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BURS loses P3.9 million VAT landmark case to Bank Gaborone

Publishing Date : 03 September, 2019


A case which congregated interest from the banking fraternity, tax pundits, corporate lawyers and the whole business community in its entirety, a first of its kind in Botswana judicial chambers, set a critical precedence when it overruled Botswana Unified Revenue Services (BURS) claim for Value Added Tax (VAT) on finance leases from Bank of Gaborone.

What aroused this court case emanated from a banking norm which has been a practice for years in Botswana. In some of the banking customs which can be seen even in Botswana jurisdiction, a bank would buy a car from a car dealer and sell it to a customer or client upon request without mark-up. In this case the tittle for the car is reserved by the bank until full payment is made. But VAT is charged on the buyer by the bank after it paid VAT when purchasing the car for the individual. This facility or transaction is categorized under asset financing or finance leases.

In 2014, Bank Gaborone was entangled in a legal fracas in which its operation of finance leases was being put on the spotlight by the taxman; the bank could have been defaulting on paying VAT as per the BURS case.  After BURS did audit on Bank Gaborone VAT matters in 2014 it concluded that the bank has a tax bill of P3.9 million from a vehicle sale facility.  

The Bank Gaborone versus BURS case was regarded as a first of its kind and anticipation was on the case because it was dealing with the never-been- challenged issue in Botswana of dealing with VAT on asset financing (finance leases). As Bank of Gaborone’s modus operandi, the financial institution would receive request for financing from clients and it would in turn purchase vehicles chosen by the clients from car dealers then claim VAT that it is charged. 

Bank of Gaborone then sells the vehicles to the clients at the same price, charging VAT and adding loan arrangement fees plus interest. But the bank would not put a mark-up on the price of the vehicles, which makes the VAT incurred similar to the VAT it charges on the vehicles. In this practice, the bank makes these sales under what it refers to as installment sale agreements.

Between 2011 and 2012 BURS assessed Bank Gaborone and demanded P3 890 964.49 as VAT withheld by the bank. The amount of P3.9 was perceived to be unpaid VAT as a result of mistreatment of the vehicle finance leases. In the BURS Commissioner’s opinion in 2014, he stated that for purposes of VAT, the bank supplies both taxable and exempt supplies. The Commissioner concluded that what Bank of Gaborone was doing was provision of loans which it earned interest and it therefore miscalculated its VAT apportionment ratio by including the financed vehicle sales as subject to VAT.

Bank Gaborone was aggrieved by the taxman’s assessment saying that even though it grants loans, which are an exempt supply, it also grants vehicle finance by way of installment sale agreements of which the acquisition cost of the vehicle and its sale are a taxable supply for VAT purposes. Bank Gaborone took its grievances to Board of Adjudicators, a tax court set-up by the Ministry of Finance and Economic Development to expedite the resolution of tax disputes. 

The Board of Adjudicators decided that the bank’s vehicle sale arrangements were not ‘finance leases’ subject to VAT, upholding BURS’s judgment that Bank of Gaborone underpaid VAT. The Board of Adjudicators also looked into the Banking Act questioning the practice of banks dealing in vehicles. As if that was enough, the bank’s appeal to the High Court was also rebuffed as BURS and the Board of Adjudicators’ findings were upheld leading to Bank of Gaborone parting with P3.9 million which was destined to the taxman’s coffers as unpaid VAT.

The highest court in the land, Court of Appeal, last week quashed both the Board of Adjudicators and High Court concluding that the two were wrong in their judgment. Court of Appeal said the two misdirected themselves by considering whether the vehicle sales qualified as ‘finance lease’ sales for VAT instead of considering whether the bank’s standard installment agreement was ‘a taxable supply’ or an ‘exempt supply.’

Emphasizing its landmark ruling, much to the delight of bankers, Court of Appeal said the High Court was wrong to opine that since the bank did not add value to the price of vehicles, the arrangement could not be held to be subject to VAT, a tax which requires that value be added.

When delivering another blow to the taxman, the Supreme Court found fault on BURS for contending that since the vehicles were immediately sold to the bank’s clients on purchase, the bank at no time owned the assets and therefore it did not make sales but merely provided finance. Bank Gaborone’s appeal was upheld by the higher court with costs as the Commissioner’s assessment was annulled while the taxman was ordered to refund the bank its P3.9 million.

The significance of the landmark judgment to banking sector and tax fraternity

This judgment will remain significant in the tax history with regard to the banking sector. All in all the judgment clear air over the treatment of installment sale agreements, a well-established practice among banks, which has in practice, always been subjected to VAT.
“It makes it certain that banks can include asset sales in the determination of their VAT apportionment ratio. This brings clarity as to what affects the said ratio, which is so critical in accounting for the VAT for banks, considering the magnitude of the amounts involved in such transactions,” said one tax expert interviewed by this publication.

According to this tax observer, whilst the Court of Appeal held that the bank’s installment sale agreements were correctly subject to VAT on the basis that they are ‘hire purchase agreements,’ it would appear that the bank’s installment arrangements were in fact ‘finance leases.’
It has always been the issue in the case, a headache also for Board of Adjudicators and High Court, whether the sales were in fact finance leases.

However the tax expert told this publication that the critical issue is that the installment sale agreements by banks have always been subject to VAT, which was confirmed by the Court of Appeal.“The issue of whether they are hire purchase agreements or finance leases does not change the VAT treatment of such sale agreements. The Court of Appeal ruling comes with so much relief to the banking sector which was under scrutiny by the taxman,” said a tax expert.



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