KRA Loses VAT Battle Against Payment Switch Firms, Raising Bigger Questions for Kenya’s Tax Regime

Kenya’s payments infrastructure has always worked behind the scenes — a lattice of connections between banks, card networks, and mobile money platforms that keep the economy moving. But a new decision by the Tax Appeals Tribunal has pulled this network into the policy spotlight. On October 24, the tribunal ruled that the Kenya Revenue Authority (KRA) cannot collect the standard 16 percent VAT from firms that link banks, mobile money operators, and payment service providers.

At the center of the case was Kenswitch, the company that connects ATMs and point-of-sale systems across dozens of Kenyan banks. The ruling classified Kenswitch’s services not as ICT-based operations, but as part of the financial system itself — and therefore exempt from VAT. The decision reverses KRA’s earlier attempt to tax interchange fees, an effort that would have added millions to the firm’s liabilities.

The fine print of financial infrastructure

Payment switch firms play an unglamorous but crucial role. They act as the “traffic controllers” of digital transactions, moving data and money between issuers, acquirers, and card networks. Every time a customer uses a debit card, there’s an invisible relay among at least four parties: the cardholder, the issuing bank, the acquiring bank, and the switch that links them.

Kenswitch earns a share of what’s called the Merchant Discount Rate — the small fraction a merchant pays on every card transaction. That rate is divided among the switch, the banks, and card companies. KRA’s case hinged on this: it claimed Kenswitch’s earnings came from software-related services and thus fell within taxable ICT activities.

The tribunal disagreed. It found that Kenswitch does not sell or license software but facilitates financial flows, a function integral to banking operations. By treating the company’s work as a financial service rather than a digital one, the tribunal essentially reaffirmed that financial intermediation, even in its digital form, remains part of the VAT-exempt financial sector.

What the verdict means for the payments ecosystem

The ruling sets a precedent for two other licensed switch operators — PesaLink, run by the Kenya Bankers Association’s subsidiary Integrated Payments Services Ltd (IPSL), and Switchlink Africa, which serves fintechs and payment processors. Collectively, they form the core of Kenya’s domestic payments network.

For them, the decision offers both relief and clarity. Tax uncertainty had hovered over the industry for years, with KRA pursuing digital intermediaries under the banner of ICT taxation. This ruling draws a sharper line between financial and technological services, though the distinction may continue to blur as more financial operations migrate to digital infrastructure.

There’s also a broader institutional tension at play. KRA has sought to widen the tax base by classifying emerging service models under VAT, while the Central Bank of Kenya (CBK) has taken the opposite direction — encouraging interoperability, innovation, and inclusion. The tribunal’s interpretation aligns more closely with CBK’s view of payment switches as part of the country’s financial plumbing rather than as external tech vendors.

The coming national switch and the stakes ahead

Beyond Kenswitch’s courtroom win, Kenya’s broader payments landscape is approaching a pivotal redesign. The CBK plans to introduce a national switch — a unified payments infrastructure that would let users transfer money seamlessly between any bank, wallet, or network. It’s an idea that has circulated for years but is now gaining urgency as transactions grow more fragmented across platforms.

In 2024, mobile money services processed over Sh8.7 trillion, more than triple the value moved through cheques. Yet interoperability gaps remain. Transfers between certain banks and mobile wallets, especially those outside M-Pesa’s ecosystem, still fail or require intermediaries. The national switch aims to close those gaps and level the playing field.

The Kenswitch ruling could shape how that system evolves. If financial switching is legally recognized as a VAT-exempt service, future infrastructure providers — including the national switch operator — may inherit similar treatment. That has implications for pricing, competition, and cross-platform transaction costs.

Tension between innovation and taxation

KRA’s push to treat switching as an ICT function reveals the tax authority’s struggle to keep pace with financial technology’s hybrid nature. A payment transaction today involves both data transfer and money movement. In KRA’s eyes, the digital rails themselves are taxable software infrastructure. For the tribunal, the rails are inseparable from the financial act they enable.

This debate isn’t limited to Kenya. Across Africa, regulators face similar questions: when does a financial service stop being financial and start being digital? The answer often determines who gets taxed and how innovation is financed. As more African economies digitize their payment systems, the legal boundary between financial and technological services will become a battleground.

For now, the tribunal’s decision gives Kenya’s switch firms breathing room. But it also leaves open how the government will reconcile its need for revenue with the CBK’s push for integration.

Beyond taxation: the financial layer we rarely see

Most users never think about what happens after they tap “Pay.” But the pipes that connect mobile wallets and bank accounts have become one of the most contested spaces in Kenya’s economy. Whoever controls those pipes controls transaction flow, data, and access — which means influence over how digital finance evolves.

The VAT exemption reinforces that these firms aren’t just tech middlemen; they’re part of the financial architecture itself. Their work underpins the liquidity and interoperability that mobile money and banking now depend on. As Kenya builds its next-generation payments network, the tribunal’s ruling may determine not only who pays taxes, but also who builds the rails of the digital economy.

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