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April 4, 2023

Kenya High Court upholds that interchange fees are financial services exempt from VAT

  • Affirming a decision of the Tax Appeals Tribunal, the High Court held that interchange fees an issuing bank earned from acquiring banks on card transactions are exempt from value added tax (VAT).
  • Based on this decision, interchange fees paid to an issuer under facts similar to those at issue here should not be subject to VAT.

Executive summary

In Commissioner of Domestic Taxes v. Bank of Africa Limited (Civil Appeal E127 of 2020), the Commissioner of Domestic taxes (Appellant or Commissioner) sought to charge VAT on interchange fees earned by the Bank of Africa Limited (Respondent) in its capacity as an issuing bank. The Respondent maintained that the card transactions giving rise to interchange fees qualify as money-transfer services, which encompass financial services that are VAT-exempt under paragraph 1(a)(b) Part II of the First Schedule to the VAT Act, 2013.

The High Court agreed with the Tax Appeals Tribunal (TAT) decision that VAT is not applicable on interchange fees.

Detailed discussion


On 12 June 2018, the Appellant issued a tax assessment to the Respondent totaling KES87,729,030 for undeclared VAT on payments made to card companies and for marketing and management services offered to both the merchants and acquiring banks for the period January 2013 to December 2017. The Respondent objected the assessment and the Commissioner issued an objection decision dated 5 September 2018, reducing the assessed VAT on interchange fees to KES15,158,378.

The TAT held that interchange fees are not subject to VAT, and the Commissioner appealed to the High Court.

Key positions of the parties

The Commissioner asserted that that interchange fees fall under the definition of management and professional fees and thus are subject to VAT. The Commissioner relied on Commissioner of Domestic Taxes v Barclays Bank of Kenya Ltd [2020] eKLR, which held that payments by a bank in its capacity as an acquirer to the issuer satisfies the definition of management and professional fees as defined in section 2 of the Income Tax Act, Cap 470.

The Respondent distinguished Barclays by noting that the issue in that case was whether there was "a supply made by the issuing bank to the acquiring bank for purposes of withholding tax." The issue in this case is "not whether there was a supply, but whether the supply was exempt from VAT by virtue of Paragraph 1(b) of Part II of the First Schedule to the Act," the opinion states.

The Appellant further contended that although the service the issuer bank provided is ancillary to financial services, it is not expressly exempted under Part II of the First Schedule to the VAT Act. The fact that a service is essential for completing an exempt primary transaction, does not warrant the exemption of the ancillary service from VAT, the Commissioner asserted.

According to the Respondent, the verification services that the issuer offered to the cardholder amount to money-transfer services that are exempt from VAT because the service cannot exist without transfer of money from bank to bank, as the transaction is conducted by the customer at the point of sale. The Respondent asserted that the cardholder is the consumer of the service and, therefore, interchange fees arise in the course of providing this service.

High Court determination

The issue before the High Court was whether interchange fees paid to the issuer are subject to VAT.

At the High Court, it was discoursed that since in considering the Commissioner's argument that just because the service rendered was essential to completing an exempt primary transaction, the service is not necessarily also exempt, the Court determined that it is critical to focus on the provisions of the law under Paragraph 1(b) and (d), Part II of the First Schedule the of the VAT Act which exempts:

1. The following financial services-

(a) … … … … … … .

(b) the issue, transfer, receipt or any other dealing with money, including money transfer services and accepting over the counter payments of household bills, but excluding the services of carriage of cash, restocking cash machines, sorting or counting of money.

(c) … … … … .

(d) automated teller machine transactions, excluding the supply of automated machines and the software to run it.

The High Court averred that the use of the word "including" in Paragraph 1(b) implied that the list of exempted financial services was inconclusive, thus creating ambiguity, and where there is an ambiguity in the tax laws, the laws should be interpreted in the favor of the taxpayer. Therefore, the Court upheld the TAT decision that the Respondent rendered a financial service exempt from VAT under Paragraph 1 Part II of the First Schedule, VAT Act 2013.


Based on the High Court's decision, interchange fees paid to an issuer under facts similar to those at issue here should not be subject to VAT.


Contact Information
For additional information concerning this Alert, please contact:
Ernst & Young (Kenya), Nairobi
   • Francis Kamau (
   • Christopher Kirathe (
   • Hadijah Nannyomo (
   • Robert Maina (
   • Boaz Musina (
   • Denis Maina (
   • Elsie Kimeli (
Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris
   • Bruno Messerschmitt (
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
   • Kwasi Owiredu (
Ernst & Young LLP (United States), Pan African Tax Desk, New York
   • Brigitte Keirby-Smith (
   • Dele A. Olagun-Samuel (

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor


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