Kenya’s Tax Appeals Tribunal has delivered a landmark victory to the nation’s payment switch industry, ruling that their services are exempt from 16% Value Added Tax (VAT). The decision overturns the Kenya Revenue Authority’s (KRA) attempt to classify these services as taxable ICT offerings.
The ruling, which was made in October 24, came from a dispute where KRA levied KES 41.6 million VAT demand on Kenswitch for its interchange fees. The tax authority claimed that because Kenswitch uses software, it provided an ICT service. The tribunal firmly rejected this, stating that the company’s role is fundamentally one of financial intermediation-integrating banks’ ATMs and POS systems- which is legally exempt from VAT.
The tribunal is persuaded that KRA erred both in law and in fact in finding that the appellant’s services are taxable under the VAT Act, the ruling stated.
The ruling sets a crucial precedent for all licensed payment switches in Kenya including PesaLink and Switchlink Africa. These companies form the backbone of the digital payment ecosystem, acting as “traffic controllers” that direct transactions between banks, mobile money providers and card networks.
Additionally, the ruling comes as Kenya moves towards a national switch to create a fully interoperable financial system. This decision ensures that the critical infrastructure enabling this future is not burdened by what the tribunal deemed an erroneous and unlawful tax.
Future Outlook
The Central Bank of Kenya is spearheading an initiative to establish a sector-wide interoperable payments system. Part of this moves national payment strategy, seeks to overcome the current fragmentation where mobile money platforms and financial institutions operate independently. The new system will allow users to send and receive money seamlessly between any bank or digital wallet, eliminating the existing gaps caused by reliance on bilateral agreements.
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