Executive summary

In Kenswitch Limited v. Commissioner of Domestic Taxes (Income Tax Appeal E1336 of 2024) [2025] the Tax Appeal Tribunal (TAT), on 24 October 2025, ruled in favor of Kenswitch (the Appellant) affirming that its switching services qualify to be financial services, and hence are exempt from value-added tax (VAT). The Commissioner (Respondent) had imposed a VAT assessment on the Appellant's switch income on the basis that it was providing software services rather than financial services, as the Appellant asserted.

Specified financial services are exempt from VAT in Kenya. The Respondent's argument was premised on the assertion that the Appellant's services were akin to software, and that only financial institutions licensed under the Banking Act could provide a financial service. In its decision, the Tribunal rejected the Respondent's attempt to split the financial transaction facilitated by the Appellant into financial and nonfinancial components, affirming that the role played by each of the parties to the transaction was functionally integrated, and each party performed a specific role necessary for the completion of a single financial service.

Background

Kenswitch was a provider of switching services that entailed facilitation of the transfer, receipt and settlement of funds between banks and customers in card transactions at automated teller machine (ATM) and point-of-service (POS) terminals. The Appellant had classified its switching services as financial services exempt from VAT in accordance with paragraphs 1(b) and 1(m) of Part II of the First Schedule to the VAT Act, 2013.

The Commissioner, on the other hand, took the view that the Appellant was operating a switching platform using third-party software to route financial messages between issuing and acquiring banks and that these activities constituted information and communications technology (ICT)/software-based services, excluded from VAT exemption under Paragraph 1(d) of Part II of the First Schedule to the VAT Act, 2013. Therefore, the Respondent assessed Kenswitch for VAT on the switch income. The Appellant appealed to the TAT.

Appellant's case

The Appellant argued that its services were inherently financial in nature. It advanced that as a payment service provider (PSP) licensed under the National Payment System Act, 2011, its role in the transaction was not to sell or license ATM software (as contemplated under the proviso to Paragraph 1(d) of Part II of the First Schedule to the VAT Act, 2013) but rather, to facilitate the conclusion of financial services in exchange for a commission from the transaction fees paid by the customer. Furthermore, the Appellant argued, the switch fees were intricately similar to interchange fees, which have long been determined to be financial services, hence exempt from VAT.

Additionally, the Appellant highlighted that it was already complying with excise duty obligations pursuant to Paragraph 3, Part II of the First Schedule to the Excise Duty Act, which imposes excise duty on fees charged for money-transfer services by PSPs. It was therefore unreasonable for the Respondent to regard its services as financial services within the context of the Excise Duty Act, but not financial services in relation to the VAT Act, the Appellant asserted.

Respondent's arguments

The Respondent on the other hand contended that the Appellant's principal business was operating a switching platform using third-party software to route financial messages between issuing and acquiring banks and that such activities constituted ICT/software-based services. These services, according to the Respondent, were not exempt from VAT in accordance with Paragraph 1(d) of Part II of the First Schedule to the VAT Act, 2013, which excludes "the supply of automated teller machines and the software to run it" from the VAT exemption. The Respondent stated that although the Appellant did not own the ATMs, it provided software to run them and, hence, the exclusion applied to the case. Furthermore, the Respondent argued that the Appellant did not qualify to supply a financial service as it was not licensed as a financial institution under the Banking Act.

Accordingly, the Respondent took the view that the Appellant's switching services were software services, rather than financial services. The import of this was that the services did not qualify for the VAT exemption under the First Schedule to the VAT Act and, therefore, the Appellant was liable for VAT on its switch income.

Tribunal's decision

The Tribunal analyzed the underlying statutory provisions under the VAT Act and relevant case law, including Pesapal Limited v Commissioner of Domestic Taxes [2025] KEHC 12284 (KLR), and made the following findings:

• The VAT Act did not specifically prescribe criteria for classifying services as financial services. Moreover, the Act did not restrict the classification of financial services based on the technology or platform used, or the supplier's status or regulatory licensing.
• Courts have held that interchange fees are exempt from VAT by virtue of paragraph 1(b); therefore the Appellant could not be required to split the transaction because the Appellant's transaction was similar to interchange transactions.
• The relationship between Kenswitch, the banks and cardholders was functionally integrated and no standalone taxable supply could arise between Kenswitch and the banks independent of that financial service.
• The Appellant's registration and remittance of excise duty conclusively established that it provided financial services as contemplated under both Excise Duty Act, 2015 and Paragraph 1(b) and 1(m) of Part II of the First Schedule to the Vat Act, 2013.

(For more on the High Court's decision in Pesapal Ltd., see EY Global Tax Alert, Kenya High Court rules commissions received by payment service provider was VAT exempt, dated 21 November 2025.)

The Tribunal therefore allowed the appeal and set aside the VAT assessment.

Implications for the fintech sector

This decision offers insight on VAT compliance requirements for the fintech sector, particularly for PSPs operating in Kenya. It clarifies that digital facilitation of payments is akin to financial services, which affirms its exemption from VAT. This offers enhanced clarity to stakeholders in Kenya's fast growing fintech sector addressing longstanding tax concerns about digital payment services.