The Kenya Revenue Authority (KRA) has been barred from collecting 16 percent value-added tax (VAT) from firms that link banks, mobile money operators and payment service providers, marking a major win for Kenya’s three main payment switch companies.
In a ruling on October 24, the Tax Appeals Tribunal faulted the KRA’s move to levy VAT on Kenswitch’s services, finding that the firm provides financial rather than ICT services.
The tribunal noted that these financial services are exempt from the consumption tax.
Kenswitch, which interconnects banks’ automated teller machines (ATMs) and point-of-sale (POS) networks, had challenged a tax demand of Sh41.6 million on the portion of interchange fees it received for switching services. The taxman argued that such services were ICT-based and therefore taxable.
However, the tribunal sided with Kenswitch, declaring that the company’s switching role is integral to the financial system and squarely within the VAT exemption.
“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.”
It added that the VAT assessment of Sh41,637,843 issued on July 9 and confirmed on October 4, 2024, was “erroneous and unlawful”. Besides Kenswitch, other licensed switch companies include PesaLink (operated by Integrated Payments Services Ltd—IPSL), a subsidiary of the Kenya Bankers Association.
Switchlink Africa, which supports fintechs and payment processors, is the third firm offering payment switch services.
A switch acts as the “traffic controller” of Kenya’s digital payments highway, directing money and data between banks, mobile money operators and card networks.
These firms are licensed by the Central Bank of Kenya (CBK) under the National Payment System Act 2022, and related regulations.
The KRA had relied on the Banking Act to argue that Kenswitch was not a “financial institution” and that its commissions amounted to software-related income subject to VAT.
It claimed the company used third-party software supplied through Mauritius-based EFT Corporation and global provider ACI Worldwide, and therefore its services were excluded from VAT exemption as ICT.
The tribunal dismissed this reasoning, noting that Kenswitch neither supplies ATMs nor sells software and that its core function is financial intermediation rather than ICT services.
In a card transaction, several parties are involved: the cardholder, the issuing bank, the acquiring (receiving) bank, a merchant and the switch company. The acquiring bank deducts an amount from the money due to the merchant for the transaction, known as a Merchant Discount Rate (MDR).
The acquiring bank pays the balance to the merchant and then apportions the MDR between the card companies, the switch payment service firm and the issuing bank. The money paid to the issuing bank is the interchange fee.
The tribunal faulted KRA for seeking to charge VAT on only one of these parties while leaving the other two unaffected.
The stakes around switching are set to rise as the country moves toward a national switch that will enable customers to move money across any mobile provider or banking institution promptly and at reduced cost.
The CBK has announced plans to develop a “single integrated solution with multiple functionalities (national switch).” While mobile money already allows instant transfers between Kenyan banks and digital wallets, coverage often depends on bilateral agreements, leaving gaps.
As part of its National Payments Strategy, the CBK wants to introduce a financial sector-wide interoperability system to allow users to send and receive money instantly, regardless of the bank or financial institution they use.
Kenya’s payments ecosystem remains fragmented, with mobile money platforms like M-Pesa and Airtel Money operating separately from other financial institutions; for example, some banks and microfinance institutions still do not allow transfers to Airtel Money wallets.
Mobile money continues to dominate Kenya’s payments market. In 2024, mobile money services processed over Sh8.7 trillion, outpacing traditional methods like cheques (Sh2.48 trillion). High-value transfers through the Real-Time Gross Payment System stood at Sh27.86 trillion in the eight months to August.
