The Kenya Revenue Authority (KRA) has once again been blocked from charging 16 percent Value Added Tax (VAT) on fees banks receive when consumers pay for goods or services using their debit or credit cards.
It is yet another blow to the taxman's attempt to lay its hands on over Sh287 billion transacted annually by customers who run their cards through the Point of Sale (POS) machines operated by retail outlets such as supermarkets, petrol stations and hotels.
The Tax Appeals Tribunal agreed with Prime Bank that the interchange and merchant service fees it charged did not amount to payment for taxable services but the normal credit processing fee charged for facilitating the transfer of money from a customer’s account.
“The upshot of the foregoing is that the appeal succeeds, and the tribunal accordingly proceeds to make the following Orders…the appeal be and is hereby allowed,” reads the judgement delivered on February 2, 2024, by the tribunal.
Prime Bank moved to the tribunal to appeal KRA’s demand from the small lender for a total of Sh17,361,157 in principal tax, penalties and interest on additional VAT on merchant purchase and interchange commission for the tax periods between January 2017 and December 2019.
Prime Bank rejected the assessment by KRA but the taxman affirmed its decision forcing the bank to appeal to the tribunal.
The KRA had argued that the interchange fees earned by Prime Bank, known as the issuing bank, constituted fees earned for management and professional services subject to VAT.
Some of the services the KRA offered, according to KRA, included facilitating a medium of communication for the issuer, acquirer and merchant. Prime Bank, the issuing bank, also helped the acquiring bank to confirm the creditworthiness of the cardholder, according to the KRA.
Prime Bank explained that it is a member of Visa International (the network) which enables customers with Visa credit, debit, and prepaid cards to make payments for goods and services using these cards. It insisted that it does not own the VISA platform and neither does it maintain it.
“That there would be no justification for the bank to receive payment in managerial, professional, contractual fees or royalty payment in this case,” reads the ruling.
The KRA has had a long-running battle with banks over the taxation of merchant and interchange fees. These banks, from which KRA unsuccessfully demanded VAT on cardholding fees, include Standard Chartered Bank, NIC Group (now part of NCBA Bank), KCB, Commercial Bank of Africa (also part of NCBA), and Bank of Africa Kenya.
To pay using credit, debit, or prepaid cards a customer has to be facilitated by the bank that issued the card, the same way this bank has to facilitate the access of their money through the automated teller machine (ATM) or physically through the counter.
Services in which customers are facilitated by banks to deal with their money are exempted from VAT by an Act of Parliament.
KRA had argued that Prime Bank fees were for facilitating the acquiring bank
Prime Bank, which gave the card, is known as the issuing bank while the bank which gives the retail outlets the POS machines is known as the acquirer bank.
