KRA loses Sh116 million tax case to Commercial Bank of Africa

Commercial Bank of Africa. [File, Standard] The Kenya Revenue Authority (KRA) has lost a Sh116 million case to the Commercial Bank of Africa (CBA). Justice Alfred Mabeya ruled that KRA was wrong to demand tax on fees paid by bank customers while transacting. "The court finds that the assessment by the appellant (KRA) was wrong in charging VAT on interchange fee. Consequently, the court finds no merit in the appeal and dismisses the same with costs," ruled Justice Mabeya. On June 12, 2018, KRA demanded Sh304 million following an audit of CBA books for 2013. The lender however objected to the assessment. Subsequently, KRA lowered the amount to Sh116 million. It however claimed Sh16 million as penalty in addition to Sh20 million interest. Aggrieved, CBA moved to the Tax Appeals Tribunal arguing that interchange fees are not payment for service. Instead, the bank said, the amount paid by a card holder is a cost balance mechanism, which the issuing bank incur when issuing cards. The visa payment system is what economists call a 'two sided' market because it consists of two distinct groups - cardholders and merchants that provide each other with benefits. Cardholders want a payment card they can use at many merchants as possible. Merchants want to accept a payment card that is carried by many customers as possible. Banks issue their customers with credit, debit or pre-paid cards which they use to pay for services or buy goods. Those banks that issue cards to their customers are known as Issuing Banks. In the card companies' network there is the merchant. The card holder presents the card to the merchant or supermarket for a purchase, the merchant swipes the card on the Point of Sale (POS) machines supplied by the acquiring bank. The network switches the transaction from the acquiring bank to the issuing bank. The issuing bank on confirming the card holder has sufficient funds to satisfy the payment or if it is a credit card on confirming that the purchase is within the card holder's credit limit sends authorization, this is a commitment by the issuing bank to settle the merchant's funds. Once that authorization is received by the acquiring bank the acquiring bank sends it to the merchant. The merchant generates a transaction receipt, a merchant's copy and a card holder which is signed by the card holder. The card holder then takes possession of the purchased goods. It is this transaction that KRA sought tax, arguing that it amounted to a service, but the judge rejected its argument. In the case, the lender argued that its role in the card payment transaction involves verification of the customer's card details, checking availability of money and transfer of money from the card holder's account. CBA explained that the interchange fees is only earned if the cardholder has sufficient funds to pay for the goods and services. It asserted that this transaction is exempt from tax. The tribunal agreed with CBA. However, KRA moved to the High Court. Justice Majanja said that interchange fees cannot be said to be payment of services to CBA. "Since interchange fee is earned from the process of operating the customer's account by conducting verification of the card holder's details, the availability of funds in the account of the card holder before transferring funds for the transaction, the Court finds that transaction is exempted from VAT," the judge ruled.

KRA loses Sh116 million tax case to Commercial Bank of Africa

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KRA loses Sh116 million tax case to Commercial Bank of Africa

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