The recent ruling by the Tax Appeals Tribunal concerning Kenswitch, Kenya’s largest independent payments switch, carries significant implications for the country’s business, finance, and policy landscape. On October 24, the Tribunal delivered a judgment that struck down the Kenya Revenue Authority (KRA)’s demand for KES 321856 in value-added tax (VAT).
The Core of the Ruling
The Tribunal determined that Kenswitch’s primary operations—including routing payments, authorizing ATM withdrawals, and settling card transactions—fall squarely within the definition of financial services. Crucially, in Kenya, financial services are generally exempt from VAT.
The dispute arose because the KRA contended that payment switching was exclusively a technology business. The Authority based its argument on Kenswitch’s use of licensed platforms from technology providers. However, the Tribunal rejected this interpretation. It clarified that the substance of the company’s activities—what the company does—is the determining factor for tax classification, not merely the underlying technology it employs.
Setting a Critical Precedent
This decision establishes a vital tax precedent for payment switches and various financial technology operators throughout Kenya. Competitors in the digital payments space may now rely on this judgment when facing similar VAT assessments from the tax authority. The clarity provided by this ruling is expected to simplify the tax compliance landscape for these entities.
The Kenswitch victory follows a similar case just weeks prior where a prominent fintech firm won its own tax battle. In that instance, the High Court overturned a previous tribunal ruling, declaring the firm’s merchant commissions to be VAT-exempt. The court explicitly emphasized that digital platforms actively involved in handling money function as financial service providers, differentiating them from simple information technology companies.
The Broader Economic Impact
This ruling is poised to redefine how tax authorities view and classify fintech companies. By solidifying the interpretation of digital payments and switching services as financial services, more digital payments players may strategically adopt this classification to secure tax advantages. The potential consequences of this shift include lower operational costs for fintech businesses, which could ultimately translate into more competitive pricing and potentially lower transaction fees for consumers and businesses utilizing these digital payment services.
