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Kenswitch, Kenya’s leading independent payment switch, has secured a major legal victory after the Tax Appeals Tribunal ruled that its transaction switching services qualify as financial services and are therefore exempt from value-added tax (VAT). The decision overturns a KRA tax assessment of KES 41.6 million (US$321,856) and sets a significant precedent for the taxation of digital payment infrastructure in Kenya.
Delivered on October 24, the ruling clarifies that the core functions performed by Kenswitch—authorising ATM withdrawals, routing point-of-sale (POS) transactions, and facilitating settlement between issuing and acquiring banks—fall squarely within the category of VAT-exempt financial services under the VAT Act.
“The tribunal is persuaded that KRA erred both in law and in fact,” the judgment stated. “The appellant’s services clearly fall within the meaning of financial services exempt from VAT under Paragraphs 1(b) and 1(m). The VAT assessment was erroneous and unlawful.”
KRA had insisted that Kenswitch’s revenue constituted ICT services, arguing that the company relies on third-party switching technology licensed from EFT Corporation (Mauritius) and ACI Worldwide. On that basis, it claimed Kenswitch’s interchange commissions were taxable under VAT exclusions relating to ATM software.
However, the tribunal rejected this position, noting that Kenswitch does not supply ATMs or ATM software and emphasising that VAT classification is determined by the nature of the service provided, not the technology underpinning it.
The decision drew support from recent High Court rulings—including the Pesapal and Commercial Bank of Africa cases—which affirmed that payment processors and issuing banks engage in VAT-exempt “dealings with money” when verifying cardholder details, processing electronic payments, and enabling movement of funds between accounts.
The tribunal further criticised inconsistencies in KRA’s approach. Under the Finance Act 2023, payment service providers—including Kenswitch—were brought under the excise duty regime as entities offering “money transfer services.” The tribunal held that KRA could not recognise the activity as a financial service for excise purposes while simultaneously classifying it as ICT for VAT, calling this a violation of the taxpayer’s legitimate expectation of consistent tax treatment.
Another key flaw in KRA’s argument was its attempt to tax Kenswitch’s share of interchange fees while exempting the portions retained by issuing and acquiring banks. The tribunal ruled that interchange represents a single, indivisible financial transaction in which no standalone VAT-taxable supply can be carved out.
The ruling arrives as Kenya prepares for a major transformation in its payments ecosystem. The Central Bank of Kenya (CBK) is developing a national payments switch that will eventually support seamless, real-time transfers across banks and mobile money platforms. As the sector evolves, clarity on tax treatment for switching and payment infrastructure will play a crucial role in pricing, interoperability, and future investment decisions.
Kenswitch’s victory now provides an important reference point for operators navigating Kenya’s increasingly complex digital payments landscape.
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