The Supreme Court has overturned a decision that allowed the Kenya Revenue Authority (KRA) to tax e-commerce card payments, saying the taxman exceeded legal authority by subjecting credit/debit card transactions to withholding tax.
This unanimous decision ends a 13-year legal battle and shields banks from billions of shillings in tax exposure, effectively forcing KRA to rethink how it approaches taxation in a rapidly digitising payments ecosystem.
In a precedent-setting verdict, the apex court set aside the Court of Appeal’s 2020 finding that ABSA Bank Kenya’s payments to global card companies-Visa, Mastercard, and American Express-amounted to royalties, and that interchange fees paid to local issuing banks qualified as management or professional fees.
Both classifications had attracted withholding tax demands since 2011.
Chief Justice Martha Koome-led bench affirmed KRA violated constitutional Article 210’s requirement that taxes must be imposed strictly under legislation.
“A tax cannot be imposed in a vacuum. Taxpayers deserve specific clarity on their obligations,” the court emphasised, criticising KRA’s reliance on conjecture rather than statutory definitions.
Article 210(1) of the Constitution provides that ‘no tax or licensing fee may be imposed, waived or varied except as provided by legislation’.
The dispute originated from KRA’s 2011 audit of ABSA (then Barclays Bank Kenya), demanding withholding tax on two streams: network fees paid to the global card firms and interchange fees shared with issuing banks.
While the High Court quashed these assessments in May 2015, the appellate court reinstated them through the November 2020 verdict, prompting ABSA’s Supreme Court appeal, which was certified as constitutionally significant.
Central to the case was whether card transactions fit the Income Tax Act’s definitions of “royalty” or “management/professional fees.”
The court rejected KRA’s expansive interpretation, insisting legal definitions should not be stretched to fit modern payment systems.
“The taxing authority cannot exercise powers based on generalized opinion,” the judges ruled, noting explicit contracts showed Mastercard and American Express did not charge royalties, while Visa’s agreement was silent.
“Justice is not served by disregarding clear contractual terms,” they added.
Since the gist of the dispute was whether card payment processes fall within the definitions of ‘royalty’ or ‘management and professional fees’ under Sections 2 and 35 of the Income Tax Act, the Supreme Court said the definitions must be applied as written, without stretching them to fit modern commercial arrangements.
On interchange fees-small percentages retained by issuing banks per successful transaction-the court dismissed KRA’s characterisation as payment for services.
Instead, it ruled these constitute revenue components within merchant service fees, not compensation for managerial/technical services.
“This composite financial process cannot be forced into tax categories Parliament never envisioned,” the judgment stated, underscoring legislative intent’s primacy in tax matters.
The verdict shields banks from billions in potential liabilities while compelling KRA to recalibrate its approach to digital payment taxation.
Banking sector players had warned that KRA’s interpretation would have increased transaction costs, ultimately passed to consumers.
Kenya Bankers Association, which participated in the court case as an interested party, argued that sustaining the tax would have disincentivised cashless payments-counter to Kenya’s financial inclusion goals.
The Association held that KRA’s approach to card-related payments threatened Kenya’s cash-lite ambitions.
Industries heavily reliant on card payments-including tourism, retail, hospitality, and transport-stood to bear the brunt of such cost increases.
The Supreme Court appeared alive to those concerns, noting the importance of certainty and predictability in taxation, especially in sectors that support the national digital payments agenda.
“Certainty of law remains fundamental to rule of law, including tax law,” the court observed, signaling judicial reluctance to uphold creative tax interpretations lacking legislative grounding.
The court ordered parties to bear their own costs, closing a marathon litigation that began when Kenya’s digital payments ecosystem was nascent.
Today, with mobile money processing billions daily and card transactions rebounding post-covid19 pandemic, the verdict provides much-needed clarity for financial sector players.
“We are of the opinion that this litigation is not one suitable for visiting any of the parties with costs, given the fact that, each of them has participated in a protracted dispute that has resulted in a final clarification of the law, which should go a long way in serving the Country’s revenue collection, financial and banking system, and the tax paying public,” said the judges.