By Victor Orandi
Composite supply means a supply that comprises two or more goods or services, which are naturally bundled and supplied in with each other in the ordinary course of business, one of which is a principal supply and ancillary supply. This means that the goods or services are generally supplied as a combination and cannot be supplied separately.
Value Added Tax (VAT) on composite supply
In Barclays Bank of Kenya Limited (BBK) v Commissioner of Domestic Taxes [2020], the Commissioner for domestic taxes revealed that BBK was paying interchange fees to issuing banks without operating reverse VAT on payments card companies.
The Tribunal upheld the tax assessment of the COMMISSIONER OF DOMESTIC TAXES (hereinafter the Commissioner) and thereby upheld the Commissioner’s demand from BBK for Value Added Tax (VAT) in respect to interchange fees.
BBK filed an appeal against the Tax Appeals Tribunal’s decision. BBK was the Acquiring Bank in respect to the assessment by the Commissioner in this matter. The acquiring bank is the one that recruits, screens and accepts merchants into the network of the card system.
It was established that the issuing bank’s authorization of use of the card is part and parcel of the issuing bank’s operation of its customers (the cardholder’s) account. The said service of authorizing the use of the card is a service that is exempt from VAT. Thus, the interchange fee was not subject to VAT.
The above case made in reference to the Tax Appeal Tribunal case NIC Group and NIC BANK KENYA PLC v COMMISSIONER OF DOMESTIC TAXES (TAT) APPEAL NO. 361 OF 2018.
The Commissioner contended that the cardholder verification process is a distinct service from money transfer to the acquiring banks.
However, the finding held that a customer’s intended purchase necessitates a cardholder verification process. All that the appellant bank is doing is confirming that the customer’s account has sufficient funds to continue with the purchase.
Therefore, it was held that the role played by the Appellant bank in verifying the cardholder’s information is a normal process related to money transfer. Thus, the cardholder verification process is not a distinct but an ancillary role played by the appellant in the transfer of money.
What are the requirements for a composite supply?
For any supply to be considered a composite supply, it should meet the following conditions:
- The supply should be a combination of two or more goods or services bundled together and cannot be sold separately.
- The supplier should not charge separate amounts for individual goods or services.
- A single supplier should provide all components of the supply.
Similarly, the commercial expectation is that goods would require an ancillary service as part and parcel of operationalizing and enjoying the goods.
The Kenya Revenue Authority (KRA) has, in several cases, imposed VAT, separately, on composite supplies for transactions carried on by various companies. The KRA decision to impose VAT on these supplies has led to multiple Tax Appeal Tribunal cases, which resulted in the overturning of KRA decisions.
Chargeable VAT on composite supplies should be applied on principle product as a whole and not separately from the ancillary supply. The Value Added Tax Act 2013 provides that a supply of goods involves their installation or assembly. Further, a supply of an exempt/zero rated good with an ancillary service cannot be considered a taxable supply subject to VAT in respect to the ancillary service.
We conclude that an argument can be made that goods and services supplied is an indivisible supply by a single entity and therefore not subject to separate VAT. The service can be ancillary to the principal supply of the good, and the ancillary service was merely to allow the utility of the good. As such, the ancillary service should maintain the same VAT treatment as the good.