The Kenya Revenue Authority (KRA) just lost a major legal fight over who pays what taxes in the digital payments world. The Tax Appeals Tribunal ruled that payment switch companies provide financial services, not ICT services, which means they’re exempt from the 16% VAT.
This matters because switch companies are the operators behind the scenes that make it possible for your ATM card to work at any bank’s machine or for payments to flow between different financial institutions.
Kenya has three main players in this space: Kenswitch, PesaLink (run by a Kenya Bankers Association subsidiary), and Switchlink Africa.
The case centered on Kenswitch, which had been hit with a tax bill of KES 41.6 million. KRA’s argument was that these companies use software and technology, so their services should be classified as ICT and taxed accordingly.
They pointed out that Kenswitch relies on software from providers like Mauritius-based EFT Corporation and ACI Worldwide.
However, the tribunal disagreed completely. According to Business Daily, the judges found that KRA had made both legal and factual errors. Their reasoning was that what these companies actually do is financial intermediation.
They don’t sell software or supply ATMs. They facilitate the movement of money between financial institutions, which puts them squarely in the category of financial services that are VAT-exempt under the 2013 VAT Act.
The tribunal’s October 24 ruling declared the tax assessment erroneous and unlawful, effectively shutting down any attempt by KRA to collect.
If you want to know why this matters beyond one company’s tax bill, every time you use your card at a store, multiple parties take a cut. The merchant’s bank deducts what’s called a Merchant Discount Rate from the payment.
That amount then gets split between the card companies, the switch operator, and the bank that issued your card. The portion going to the issuing bank is the interchange fee, and that’s what Kenswitch was being taxed on.
The tribunal pointed out an inconsistency in KRA’s argument where they wanted to tax only the switch company when other parties in the transaction chain weren’t being similarly targeted.
This ruling comes at a relevant time because Kenya is moving toward a unified national switch system. The Central Bank has announced plans for a single integrated platform that would let customers transfer money across any bank or mobile money provider instantly and cheaply.
Right now, Kenya’s payment ecosystem is fragmented. Mobile money platforms like M-Pesa and Airtel Money still operate largely separate from traditional banking. Some banks and microfinance institutions still can’t transfer to Airtel Money wallets, which creates obvious gaps for consumers.
Mobile money dominates the market by a wide margin. In 2024, mobile money services processed over KES 8.7 trillion compared to just KES 2.48 trillion for checks. High-value transfers through the Real-Time Gross Payment System hit KES 27.86 trillion in the first eight months of the year.
The Central Bank’s National Payments Strategy hopes to fix the fragmentation by creating true interoperability across the entire financial sector. As a result, the tribunal’s ruling removes a potential tax obstacle for the companies that would help make that vision a reality.
