A key tax dispute involving the digital payments ecosystem has ended in favour of payment switch operators after the Tax Appeals Tribunal halted the Kenya Revenue Authority’s move to collect 16 percent VAT from their services.
The ruling, delivered on October 24, found that switching firms operate within the financial sector and their services are exempt from value-added tax under the law.
The judgment arose from a case filed by Kenswitch, which was contesting a Sh41.6 million VAT demand on income earned from switching fees.
Kenswitch manages interbank ATM and point-of-sale connectivity, allowing cardholders to access banking services across different institutions. The tax agency insisted that the firm’s income was tied to technology services and should attract VAT.
However, the tribunal disagreed and concluded that Kenswitch’s role goes beyond supplying software or technology. It noted that the company serves as a financial intermediary by enabling funds to move between banks, merchants and mobile platforms.
“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 appellant’s services clearly fall within the meaning of ‘financial services’ exempt from VAT under Paragraphs 1(b) and 1(m) of Part II of the First Schedule to the VAT Act, 2013.” The panel also annulled the tax assessment of Sh41,637,843, calling it “erroneous and unlawful”.
Kenswitch is one of three licensed switching entities in the country, alongside PesaLink, operated by Integrated Payments Services Ltd, and Switchlink Africa, which serves fintechs and payment processing firms.
These companies are supervised by the Central Bank of Kenya under the National Payment System framework.
In its argument, KRA relied on the Banking Act and maintained that Kenswitch was not a financial institution. It further argued that the firm used software supplied by offshore and global technology providers, therefore classifying its income under ICT services.
The tribunal rejected this logic and said Kenswitch does not market or distribute software, nor does it supply ATM infrastructure.
Explaining how card payments work, the tribunal stated that every transaction involves several players including the issuing bank, acquiring bank, merchant, cardholder and switch provider.
The acquiring bank deducts a Merchant Discount Rate from the transaction value, which is then shared among the switch company, card schemes and issuing bank. The tribunal faulted the taxman for singling out one party in the chain for VAT while ignoring the rest.
The ruling comes as the country prepares to introduce a national payment switch that will allow users to send money across banks and mobile systems instantly. The Central Bank has signalled that the platform will create a single interoperable system to support smooth transfers across all financial channels.
