Kenya Revenue Authority (KRA) has lost a bid to compel NCBA to pay about Sh117 million on account of VAT arising from interchange fees charged to cardholders.
High Court judge Alfred Mabeya dismissed KRA’s appeal stating that the transaction is exempted from VAT and that the demand by the commissioner of domestic taxes was wrong.
The taxman held that the VAT Act did not expressly state that interchange fees were exempt financial services and that the services issued by the lenders, which include authorisation, clearing and settlement, were not exempted by the law.
Justice Mabeya, however, said since the interchange fee is earned from the process of operating the customer’s account by conducting verification of the cardholder’s details, the availability of funds in the account of the cardholder before transferring funds for the transaction, the transaction is therefore exempted from VAT.
“Accordingly, the Court finds that the assessment by the appellant was wrong in charging VAT on interchange fee. Consequently, the Court finds no merit in the appeal and dismisses the same with costs,” the judge ruled.
The court heard that the taxman conducted an audit on the affairs of the lender from January 1 to December 31, 2013, and issued an assessment of Sh304 million.
The bank, then known as Commercial Bank of Africa objected to the assessment and the commissioner of domestic taxes issued an amended assessment of Sh116.5 million on September 6, 2018.
The amount demanded included a principal tax of Sh80.3 million, a penalty of Sh16 million and interest of Sh20.1 million.
Aggrieved by the decision, the lender lodged an appeal at the Tax Appeals Tribunal and the judgment was delivered on June 11, 2021, in its favour.
KRA then appealed before the High Court, arguing that the Tribunal was wrong in finding that the VAT on Visa interchange fees was tax exempt.
NCBA maintained that the interchange payment was not a payment for service but rather a cost balancing mechanism which the issuing banks incur when issuing cards.
The lender added that the Tribunal did not err in holding that the issuing bank conducts the services based on the contractual relationship with the customers and therefore exempt from VAT.
According to the bank, its role in the card payment transaction involved verification of the customer’s card details, checking the availability of money and transfer of money from the cardholder’s account, and which services were exempt.
The lender added that the interchange fee was not a payment for the provision of services to an acquirer because it arises from the issuing bank’s activities that result in the transfer of money from the cardholder’s bank account for the purchase of goods or services by the account holder.
The court further heard that in a financial transaction, the interchange fees is only earned if the cardholder has sufficient funds to pay for the goods and services.