Nairobi Commercial Court has ruled that interchange fees should not be taxed saying that it does not constitute a service. Justice Mary Kasango made the ruling in a case where the Kenya Revenue Authority was demanding tax arrears to the tune of Ksh130 million from Absa Bank Kenya.
The interchange fees are charged by a bank to facilitate the transfer of money from a cardholder to a merchant say a supermarket. KRA argued that Absa Bank, previously referred to as Barclays Bank Kenya, to pay the tax arrears for the interchange fee saying that it falls under taxable services.
In its submission, Absa said that it is a member of a network set up by credit card providers the likes of Visa, Master Card, and American Express that charge interchange fees. The card companies provide the payment system that enables Absa customers to use the credit cards, debit cards, and travellers’ cheque.
Absa pays transaction fees to access and use the network operated by the card companies such as switching fees, clearing and settlement fees.
Justice Kasango said that in this case, the interchange fee by the issuing bank is not for any service rendered by the issuing bank to the acquiring bank. The cardholder verification process performed by the issuing bank is to confirm if the customer’s account has sufficient funds to make the purchase. Therefore, the bank is simply verifying the cardholder’s information.
Therefore, there was no need to determine whether the service is exempt from the charge of VAT because no service was offered by the issuing bank to Barclays bank. The ruling is a reprieve for many issuing banks that receive interchange fees for card transactions.
The ruling concurs with the Tax Appeals Tribunal determination that interchange fees received by issuing banks are not subject to VAT in April this year.
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