Kenswitch wins tax battle as tribunal guidelines fee switches are exempt from VAT

Kenswitch, Kenya’s largest impartial funds swap, has gained a tax dispute with the Kenya Income Authority (KRA) after the Tax Appeals Tribunal dominated that its switching companies are monetary and are due to this fact exempt from value-added tax (VAT).

The judgment, delivered on October 24, units an necessary precedent for a way Kenya treats the digital fee methods that transfer cash between banks, cell cash operators, and retailers.

The tribunal put aside KRA’s evaluation of KES 41.6 million ($321,856) in VAT on Kenswitch’s share of interchange charges earned between 2022 and 2024. In its choice, the panel discovered that the corporate’s work—authorising ATM withdrawals, routing point-of-sale card funds, and facilitating settlement between issuing and buying banks—fell squarely throughout the VAT Act’s definition of exempt monetary companies.

“The tribunal is persuaded that KRA erred each in legislation and actually,” the ruling mentioned. “The appellant’s companies clearly fall throughout the which means of ‘monetary companies’ exempt from VAT beneath Paragraphs 1(b) and 1(m). The VAT evaluation was faulty and illegal.”

KRA had argued that Kenswitch’s commissions are earned from offering software-based ICT companies. It pointed to the corporate’s use of switching platforms licensed from Mauritius-based EFT Company and ACI Worldwide, saying this positioned the exercise inside a VAT exclusion for ATM software program.

However the tribunal rejected that view, saying Kenswitch “doesn’t provide automated teller machines or the software program to run them,” and that VAT therapy relies on the character of the service, not the expertise behind it.

The panel leaned on current Excessive Court docket choices, together with the Pesapal and Business Financial institution of Africa instances, which discovered that fee processors and issuing banks carry out VAT-exempt “dealings with cash” after they confirm cardholder particulars, course of transactions, and transfer funds between accounts.

Kenswitch’s case additionally uncovered inconsistencies in KRA’s personal classification. Underneath modifications launched within the Finance Act 2023, fee service suppliers have been introduced into the excise obligation regime as a part of “charges charged for cash switch companies.”

The tribunal identified that KRA had already registered Kenswitch for excise on this foundation. It mentioned the authority couldn’t deal with the identical exercise as a monetary service for excise, then as an ICT service for VAT. This, it mentioned, breached the taxpayer’s legit expectation of constant therapy.

One other weak point in KRA’s case was its try and tax solely Kenswitch’s portion of interchange charges, whereas leaving the issuing and buying banks’ parts exempt. The tribunal mentioned this artificially cut up a single transaction. The cardholder pays one payment, which is then distributed throughout the events concerned in authorising and settling the fee.

“No standalone taxable provide arises,” the tribunal mentioned.

The ruling comes as Kenya prepares for greater modifications in its funds system. The Central Financial institution of Kenya (CBK) is growing a nationwide swap to allow real-time transfers throughout banks and cell cash platforms with out counting on bilateral integrations. As its position expands, the tax therapy of swap operators issues extra for pricing, interoperability, and funding choices.