Setback to KRA as the court blocks the collection of Interchange and merchant service fees collected during debit and credit card Transactions.

The Kenya Revenue Authority's (KRA) recent attempt to impose a 16 percent Value Added Tax (VAT) on interchange and merchant service fees collected by banks during debit or credit card transactions has faced a significant legal setback. The Tax Appeals Tribunal ruled in favor of Prime Bank, blocking the KRA from enforcing the tax on the bank. This decision affects Prime Bank and sets a precedent that could influence the outcome of similar cases involving other financial institutions.

Prime Bank's appeal to the Tax Appeals Tribunal was prompted by KRA's demand for Sh17,361,157 in taxes, penalties, and interest between January 2017 and December 2019. The tax authority argued that the interchange fees collected by Prime Bank for facilitating transactions between cardholders and merchants constituted fees for management and professional services and, thus should be taxed under VAT. However, Prime Bank contended that these fees were part of the normal processing charges necessary for executing payment transactions and not for taxable services.

In its ruling, the tribunal highlighted several key points that supported Prime Bank's argument. Firstly, it noted that Prime Bank, as a member of Visa International, provides a payment facilitation service integral to the operation of credit, debit, and prepaid card transactions. The bank's role in this process, including confirming the creditworthiness of the cardholder, is part of its basic banking services and not an additional professional or management service that warrants a VAT.

Furthermore, the tribunal emphasized that Prime Bank does not own or maintain the Visa platform; instead, it participates in a larger network that enables card payments. This participation, the tribunal reasoned, does not equate to the provision of taxable services but is merely a component of the broader banking services exempt from VAT by an Act of Parliament.

Conclusion

The Tax Appeals Tribunal's decision in Favor of Prime Bank marks a critical juncture in the ongoing dispute between the KRA and banks over the taxation of fees related to debit and credit card transactions. This ruling not only relieves Prime Bank of the immediate financial burden but also establishes a legal precedent that could influence future disputes between the KRA and other financial institutions over similar issues.


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