The Kenya Revenue Authority (KRA) has suffered a significant setback following a ruling by the High Court stating that it cannot impose levies on fees collected by banks from card transactions. The court agreed with Standard Chartered Bank that the KRA cannot collect both the 16% value-added tax (VAT) and excise duty on fees paid by merchants for the use of point-of-sale (POS) machines.
This ruling by Justice David Manjanja marks the second loss for the KRA, as the Tax Appeals Tribunal (TAT) had previously held that banks are only responsible for verifying cardholder information during money transfers. The main issue at stake was whether interchange fees are exempt from VAT and whether the commissioner’s imposition of a shortfall penalty was justified.
Standard Chartered argued that interchange fees are secondary to money transfers and therefore should be exempt from VAT. The bank claimed that the fees charged to merchants are solely for purchasing goods or services and should not be considered as money transfers.
On the other hand, the KRA argued that card users of VISA International Services Association, MasterCard, Inc., and American Express Ltd pay a royalty to the global service network system for facilitating the transaction, thus subjecting it to VAT at the general rate.
Justice Manjanja found that the KRA’s argument relied on a Court of Appeal verdict against ABSA regarding payments made to Visa companies for trademarks and logos. However, he ruled that the appellate court did not specifically address royalty payments.
Regarding excise duty, Standard Chartered argued before the TAT that the receiving bank, which owns the POS machine, is responsible for paying the duty. The remaining fees are then shared among the issuing banks and payment service providers like VISA. The tribunal determined that charging excise duty on fees received by Standard Chartered would amount to double taxation.
The KRA had reviewed Standard Chartered’s financial statements from January 2014 to September 2018 and claimed that the bank owed additional excise duty on fees and commissions earned, totaling Sh505.7 million, including interest and penalties.
As of March 2021, there were 48,355 POS machines in Kenya, facilitating 3,511,453 transactions.