made by Government institutions.

The bank has asked the court to reinforce its constitutional rights, to quash the revocation decision by the National Treasury, and to prohibit the Kenya Revenue Authority from implementing the tax in dispute.

Following the revocation, KRA has demanded about KES 900 million plus interests in lieu of Capital gains tax. The NCBA merger was effected by way of a share swap that saw the previously privately held CBA Group become a publicly listed entity as part of the NCBA Group.

NCBA Group argues that the merger was considered against the backdrop of the Central Bank of Kenya encouraging the amalgamation of banks to create stronger institutions. The merger would lead to the formation of one of the largest and strongest financial institutions in East and Central Africa.

The Bank argued that: “Based on this clear Government policy as stated in the letter seeking the Exemption, the Merger was intended to ultimately create a s t r o n g e r b a n k designed to reduce the systemic risks within the banking system and t h a t c o u l d withstand the turbulence of any macro-economic factors.”

In its application for the exemption, NCBA had argued that the merger was in the best interest of the public in increasing access to credit, increasing employment opportunities, scaling up the group’s corporate social responsibility, and enhancing access to financial products by Medium, Small and Micro Enterprises and individuals.

It also stated the increased investment opportunities through the Nairobi Securities Exchange and reduced transaction costs, which would be passed on to customers.

The strengthening of the sector and having the industry led by large locally owned banks was of significant public interest as it was designed to increase confidence in the banking system.

NCBA has emerged stronger after the merger and declared in its latest financial results that it will be paying out dividends of KES 7 billion to its over 27,000 shareholders. In addition, the bank announced that it has employed an additional 700 employees since the merger. NCBA has stated before that it is ready and willing to pay any taxes that the courts may rule were due.

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