[2024] KETAT 327 (KLR)

Absa Bank Kenya PLC v Commissioner of Domestic Taxes (Appeal 760 of 2022) [2024] KETAT 327 (KLR) (Civ) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 327 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 760 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

February 23, 2024

Between

Absa Bank Kenya Plc

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya and is licensed and regulated by the Central Bank of Kenya. Its principal activity is the provision of financial services as provided for in the Banking Act (Cap 488) the Central Bank of Kenya Act (Cap 491) and the Regulations emanating from the two statutes.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On 16th March, 2022, the Respondent issued a tax assessment in which it assessed additional Value Added Tax (hereinafter ‘V.A.T’) in respect of the period February 2017 to December, 2020 as having amounted to Kshs. 1,121,785,619. 00 inclusive of penalties and interest. The assessment was on fees earned out of card payment transactions.

4. On 14th April, 2022, the Appellant objected to the entire assessment. The Respondent, reviewed the Appellant’s objection and confirmed the entire assessment of Kshs. Kshs. 1,121,785,619. 00 inclusive of penalties and interest through its objection decision on 10th June, 2022.

5. Aggrieved by the Respondent's objection decision, the Appellant lodged its Notice of Appeal on 8th July, 2022.

The Appeal 6. The Appeal as contained in the Memorandum of Appeal dated and filed on 21st July, 2022 is premised on the following grounds:i.That the Respondent erred in both fact and law in concluding that the entire Merchant Service Commission ("the MSC") is income of the Appellant alone;ii.That the Respondent erred in both fact and law by failing to take into account the fact that the MSC is an aggregate of fees charged by the various players in the card payment transaction;iii.That the Respondent erred in concluding that the services in card payment transactions are subject to VAT;iv.That the Respondent erred in law and in fact in confirming an overstated and excessive assessment;v.That the Respondent's demand is unreasonable in the circumstances and violates the Appellant's right to fair administrative action provided under Article 47 of the Constitution of Kenya, 2010 (hereinafter ‘the Constitution’).

The Appellant’s Case 7. The Appellant has set out its case in the Statement of Facts dated and filed on 21st July, 2022 in which it stated as hereunder.

8. The assessment is in relation to VAT on fees earned by the various players in a card payment transaction whilst the Respondent averred in the objection decision that it earned the entire Merchant Service Commission ("MSC") income, and that the MSC is chargeable to VAT at 16%. It therefore outlined a background on card payment transactions before proceeding to analyse its grounds of appeal.

Background of card payment transactions 9. The Appellant stated that the entire assessment arose out of payments earned by the various players in a card payment transaction. It was therefore important to clarify the parties involved in a card payment transaction the role played by each party and the income each earned as well as the events that took place during a card payment transaction.

10. The Appellant indicated that in a card payment transaction, there are three principal parties involved, namely:a.The Acquirer (hereinafter "acquirer”) – this is a bank that signs up merchants, provides them with Point of Sale ("POS") equipment, commonly referred to as PDQ machines, which are used for processing credit or debit card payments and ensures the merchants receive payments for goods and services sold. The acquirer establishes and maintains the relationship with the merchant through the Merchant Service Agreement ("MSA") which sets out the terms of the services rendered.b.The issuer bank (hereinafter "issuer") - this is any bank that issues credit and debit cards to its customers ("cardholders"). The issuer, issues VISA, American Express or MasterCard branded cards to its customers depending on which card company the issuer is affiliated to and facilitates the card transaction by authorizing the sale and ensuring payments are made on behalf of its customers; andc.The card companies, for example VISA, MasterCard or American Express (hereinafter "Card Companies") – Card Companies own and operate the payment processing platform that facilitate transfer of instructions and the flow of payments between the issuer and the acquirer. In summary, they provide clearing and settlement services for payments which is a vital role to the card payment transaction and similar to how the Central Bank of Kenya acts as a clearing house for Kenyan banks through the Kenya Electronic Payment and Settlement System.

11. That the three parties are paid by the merchant a payment that is collectively referred to as the MSC.

12. The Appellant stated that cardholder goes to a merchant, for example, a supermarket and upon using the card issued to him by the issuer to pay for goods or services he purchases from the merchant (‘Purchase transaction’). The merchant swipes the card on a PDQ machine supplied to it by the acquirer which has been configured to accept the relevant card.

13. That the events that take place during a card payment transaction are as follows:a.Authorisation: this is the first step during a card payment transaction during which the process of approving or declining a payment transaction before a purchase is finalized. After a merchant swipes the card, the payment instruction is electronically submitted to the issuer requesting authorization for the payment through the relevant card platform. Once payment is authorized, the merchant's sale is processed. If there are no funds in a cardholder’s bank account with the issuer, the issuer does not authorize the payment request and, accordingly, the card payment is declined. In that case, no income accrues to either the issuer, acquirer or Card Companies. If the cardholder has sufficient funds or a credit limit with its issuer, the payment is finalized and, accordingly, the merchant will allow the cardholder to take the goods purchased.b.Batching: during this step, the merchant collates all the day's authorized card sales and transmits the information to the acquirer.c.Clearing: This is the third step during which the acquirer prepares a settlement and clearing payment file which it transmits to the Card Company for further processing. The Card Company in turn routes the settlement and clearing file to the respective issuer(s) and calculates the settlement obligation of the issuers and the amount due to the acquirer net of certain fees and obligations.d.Funding/Settlement: The issuer subtracts its interchange fee and remits the remaining amount to the acquirer. After receiving payment of the settlement amount from the issuer, less the interchange fee and assessment fees earned by card companies, the acquirer subtracts its acquirer fee and remits the balance to the merchant.

14. From the process set out in the Statement of Facts, the Appellant outlined the fact that the composite MSC is made up of three distinct and separate components, namely, fees charged and earned by the Issuer [interchange fees]; fees charged and earned by the Card Companies or schemes for settlement and clearing services [aassessment or transaction fees] and fees charged by the acquirer [acquirer fees].

15. That the three fees together constitute the MSC, which is charged to the merchant. The fees earned by each party represent their share of revenue for their distinct roles in the card payment transaction; and in a card payment transaction, the primary service is the transfer of money, and this is the only service from which the parties can receive any payment. This service is provided by the various players in the transaction to the Merchant and to the cardholder.

16. The Apellant stated that the facts behind card payment transactions were uncontested and had been the subject of litigation between it and the Respondent in various courts. At Paragraph 22 of this Tribunal's decision in Tax Appeal No. 137 of 2016, the Tribunal stated as follows in relation to the facts:“We note from the parties' concurrence that the MSC is an aggregate of three separate and independent fees paid to three parties involved in the approval and remittance of payments due to a merchant for goods or services purchased."

17. That in a typical card transaction, it would have been playing the role of either an issuer or an acquirer. In the case of a merchant who has an account and MSA and a cardholder who holds its debit/credit card, it would in such an instance be both the issuer and the acquirer.

18. The Appellant averred that in the assessment and the objection decision, the Respondent wrongly contended that it supplied merchant services and the entire MSC accrued to it. The Respondent further contended that the entire MSC is a taxable service subject to VAT at the standard rate. That these contentions were wrong. The Appellant therefore analysed its own grounds of Appeal as hereinafter.

19. In respect to Grounds (i) and (ii) of the Appeal, the Appellant stated that the Respondent erroneously assessed VAT on the entire MSC as being fees charged by the acquirer. More particularly, it stated that the Respondent's assessment was factually incorrect and had no legal basis because as held by the Tribunal in Tax Appeal 137 of 2016, the card payment transaction was made up of four steps which translated into vital roles played by the three parties. It was therefore unreasonable and factually incorrect for the Respondent to conclude that the entire MSC which constituted three separate fees to be earned by the three parties in the card payment transaction would be its income in its capacity as the acquirer.

20. That the Respondent's assessment was made pursuant to Section 5(1) of the VAT Act, which provides as follows:“(1)A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on –(a)a taxable supply made by a registered person in Kenya;(b)the importation of taxable goods; and(c)a supply of imported taxable services.”

21. That in its capacity as the acquirer, it's income could only be the acquirer fee and not the entire MSC as the Respondent contended. That the Respondent was fully aware of this fact and has attempted to create the flawed computations annexed to the assessment.

22. Accordingly, that if the services offered by the acquirer had been subject to VAT, it would only be required to charge VAT on the supply it had made, which is the acquirer fee income and certainly not the entire MSC.

23. The Appellant stated that the interchange and transaction fees subjected to VAT in the Respondent's tax demand were fees earned by separate institutions. Section 5 of the VAT Act contemplates a scenario where a person accounts for VAT on a supply/income made by the person. Demanding VAT on the entire MSC from the acquirer for this income is not provided for nor contemplated in Section 5 of the VAT Act. The Respondent therefore had no legal basis for demanding tax from it on the interchange and transaction fees from it in its capacity as an acquirer.

24. That the expectation by the Respondent that it ought to charge VAT on the services provided by other entities was unreasonable and not provided for in law as a VAT registered vendor is only liable to account for VAT on supplies made or services rendered by it.

25. That in Tax Appeal No. 137 of 2016, the Tribunal categorically stated that in card payment transactions, each party had to bear its own tax burden. That the Tribunal it specifically stated that:-“It would be prudent for the Tribunal to reiterate our previous position, that the MSC is an aggregate of three fees accruing to three distinct and separate parties in a card transaction. Each of these parties should be made to bear its own tax burden as opposed to hanging one party at the expense of the others. The acquirer fees accrue to the Appellant herein, for which the Appellant has accounted for in full for the period under assessment. It would therefore, in our view, be unfair for the Respondent to hold the Appellant liable for the entire merchant service commission.”

26. The Appellant prayed the Tribunal would find that on the basis of quantum, the Respondent's assessment must be restricted only to the acquirer fees and not the entire MSC as the Respondent has purported to.

27. That the Respondent erred in concluding that the gross MSC income accrues to the acquirer by attempting to demand VAT on the aggregated MSC from the acquirer. This was prima facie wrong as it was uncontested that the provision of card payment services required collaboration between five parties. It is even clear from the assessment that the Respondent is cognizant of this fact, where at Paragraph 2. 1.1, it has set out the various parties to the card payment transaction, and their distinct roles for which they earn the various fees.

28. That in raising the demand, the Respondent chose to depart from its own understanding of the card payment ecosystem and wished to pursue a false narrative that for the purposes of assessing VAT, it was only the interaction between the acquirer and merchant that must be considered.

29. That as elaborated above, the MSC had three components namely the interchange fees charged by the issuer; the transaction/ assessment fees charged by the card companies or schemes for settlement and clearing services; and the acquirer fees charged by the acquirer. The interchange fees and transaction/ assessment fees are determined by the card companies and published in the card companies' fee schedule online. The acquirer does not negotiate or play any role in the determination of the interchange fees and/or the assessment fees.

30. That the interchange fees and assessment fees are fixed components that are deducted at source without the acquirer having any input or control whatsoever over the amount to be deducted by the issuer and card companies. The acquirer only has freedom to negotiate the acquirer fees that will be charged over and above the iinterchange reimbursement fees and aassessment fees. That these facts are uncontroverted and even relied on in the Respondent's assessment at Page 4, Paragraph(s) (e) and (f) wherein it stated as follows:“(e)Subsequently, the Association debits the pre-funded account of the Issuing Bank on a net settlement basis, that is, the Interchange fee which is the share of the Issuer retained by the Issuer;(f)The Issuer, the Acquirer, and the Card Associations each play their role to ensure that a transaction can be undertaken between the Cardholder and the Merchant;”

31. The Appellant averred that having acknowledged that the interchange fee is the issuer's share of the MSC and that the issuer deducts the interchange fee at source from the cardholders' account, it was unreasonable for the Respondent to demand VAT from the acquirer for income the acquirer did not earn or receive. The Respondent's entire assessment premised on the fact that the merchant is not made aware of the arrangement and the role played by the different parties when signing the MSA, means, the arrangement or roles played by the issuer and the card company did not also exist.

32. It stated that the fact however was that the Respondent itself was clearly aware of the arrangement and the roles played by the different parties and that the MSC is an aggregate of the different share of fees due to the different parties. Indeed, the Respondent in Tax Appeal No. 137 of 2016 on this very same issue stated the following facts in its Statement of Facts showing the breakdown of the MSC as follows:-‘Interchange Fee + Assessment Fee + Acquirer Fee = Merchant Service Fee’

33. That the same facts were also acknowledged by the Tribunal in its judgement in Tax Appeal No. 137 of 2016, where it stated as follows in relation to charging tax on the gross MSC:“It would be prudent for the Tribunal to reiterate our previous position, that the MSC is an aggregate of three fees accruing to three distinct and separate parties in a card transaction. Each of these parties should be made to bear its own tax burden as opposed to hanging one party at the expense of the others. The acquirer fees accrues to the Appellant herein, for which the Appellant has accounted for in full for the period under assessment. It would therefore, in our view, be unfair for the Respondent to hold the Appellant liable for the entire merchant service commission.”

34. That the Respondent's primary basis for contending that the entire MSC was its revenue was the fact that it was the party that entered into and signed the MSA with the merchant. This contention contradicted the uncontroverted fact that the MSC is an aggregate of three separate and independent fees paid to three parties involved in the payment, clearing and settlement and remittance of payments due to a merchant for goods or services purchased using credit or debit cards and prepaid cards. Further, nothing turns on whether the merchant was made aware of the roles played by the different parties as it did not change or alter the factual position.

35. The only portion of the MSC that is determined based on negotiations between the merchant and the acquirer was the acquirer fee. It followed therefore that the only item of the MSC that the acquirer had discretion over at the point of negotiating with merchants and which it charges was the acquirer fee. Accordingly, the only item an acquirer could reasonably be expected to account for in terms of applicable taxes such as excise duty was the acquirer fee.

36. That despite it being in a contractual relationship with the merchant, it did not earn the entire MSC. From the explanations above, it was evident that it could only receive the acquirer fee or the issuer fee or both, depending on a particular transaction.

37. That having acknowledged that the MSC was an aggregate of fees payable to different parties, it was unreasonable for the Respondent to seek to recover VAT on the portion of the MSC payable to the other members of the card association from it. There was therefore no basis for the Respondent to ignore its own understanding of the facts to raise what was clearly a misplaced assessment.

38. In respect to Ground (iii) of the Appeal the Appellant was of the view that the Respondent erred in concluding that the services in the card payment transactions were subject to VAT. The Respondent acknowledged in the tax decision that the acquirer, the issuer and the card companies all had a role to play to ensure that the transaction could be undertaken between the cardholder and the merchant. The transaction referred to and for which the parties played a role, was the transfer of money from the cardholders account to the merchants account through a debit/ credit card for payment of goods and/or services.

39. The Appellant averred that had already addressed the Respondent's position with respect to its reference to a merchant service as if it is a service provided by the acquirer alone. The merchant service is the composite service which comprises services performed by the acquirer, the issuer and the Card Companies in their independent capacities. The Respondent was well aware of this fact and therefore it's attempt to expand the role of the acquirer and to assess tax on contrived fees was illegal and unreasonable.

40. It contended that in its capacity as an acquirer, it could only be made to answer for the acquirer fee portion of the MSC. Upon consideration of the roles played by each of the entities, it was clear that the various services that comprise the Merchant Service entail the transfer of money from the Cardholders account to the Merchants account arising from a debit or credit card transaction.

41. That money is defined in Section 2 of the VAT Act to include:“(a)any coin or paper currency that is legal tender in Kenya;(b)a bill of exchange, promissory note, bank draft, or postal or money order;(c)any amount provided by way of payment using a debit or credit card orelectronic payment system;”

42. That the primary function of all the parties in a card payment transaction is therefore the transfer of money from cardholders' accounts to merchants for goods and services. The key services in the card payment transaction and without which no party can earn any income, is the transfer, receipt or any other dealing with money, including money transfer services, which is exempted from VAT by Paragraph 1 (b) of Part II of the First Schedule to the VAT Act.

43. The Appellant reiterated the functions of the various parties in the transaction as follows:

a. The Acquirer 44. That the services provided by it in its capacity as an acquirer was a payment service through an electronic platform by use of debit cards, credit cards or prepaid cards. It was a single supply for which it received a fee referred to as the acquirer fee. The central role it played as an acquirer was to enable merchants to receive payment for goods and services sold. An acquirer receives money from the card holder's bank i.e. the issuer (which deducts at source the interchange fees) and transfers the remaining proceeds, less the assessment fees to the acquirer which in turn deducts the acquirer fees and remits the net balance to the merchant's bank account.

45. That the role played by the acquirer is limited to facilitating a payment electronically through the use of debit cards, credit cards or prepaid cards. The process involves movement of money from the card holder's bank account to the merchant's bank account. this clearly falls into the category of transfer, receipt or any other dealing with money, including money transfer services which are exempt from VAT.

46. It stated that its tax decision, the Respondent completely disregarded this critical service that is provided by the Appellant in its capacity as an acquirer. The true scope and nature of the services provided by the acquirer are the provision of payment services using debit cards, credit cards or prepaid cards, which constitute the transfer of or other dealing with money.

47. The Tribunal in its decision in Tax Appeal No. 137 of 2016, acknowledged that the service offered by an acquirer is the transfer of money, which is clearly exempted from VAT. The Tribunal specifically stated as follows:-“In view of the foregoing, the Tribunal is persuaded by the Appellant's argument against the imposition of VAT on its services as an acquirer and finds that these services enjoy an exempt status under the VAT Act, 2013. The services provided by the acquirer, in isolation serve no independent purpose that would attract VAT obligations as argued by the Respondent. In order to determine the applicable VAT rate therefore, it is prudent to identify the underlying service rendered by the Appellant, that is, transfer of money ....Accordingly, we make a finding that the services rendered by the Appellant as an acquirer are not subject to VAT.”

48. In the assessment and the objection decision, the Respondent focused on the ancillary functions provided by an acquirer to Merchants necessary for the transfer of money to be effected. These included:-i.Point of Sale ("PoS") terminals;ii.Marketing and technical support;iii.Virtual payments processing;iv.Host to Host - enables Merchants to send and receive files directly from their corporate systems to the Appellant’s systems and vice versa via various supported connectivity protocols, without manual intervention;v.E-commerce;vi.Virtual Point of Sale ("V-POS");vii.Mobile Point of Sale ("M-POS") - the solution enables customers to pay for products and services using their debit or credit cards on the go.viii.Back-end customer service;ix.Risk management.

49. The above services are ancillary services designed to assist it in performing its core function of facilitating the movement or the transfer of money as between a Card Holder and a Merchant. For example, the whole card payment transaction cannot take place without a POS terminal. It was instructive to note that pursuant to the MSA, a particular merchant selects the service they would prefer to enable them receive payments for their goods/services. You will note that other merchants have V-Pos which enables the merchants to receive payments through online means, without a card being physically input into a POS.

50. That in order for the acquirer to enable card payments and earn its acquirer fee, it must provide or make available to merchants the relevant infrastructure and enabling environment necessary to process Card Payments. The infrastructure and enabling environment are integral to the principal supply, which is the transfer of money. They do not change the true character of the service provided and must be recognised for what it is, which is an infrastructural platform.

51. The Appellant averred that it is settled law that ancillary services acquire the VAT treatment of the principal service as follows:i.In the case of Card Protection Plan Limited (Appellants) vs. Commissioners of Customs and Excise (Respondents) [2001] J Ukhl 4, the issue for determination was whether the supply made constituted a single supply with some ancillary services or whether there were two independent supplies, an exempt insurance supply and a non-exempt card registration service. It was held that the transaction performed was to be regarded for VAT purposes, as comprising a principal exempt insurance supply and the other supplies in the transaction are ancillary so that they are to be treated as exempt for VAT purposes.i.In Customs and Excise Commissioners v FDR Ltd (Case No: C/1999/0654/ (hereinafter "the FDR Case") the court found that ancillary services do not alter the character or VAT status of the core services provided by the Appellant as the acquirer. The court particularly stated as follows regarding ancillary services:

52. That this Tribunal also pronounced itself on the issue of ancillary services offered by an acquirer in Tax Appeal No. 137 of 2016 where it stated as follows:-“in order to determine the applicable VAT rate therefore, it is prudent to identify the underlying service rendered by the Appellant, that is, transfer of money. As such, seeing as the services provided by the Appellant as an acquirer significantly contribute to the performance of the principal service, we find that these ancillary services enjoy the same VAT status as the principal service; exempt from VAT liability.”

53. That it is further clear that the services listed above are merely ancillary, from the fact that the only time that the acquirer earns the acquirer fee is when a transfer of money has been effected. If a customer uses his card to make a purchase, it will not earn any money even if it has provided the merchant with marketing and technical support, back-end customer service or any of the other services provided by the Appellant. In view of the foregoing, the acquirer services are exempted from VAT. The Respondent's assessment and attempt to subject the acquirer income earned by the Appellant to VAT at 16% was therefore erroneous and misplaced.

b) Issuer Services 54. The Appellant summarised the sequence of events that would arise in a typical card transaction by proceeding to highlight the role of the issuer as follows:-a.When a customer applies to an issuer for a credit, debit or pre-paid card the issuer issues a VISA, American Express or MasterCard to its customer depending on which card company the issuer is affiliated with. In the case of credit cards, the issuer sets the limit depending on the credit assessment of, and/or security arrangement provided by, the customer;b.the bank's customer becomes a card holder and, in that capacity, goes to a merchant (for example a supermarket) and uses the card to make a purchase. The merchant swipes the card on a POS machine configured to accept a card;c.by swiping the card, the merchant seeks approval and confirmation of funds availability and subsequent settlement and payment from the issuer through the applicable card companies. The card company processes the payment request from the acquirer to the issuer. The issuer then checks the account of its card holder, in order to confirm whether the account has sufficient funds to satisfy payment or to confirm that the purchase made is within the card holder's credit limit if it is a credit card. The issuer then sends a confirmation of availability of funds to the card companies or schemes and at the same time debits the amount from the card holder's account pending settlement and transfer of the money.d.In cases where there are no funds in a card holder's account the transaction fails and no income accrues to the issuer, acquirer or Card Companies which is a clear indication that the service in question is a transfer of money or dealing with money as otherwise income would accrue regardless of the transaction failing for lack of funds. This also discounts the Respondent's argument that there are other services other than payment of money.

55. It contended that based on the Sections highlighted above it was clear that the services provided by an issuer fell squarely within the provisions of Paragraphs 1 (a), (b) (c) and (h) of the First Schedule of the VAT Act which stated as follows:“a)the operation of current, deposit or savings accounts, including the provision of account statements;b)the issue, transfer. receipt or any other dealing with money, including money transfer services, and accepting over the counter payments of household bills, but excluding the services of carriage of cash, restocking of cash machines, sorting or counting of money;c)issuing of credit and debit cards;h)the making of any advances or the granting of any credit;”

56. That the issuer operates the cardholder's account and facilitates transfer of money from the cardholders' account. Accordingly, there is clearly no basis for treating the interchange reimbursement fees as a vatable supply. The Tribunal has pronounced itself on the VAT status of interchange fees and declared that these are exempt from VAT in the following decisions:-(a)In NIC Group 8: NIC Bank Kenya PLC vs Commissioner of Domestic Taxes (2020) eKlr ("the NIC case");(b)In Tax Appeal No. 137 of 2016. (c)The High Court in Barclays Bank of Kenya Limited v Commissioner of Domestic Taxes [2020] eKLR upheld the decision in the NIC case above.

57. Accordingly, that the Respondent's contention that the interchange fees were subject to VAT were based on a misapprehension and/or misinterpretation of the facts and also had no legal basis.

c) Services performed by the Card Companies 58. The Appellant stated that including assessment fees earned by card companies in its computations, the Respondent is attempting to collect VAT from it on revenue that is not earned by it. This is in clear contravention of Section 5 of the VAT Act that provides that the person who makes the supply is the one liable to VAT. While it offers acquirer/issuer services, it clearly does not offer the services performed by the card companies whose role in a card payment transaction is to facilitate payment transactions between merchants and cardholders. To do this, card companies have created a payment platform and infrastructure for processing consumers' credit or debit card transactions.

59. That the assessment fees earned by a card company is its share of the fees for the roles it plays in the card payment transaction, which primarily entails transferring payment and settlement instructions and process between the issuer and acquirer and clearing of transactions. From the tax decision, the Respondent did not dispute that the primary role for which card companies earn their fees is the transfer of money, which constitutes ‘the transfer, receipt or any other dealing with money, including money transfer services’, and is consequently exempt from VAT pursuant to Paragraph 1 (b) of Part 11 of the First Schedule to the VAT Act.

60. That the role played by card companies in a card payment transaction (transfer of payment and settlement instructions) is inseparable from the role played by the issuers and the acquirers. It is well known that the issuer and the acquirer have no contractual relationship and are only connected due to their affiliation with the card companies.

61. It stated that the absence of a card company, the card payment transaction cannot take place and the other four parties to the transaction, (the cardholder, the merchant, the issuer and the acquirer) cannot facilitate the transfer of money using debit or credit cards. The card company therefore plays a primary role in the transfer of money and similar to issuers or acquirers, the fees earned by the card company are exempt from VAT.

62. That in the assessment and the workings, the Respondent averred that the fees levied by card networks, are chargeable to VAT either as a direct charge or under the reverse VAT mechanism. It is trite tax law that taxes are to be levied strictly and in clear, unambiguous terms. The Respondent was supposed to specify how a transaction was to be treated for tax purposes. The direct charge VAT mechanism and reverse VAT mechanism have very different tax implications, which need to be addressed differently. It is unfair for the Respondent to state that a transaction could be taxed in two ways (as either direct charge or reverse charge) as the taxpayer does not know which specific case it is defending against.

63. That in the case of Republic v Commissioner of Domestic Taxes large Tax Payers office Ex parte Barclays Bank of Kenya Limited [2012] eKLR, Justice Majanja stated as follows:“39. Consistent with the decision I have cited above, the duty of the respondent in assessing tax is to identify transactions or payments that attract tax liability especially where there are objections to such categorisation ...... the respondent is obligated by law to state with clarity its claim and state how the transaction falls within the terms of the statute. The respondent cannot exercise its duty like a trawler in the deep seas expecting all the fish by casting its net wide. The respondent's decision in this respect falls below this standard and the transaction caught by the decision cannot be said to fall within the statutory definition of the tax.”

64. That in any event, the fees paid to card companies are exempt from VAT and consequently cannot be subjected to reverse charge VAT as imported services. That Section 2 of the VAT Act defines the "supply of imported services" as:-“a supply of services that satisfies the following conditions:a)the supply is made by a person who is not a registered person to a person who is a registered person;b)the supply would have been a taxable supply if it had been made in Kenya; andc)the registered person would not have been entitled to a credit for the full amount of input tax payable if the services had been acquired by the person in a taxable supply;”

65. That from a reading of part (b) above, among the criteria for a supply to be considered an imported service, is that it would have been a taxable supply if it had been made in Kenya. It contended that the assessment/transection fees were exempt from VAT pursuant to Paragraph 1 (b) of Part II of the First Schedule to the VAT Act and as such do not qualify as a supply of imported services, which would be subject to VAT under the reverse charge mechanism.

66. In respect to Ground (iv) which was that the Respondent erred in law and in fact in confirming an overstated and excessive assessment, it averred that it had explained to the Respondent that its assessment was overstated and excessive because it was based on its entire transaction/ assessment fees which includes fees that are not related to its merchant acquirer business; and secondly that the acquirer fee captured in the Respondent's assessment were overstated and excessive.

67. It expounded on the highlighted issues as follows, first in regard to the Respondent’s assessment having been based on its entire transaction/ assessment fees which included fees that were not related to its merchant acquirer business, it was of the view that the Respondent's assessment had been issued to it in its capacity as an acquirer. The issue in dispute related to the Appellant's merchant acquiring business.

68. It paid various transaction costs to card companies, including costs on ATM withdrawals and other costs that related to services offered in its capacity as an issuer. As the Respondent's assessment was with regard to its capacity as an acquirer, only the transaction fees relating to the Merchant acquirer activities should have been captured in the assessment.

69. That the transaction fees relating to the acquiring business were captured in the Respondent's assessment. The same was tabulated as follows:-Transaction fees figures in the Respondent's assessment2017 2018 2019 2020

(460,399,540. 00) (549,498,963. 00) (222,749,598. 00) (503,158,493. 00) Correct transaction fees figures that related to the Acquirer2017 2018 2019 2020

(167,275,795. 00) 159,533,062. 00) (170,552,350. 00) (111,345,501. 00)

70. The Appellant stated that the other ledger accounts in the transaction fees figures did not relate to transaction fees paid to card companies for card payment transactions. Some of the ledger accounts in the assessment related to fees paid to card companies for ATM transactions which were irrelevant to the assessment as those payments did not relate to card payment transactions. For example, GL 413010305 – Other, which formed part of the Respondent's assessment relates to fees paid to card companies for ATM transactions, GL 413010309 - Transmission fee Africa Acquiring, related to SWIFT charges incurred by it when it settled with the merchants.

71. That despite it highlighting this relevant issue in the objection and providing documents that would aid the Respondent correct the quantum of its assessment, the Respondent disregarded the explanation in its grounds of objection in confirming the overstated assessment.

72. The Appellant averred that the Respondent's main contention in the objection decision was that it relied on information in the trial balance. Having clarified that not all the ledgers picked for the transaction/ assessment fees relate to the card payment business, it expected that the Respondent would amend its assessment downwards in the objection decision. The fact that the Respondent did not consider the clarifications made in the notice of objection and further, did not make any any attempt to interrogate its assessment clearly displayed a preconceived mindset to issue an elevated assessment without due regard to arriving at a correct position.

73. It contended that the transaction/ assessment fees figures relied upon in coming up with the assessment were overstated and excessive and that the Respondent's assessment (which is objected to in toto) ought to have been amended downwards.

74. Regarding the fact that the acquirer fee captured in the Respondent's assessment was overstated and excessive it averred that it was erroneous because it used the same amounts for the acquirer fee and the transaction fee which were factually impossible. In card payment transactions, the acquirer fee is the smallest component of the MSC, while the interchange fee is the largest. In no instance is the acquirer fee higher than the interchange fee.

75. That in the Respondent's assessment however, the acquirer fee in 2018 and 2020 was higher than the issuer fee. This was prima facie evidence that the Respondent's assessment was overstated and excessive. According to its records, the correct acquirer fees for the period was Kshs 251,919,017. 00, Kshs. 183,305,796. 00, Kshs. 105,194,169. 00 and Kshs. 53,677,145. 00 in respect of the 2017, 2018, 2019 and 2020 years of income, respectively.

76. The acquirer fee figures in the assessment were therefore overstated and absurd as they are equal to the figures for the transaction fees. Accordingly, the Respondent's assessment was without basis, excessive and ought to be quashed.

77. With regard to ground (v) of this Appeal on its Constitutional rights to expeditious efficient, lawful, reasonable and procedurally fair administrative action, as espoused in Article 47 of the Constitution, it averred that the Respondent attempted to demand VAT from it on the gross MSC despite the undisputable fact that not all the gross MSC accrues to an acquirer. It was manifestly unfair and unreasonable for the Respondent to demand VAT from it on fees that it did not earn. It was also patently unfair for the Respondent to confirm an overstated and excessive assessment.

78. That in addition, in the Respondent's workings, the acquirer fees figure was similar to the payments made to the card companies, which is factually impossible. The acquirer fees figure is an arbitrary figure that was literally plucked from the air and has no basis in law.

79. That it was held in Republic v Kenya Revenue Authority Ex parte Jaffer Mujtab Mohamed [2015] eKLR that:-“46. Therefore, whereas this Court is not entitled to question the merits of the decision of taxing authority, that authority must exercise its powers fairly and there ought to be a basis for the exercise of such powers. A taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the Court in intervening.”

80. That the Respondent's action to demand VAT on the gross MSC from the Appellant in its capacity as acquirer when it was aware that it is an aggregate fee payable to other entities is unreasonable and in clear breach of the Appellant's right to fair administrative action guaranteed under Article 47 of the Constitution.

81. That it was also apparent to it that the Respondent's objection decision confirming the VAT assessment on the gross MSC was erroneous and ought to be quashed. The decision appealed against was to the extent set out herein wrong in law, in breach of the Constitution, unjust in effect and therefore ought to be set aside.

Appellant’s Prayers 82. Reasons wherefore it prayed that:a.this Appeal would be allowed.b.this Tribunal be pleased to find: -i.that the services in card payment transactions are financial services which are exempted from VAT by Part II of the First Schedule to the VAT Act;ii.that the Respondent's assessment must be limited to the acquirer fee which is the only fee earned by the Appellant in its capacity as an acquirer;iii.that the Respondent's assessment was overstated and excessive;iv.that the assessment is unfair and contravenes its right to fair administrative action.(c)the costs of the Appeal be awarded to the Appellant.

Respondent’s Case 83. The Respondent’s case was as set out in its Statement of Facts dated and filed on 19th August, 2022 in which it stated as hereunder.

84. The Respondent summarised the issues for determination as follows; -i.Whether the Appellant should pay VAT for the entire MSC.

85. The Respondent stated that the Appellant was both an acquirer and an issuer. As an acquirer the Appellant contracts with the merchants and performs functions like deployment of cards terminal, marketing activities, risk assessments and settlement of disputes.

86. That the Appellant provided the payment network connectivity to its merchants in line with transaction obligations and in consideration for the merchant services the it charged a fee referred as MSC.

87. That when the Appellant issued credit cards to its customers and its customers used credit and debit cards at the merchants, the Appellant became the issuer and provided services in form of authorization, settlement and clearance to the acquirer. In return for the services rendered it earned interchange fees.

88. It averred that card companies provided infrastructure which enabled credit and debit card transactions to take place. The services provided by card companies included processing transactions between acquirers and issuers and allowing purchases to be authorized. The Card companies received dues and assessment fees for the services provided.

89. It contended that card business transactions the card holders were not charged when they made purchases at the point of sale and it is the merchant who bore the brunt of the MSC. It should also be noted that the merchant need not have an account with the acquirer and acquiring business is not a preserve for banks.

90. That there are 5 parties to a card transaction as follows:(a)Cardholder - this is the individual to whom a card has been issued.(b)Issuer- this is a financial institution that issue cards to card holders.(c)Acquirer - this is an organization (not necessarily a bank) which contracts merchants for provision of card processing services. The acquirer levies a MSC on every transaction at the merchant's point of sale (POS) terminal to generate its revenue(d)Merchant - sells goods or services to the card holder. With respect to a card purchase transaction, the merchant has no contract with the issuer.(e)Card association - card companies that provide infrastructure which enables credit and debit card transactions to take place for example, Visa Inc., MasterCard, JCB, Union Payment International and American Express.

91. That the Appellant is both an issuer and an acquirer and a typical transaction flow is as follows:i.A card holder makes a purchase at a merchant's outlet and completes the transaction by swiping his card, employing the swipe machine provided to the merchant by the acquirer.ii.The network platform then facilitates authentication of the card employed at the merchant and clears the use of the card for concluding the transaction.iii.The card association network generates reports for merchant settlement and forwards these to the acquirer. The acquirer (within a couple of days) settles account with the merchant after deducting a small percentage towards discount/ commission amount (ranging from 3% to 5%) as the MSC.iv.MSC is the charge made to a merchant by an acquirer for processing transactions originated by the card purchases. A settlement report is forwarded to the issuer via the interchange network maintained by the card association, for reimbursement to the acquirer.v.Out of the MSC retained by the acquirer, a percentage is shared with the issuer as "interchange fee" and with the card association as dues and assessment fees while the balance is retained by the acquirer as its fees.

92. The Respondent averred that the interchange fee sets the floor for the MSC, which is always the interchange fee plus an additional percentage taken by the acquirer and the card association. The Appellant provides merchant services to merchants. This includes deployment of card terminals at the point of sale, back-end customer service, risk management, and marketing activities. The Appellant also provides helpdesks that offer customer service and technical support to various merchants by having a dedicated contact point for all the merchants' queries. It also carries out the settlement process for merchants within the respective card systems.

93. That the assessment was based on filed returns for the period under review and trial balances (TBs) given by the Appellant to the Respondent. Further, a detailed schedule of tax computations was attached in the assessment notice clearly showing the period under review and the various ledger items assessed.

94. That from the trial balances it would be established that the assessment raised could be tied to the financial statements and/or the general ledgers of the Appellant. The Respondent observed that for rendering the aforementioned services, the Appellant charged the merchants the MSC. This was a percentage fee of the total price of the goods or services sold. It is deducted from the funds that the merchant received in the settlement of a card transaction. This fee compensated the Appellant for the services provided to the merchants. Therefore, the Appellant should have paid VAT for the entire MSC amount.

ii. Whether the Card Payment charges are subject to VAT. 95. The Respondent averred that imposition of VAT on MSC is provided under the Value Added Tax Act No. 35 of 2013 (VAT Act). That Section 2 of the Act defines a "service" as anything that is not goods or money. Further, Section 5(1) (a) and 5(2) of the VAT Act provides that: ‘“(1)A tax, to be known as value added tax, shall be charged in accordance with the Provisions of this Act on- (a) a taxable supply made by a registered person in Kenya; (2) The rate of tax shall be­(a) in the case of a zero-rated supply, zero per cent; or(b)in any other case, sixteen per cent of the taxable value of the taxable supply, the value of imported taxable goods or the value of a supply of imported taxable services.”

96. That in addition, merchant services are not exempt from VAT since the services are not listed in the exclusions contained in Para 1 of Part II to the First Schedule to VAT Act. Further, as the consumer of the merchant services and the payer of the MSC, it is the merchants who bear the brunt of the merchant service fee from their sales proceeds.

97. That the Appellant issued credit cards to its customers. When its customers used their credit and debit cards at a merchant, the Appellant became the issuer and provided services in form of authorization, settlement and clearance to the acquirer.

98. That as an issuer, the services provided by the Appellant included receiving the transaction information from the acquirer through card system network, ensuring that transaction information was valid and checking to ensure that the account was in good standing. As an issuer, the Appellant earned interchange fees because of providing services to acquirer banks which included facilitation fees for facilitating a medium of communication between the issuers, acquirers and merchants, and for confirmation of the creditworthiness of the cardholders.

99. The Respondent contended that the Appellant as an issuer supplied a composite service to the acquirer who does not hold an account with the Appellant and is not its client and for that service it was paid the interchange fee which was not a payment for operation of accounts. The interchange fee earned constituted fees earned for management and professional services and were therefore subject to VAT.

100. That the issuer rendered clear co-ordination, managerial, professional and contractual services to the acquirers for which the latter pays. The Court of Appeal in Commissioner of Domestic Taxes (Large Taxpayer Office) v Barclays Bank of Kenya Ltd - Appeal No. 195 of 2017 held that:-“We were persuaded that the management and professional fee does not have to fall within only one of the services defined in section 2; it can cover one or more. In our view what is critical is whether looking at the totality of the evidence on record, there is a clear explanation of what the appellant alleges to constitute management or professional fees, and whether that payment made by the respondent reasonably falls within the terms of the statute. That question cannot be answered by considering only how the parties have described or rationalised the payment.”

101. That it was guided in the above the ruling by the Court of Appeal that interchange fee earned constitutes management and professional fee. Further, the same did not fall under Part II paragraph 1 of the First Schedule to the VAT Act which outlines exempt financial services. These services described above for which the bank earns interchange fees falls within sections 5(1) (a) and 5 (2) (b) of the VAT Act.

102. The Respondent stated that it simply updated its assessments on the Appellant following the initial assessment for the year 2016. The decision came after the Court of Appeal delivered a judgement on 6th November 2020 in favour of the Respondent in the case of Commissioner of Domestic Taxes Versus Barclays Bank of Kenya Ltd (Civil Appeal No. 195 of 2017).

(iii) Whether the Respondent's demand violates the Appellant's right to fair administrative action as provided under Article 47 of the Constitution. 103. That the Respondent followed the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’), to issue the assessments on 16th March 2022. The Appellant was notified of the assessments and informed of its right to make an objection which the Appellant made on 14th April 2022. After a detailed review of the objection with the supporting documents the Respondent issued an objection decision on 10th June 2022.

104. It stated that the Appellant was heard before the objection decision was issued and therefore the Appellant's right to fair administrative action was not violated.

Respondent’s Prayers 105. The Respondent prayed that the Tribunal dismissed the Appeal since it lacked merit and also that it upholds the objection decision dated 10th June 2022.

Submissions of The Parties 106. In its Written Submissions dated 24th February,2023 and filed on 1st March, 2023 the Appellant submitted on four issues that it had identified for determination whilst in its Written Submissions dated 21st March, 2023 and filed on 22nd March, 2023, the Respondent submitted on and analyzed three issues that it had identified for determination. The Tribunal however notes that it will not rehash the submissions of both parties where these were repeated from the Statement of Facts.

107. The Appellant submitted as follows regarding the four issues it had identified for determination:

i. Whether the gross MSC is earned by the acquirer. 108. The Appellant stated that the Respondent erroneously assessed VAT on the entire MSC as being fees charged by the acquirer. The Appellant contended that the MSC is an aggregate of fees earned by the different parties to a card transaction and if any VAT was due, which it denied, each party ought to have accounted for VAT on only the income that it received.

109. That this Tribunal pronounced itself on this issue and at Paragraph 22 of its Judgment in Tax Appeal No. 137 of 2016, the Tribunal stated as follows in relation to the MSC:“We note from the parties' concurrence that the MSC is an aggregate of three separate and independent fees paid to three parties involved in the approval and remittance of payments due to a merchant for goods or services purchased."

110. That this position was reaffirmed by the High Court in Tax Appeal No. E023 of 2021, the appeal to this Tribunal's decision in Tax Appeal No. 137 of 2016. The High Court stated as follows in relation to the MSC:“From the foregoing, I appreciate the appellant's concern that the Merchant Service Commission should attract excise duty and taxes should be paid in respect to the same. The question, however, is who bears the burden of paying this excise duty. In this case there are three players involved and the payment of taxes is an obligation that is imposed on individual entities. In the same breadth, the canons of taxation dictate that there should be equality or equity in payment of taxes. A tax regime ought to include neutrality and fairness. No one should shoulder taxes on behalf of another unless the law expressly so provides. Accordingly, I therefore agree with the Tribunal that it would be unfair to impose excise duty on the whole merchant service commission solely on the respondent. The Respondent's liability should be the specific fee received as commission."

111. That it was instructive to note that in Tax Appeal No. 137 of 2016 there was concurrence by both the Respondent and the Appellant that the MSC "is an aggregate of three separate and independent fees paid to three parties involved in the approval and remittance of payments due to a merchant for goods or services purchased". It therefore urged that this Tribunal ought not to countenance the Respondent's departure from previously agreed facts on MSC to now argue the contrary position that the MSC is a fee payable only to the acquirer. The Respondent's assessment was factually incorrect and had no legal basis.

112. That as was held by this Tribunal in Tax Appeal 137 of 2016, the card payment transaction is made up of four steps with each of the three parties playing a vital role. It was therefore unreasonable and factually incorrect for the Respondent to conclude that the entire MSC which constitutes the three separate fees to be earned by each of the three parties in the card payment transaction would be the income of the Appellant in its capacity as the acquirer.

113. It contended that the Respondent's assessment is made pursuant to Section 5(1) of the VAT Act, which provides as follows:“(1)A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on-(a)a taxable supply made by a registered person in Kenya;(b)the importation of taxable goods; and(c)a supply of imported taxable services.”

114. That in its capacity as the acquirer, it's income could only be the acquirer fee and not the entire MSC as the Respondent contended. The Respondent was fully aware of this fact and had attempted to create the flawed computations annexed to the assessment. Accordingly, if the services offered by the acquirer had been subject to VAT, the Appellant would only be required to charge VAT on the supply it had made, which was the role played by an acquirer in a payment transaction and for which it earned the acquirer fee income and certainly not the entire MSC.

115. The Appellant submitted that the interchange and transaction fees that the Respondent was demanding VAT on from the acquirer were fees earned by separate institutions for the roles they played in the card payment transaction. Section 5 of the VAT Act is only applicable in a scenario where a person accounts for VAT on a supply/income made by that person. Demanding VAT on the interchange and transaction fee from the acquirer was contra statute and was not contemplated in Section 5 of the VAT Act. The Respondent had no legal basis for demanding tax from it on the interchange and transaction fees in its capacity as an acquirer.

116. That the contention by the Respondent that the Appellant ought to have charged VAT on the services provided by other entities was unreasonable and not provided for in law as a VAT registered vendor is only liable to account for VAT on supplies made or services rendered by it. Accordingly, the Respondent's contention at Paragraph 24 of its Statement of Facts that the Appellant earned the entire MSC was factually incorrect and prima facie wrong.

117. That in Tax Appeal No. 137 of 2016, this Tribunal categorically stated that in card payment transactions, each party had to bear its own tax burden. It specifically stated that:“It would be prudent for the Tribunal to reiterate our previous position, that the MSC is an aggregate of three fees accruing to three distinct and separate parties in a card transaction. Each of these parties should be made to bear its own tax burden as opposed to hanging one party at the expense of the others. The acquirer fees accrue to the Appellant herein, for which it has accounted for in full for the period under assessment. It would therefore, in our view, be unfair for the Respondent to hold the Appellant liable for the entire merchant service commission.”

118. The Appellant averred that similarly, the High Court in Tax Appeal No. E023 of 2021 stated that:“..... the canons of taxation dictate that there should be equality or equity in payment of taxes. A tax regime ought to include neutrality and fairness. No one should shoulder taxes on behalf of another unless the law expressly so provides."

119. The Appellant prayed that the Tribunal would find that on the basis of quantum, the Respondent's assessment must be restricted only to the acquirer fees and not the entire MSC as the Respondent had purported to. That the Respondent erred in concluding that the gross MSC income accrued to the acquirer alone.

120. That the Respondent demanded VAT on the aggregated MSC from the acquirer. This was prima facie wrong. It is uncontested that the provision of card payment services requires collaboration between five parties. It is even clear from the assessment that the Respondent was cognizant of this fact, where at Paragraph 2. 1.1, it had set out the various parties to the card payment transaction, and their distinct roles for which they earn the various fees.

121. It argued that in raising the demand, the Respondent chose to depart from its own understanding of the card payment ecosystem and instead wished to pursue a false narrative that for the purposes of assessing VAT, it was only the interaction between the acquirer and Merchant that must be considered. As elaborated at above, the MSC had three components namely, the interchange fees charged by the issuer; the transaction/ assessment fees charged by the Card Companies or schemes for settlement and clearing services; and the acquirer fees charged by the acquirer.

122. That the Respondent's assessment was premised on the assertion that the merchant is not made aware of the arrangement and the roles played by the issuer and the card company in the entire transaction when signing the MSA with the acquirer; implying the non-existence of such roles, which is not true. The fact however is that the Respondent itself is clearly aware of the arrangement and the roles played by the different parties and that the MSC is an aggregate of the different share of fees due to the different parties.

123. It stated that indeed, the Respondent at Page 5 of its Statement of Facts showed the breakdown of the MSC and it was therefore outstanding that the Respondent admitted that the acquirer fee was paid to the acquirer and instead of demanding VAT only this amount sought to demand VAT on an aggregate of the fees payable to all three parties as if it was paid to all parties.

124. To buttress its view, it cited the judgement in Tax Appeal No. 137 of 2016, where it was stated as follows in relation to charging tax on the gross MSC:-“It would be prudent for the Tribunal to reiterate our previous position, that the MSC is an aggregate of three fees accruing to three distinct and separate parties in a card transaction. Each of these parties should be made to bear its own tax burden as opposed to hanging one party at the expense of the others. The acquirer fees accrues to the Appellant herein, for which the Appellant has accounted for in full for the period under assessment. It would therefore, in our view, be unfair for the Respondent to hold the Appellant liable for the entire merchant service commission.”

125. That the Respondent's primary basis for contending that the entire MSC was its revenue was the fact that it was the party that enters into and signs the MSA with the merchant. This contention contradicted the uncontroverted facts and the Respondent's own admission that the MSC is an aggregate of three separate and independent fees paid to three parties involved in the payment, clearing and settlement and remittance of payments due to a merchant for goods or services purchased using credit or debit cards and prepaid cards.

126. Further, that nothing turns on whether the merchant was made aware of the roles played by the different parties as it does not change or alter the factual position. The Respondent is aware of the different roles and its assessment should have relfected such understanding. It cannot be a valid reason to raise and sustain an erroneous assessment on the very tenuous argument that the merchant is not aware of certain facts.

127. That the only portion of the MSC that is determined based on negotiations between the merchant and the acquirer is the acquirer fee. The interchange fee and the assessment fees are pre-set by the card company and are non-negotiable. It follows therefore that the only item of the MSC that the acquirer has discretion over at the point of negotiating with merchants and which it charges is the acquirer fee. Accordingly, the only item an acquirer can reasonably be expected to account for is the acquirer fee. It confirmed that it accounts for Excise duty on the acquirer fee and remits the same to the Respondent.

128. That having acknowledged that the MSC is an aggregate of fees payable to different parties, it was unreasonable for the Respondent to seek to recover taxes on the portion of the MSC that is payable to the other members of the card association from it. There was therefore no basis for the Respondent to ignore its own understanding of the facts to raise what was clearly a misplaced assessment.

iii. Whether the services in card payment transactions are subject to VAT; 129. The Appellant submitted that the Respondent acknowledged in the tax decision that the acquirer, the issuer and the card companies all have a role to play to ensure that the transaction can be undertaken between the cardholder and the merchant. The transaction referred to and for which the parties play a role, is fundamentally to ensure the transfer of money from the Cardholders account to the Merchants account through a debit/ credit card for payment of goods and/ or services which are exempt from VAT.

130. That this Tribunal in its decision in Tax Appeal No. 137 of 2016, acknowledged that the service offered by an acquirer is the transfer of money, which is clearly exempted from VAT. That the Tribunal specifically stated as follows:“In view of the foregoing, the Tribunal is persuaded by the Appellant's argument against the imposition of VAT on its services as an acquirer and finds that these services enioy an exempt status under the VAT Act, 2013. The services provided by the acquirer, in isolation serve no independent purpose that would attract VAT obligations as argued by the Respondent. In order to determine the applicable VAT rate therefore, it is prudent to identify the underlying service rendered by the Appellant, that is, transfer of money .... Accordingly, we make a finding that the services rendered by the Appellant as an acquirer are not subject to VAT."

131. That this decision was affirmed by the High Court in Tax Appeal No. E023 of 2021, where the High Court stated that: "“The court finds that the goal of the acquirer is to transmit/transfer funds from the holder of a bank card to a merchant and it therefore falls squarely under the exempted transactions under the first schedule to the VAT Act."

132. It is evident that the various services that are performed by the parties and comprise the merchant service entail the transfer of money from the cardholders account to the Merchants account. Money is defined in Section 2 of the VAT Act to include among other things, any amount provided by way of payment using a debit or credit card or electronic payment system.

133. That the primary function of all the parties in a card payment transaction is therefore the transfer of money from cardholders' accounts to merchants for goods and services. The key services in the card payment transaction and without which no party can earn any income, is the transfer, receipt or any other dealing with money, including money transfer services, which is exempted from VAT by Paragraph 1 (b) of Part II of the First Schedule to the VAT Act.

134. It went on to rehash the functions of the acquirer, issuer and card companies in the transaction for reference as it had already done in its Statements of Facts and then submitted that the services carried out by it to the merchant were merely ancillary services purely designed to assist it in performing its core function of facilitating the movement or the transfer of money as between a card holder and a merchant. The whole card payment transaction could not for example take place without a POS terminal. Further, pursuant to the MSA, a particular merchant selects the service they would prefer to enable them receive payments for their goods/services. Some merchants had V-Pos which enables the merchants to receive payments through online means, without a card being physically input into a POS.

135. That in order for the acquirer to enable card payments and earn its acquirer fee, it must provide or make available to merchants the relevant infrastructure and enabling environment necessary to process Card Payments. This infrastructure and enabling environment is integral to the principal supply, which is to transfer money. The infrastructure does not change the true character of the service provided and must be recognized for what it is, which is an infrastructural platform.

136. That it is settled law that ancillary services acquire the VAT treatment of the principal service. In the case of Card Protection Plan Limited (Appellants) V. Commissioners of Customs and Excise (Respondents) [2001 J Ukhl 4 , the issue for determination was whether the supply made constituted a single supply with some ancillary services or whether there were two independent supplies, an exempt insurance supply and a non-exempt card registration service. It was held that the transaction performed was to be regarded for VAT purposes, as comprising a principal exempt insurance supply and the other supplies in the transaction are ancillary so that they are to be treated as exempt for VAT purposes.

137. The Respondent relied on the decision in Customs and Excise Commissioners v FDR Ltd (Case No: C/1999/0654) (hereinafter "the FDR Case") where the court found that ancillary services do not alter the character or VAT status of the core services provided by the Appellant as the acquirer. The Court particularly stated as follows regarding ancillary services:“consider that a service is ancillary if, first, it contributes to the proper performance of the principal service and, second, it takes up a marginal proportion of the package price compared to the principal service. It does not constitute an object for customers or a service sought for its own sake, but a means of better enjoying the principal service.”

138. That this Tribunal also pronounced itself on the issue of ancillary services offered by an acquirer in Tax Appeal No. 137 of 2016 where it stated in order to determine the applicable VAT rate therefore, it was prudent to identify the underlying service rendered by the Appellant, that is, transfer of money it stated as follows:“As such, seeing as the services provided by the Appellant as an acquirer significantly contribute to the performance of the principal service, we find that these ancillary services enioy the same VAT status as the principal service; exempt from VAT liability.”

139. That it was clear that the services listed in the Statement of Facts were merely ancillary, from the fact that the only time that the acquirer earned the acquirer fee was when a transfer of money had been effected. If no customer used their card to make a purchase, it would not have earned money even if it had provided the merchant with a PDQ, marketing and technical support, back-end customer service or any of the other services provided by it.

140. That in view of the foregoing, the acquirer services are exempted from VAT. The Respondent's assessment and attempt to subject the acquirer income earned by it to VAT at 16% was therefore erroneous and ought to be quashed.

141. The Respondent cited in Tax Appeal No. 137 of 2016, in which the Tribunal held as follows in relation to the VAT status of interchange fees received by issuers:-“The issue of VAT on interchange fees is not foreign to this Tribunal as we have previously pronounced ourselves on the issue. In our previous judgment, we made it clear that the role of the issuer is that of authorization, settlement and clearing of funds. The issuer operates an account for its customer and as such its main function is confirming that the customer has sufficient funds or credit for the transaction, debiting the customer's account and finally transferring the funds to the acquirer for the onward transmission to the merchant.”

142. That as the issuer, it undertook the requisite activities related thereon on behalf of its customers with whom it has a contractual relationship. The Respondent argued that these services were offered to the acquirers, a position it was disinclined to accept for a number of reasons. In the first instance, there was no relationship between it as an issuer and the acquirer. The Respondent wished to impose and imply a relationship between the issuers and the acquirers where none existed. Secondly, and perhaps more imperative to note, a transaction for transfer of funds was initiated by the issuer's customer and not the acquirer’s. Therefore, the Respondent was incorrect in assuming a relationship between the issuers and the acquirers as the services undertaken by it as an issuer are done purely for the benefit of its customers.

143. With regards to whether these services are vatable as the Respondent argued, it had occasion to underscore that services offered by the issuer were ancillary to its core mandate, which was the transfer of the funds from its customers' accounts. Transfer of funds is expressly exempt from VAT as per the provisions of the Paragraph 1 (a) (b) (c) and (h) of the First Schedule to the VAT Act. This Tribunal's decision has been affirmed by the High Court in Tax Appeal No. E023 of 2021, where the High Court stated as follows:“Based on the foregoing, the question before the court is the nature of the transaction between the acquirer and the issuer .....My view is that in establishing whether the service given by the issuer is subject to VAT, the role played by the issuer in the transaction is crucial. In this case, the parties have not disputed that the issuer upon receiving instructions from the acquirer, establishes whether money is available in the cardholders account and therefore payable to the transaction and approves or declines the same. While it is clear that the VAT Act precludes financial services for transfer of money from payment of VAT, can this transaction solely be limited to transfer of money? My take is one ought to look at the big picture and this is the business of the issuer. In this case. the issuer acts as a medium for exchange of money and its principal service is to transfer the money to the required destination i.e. the acquirer bank. The upshot of this is that the benefit derived from the compensation of the issuer amounts to transfer of money and the same is not subject to VAT.”

144. That similarly, in the Commissioner of Domestic Taxes v Bank of Africa Limited (Civil Appeal No. 127 of 2020) the court held that interchange fees earned by the issuer were not subject to VAT on the basis of ambiguity and specifically stated as follow:“42. Where the legislature uses an inconclusive definition of what constitutes financial services, like in this case, it is not open to this court to say that the service Bank of Africa rendered to cardholders, as the issuer, was not a financial service. If that were to be the case, then the law, as enacted, would be ambiguous which would then be interpreted in favour of the taxpayer. In the circumstances, I agree with the TAT that Bank of Africa rendered a financial service to cardholders when verifying their identities and eligibility to use the cards when purchasing goods or services and eventually deducted money from their accounts which was a financial service exempted from VAT."

145. It then reiterated the sequence of events arising in a typical card transaction as outlined in paragraph 13 herein. It contended that based on the law as highlighted in its pleadings, it was clear that the services provided by an issuer fell squarely within the provisions of Paragraphs 1 (a), (b) (c) and (h) of the First Schedule of the VAT Act, namely:-“a)the operation of current, deposit or savings accounts, including the provision of account statements;b)the issue, transfer, receipt or any other dealing with money, including money transfer services, and accepting over the counter payments of household bills, but excluding the services of carriage of cash, restocking of cash machines, sorting or counting of money;c)issuing of credit and debit cards;h)the making of any advances or the granting of any credit;”

146. That it was evident from the foregoing that the issuer operated the cardholder's account to facilitate the transfer of money from the cardholders’ account. Accordingly, that there was no legal basis for treating the interchange fees as a Vatable supply. That this Tribunal also pronounced itself on the VAT status of interchange fees and declared that these are exempt from VAT in the following decisions:a.In NIC Group 8: NIC Bank Kenya PLC vs Commissioner of Domestic Taxes (2020) eKlr ("the NIC case"),b.The High Court in Barclays Bank of Kenya Limited v Commissioner of Domestic Taxes {2020} eKLR upheld the decision in the NIC case above.c.The Respondent's attempt to rely on the Court of Appeal's decision in Civil Appeal No. 195 of 2017 was wrong. The said appeal dealt with a different issue which was whether interchange fees are subject to withholding tax. The findings by the Court of Appeal therefore do not apply in this case, which relates to a completely different tax head, VAT.

147. Accordingly, the Respondent's contention that the interchange fees are subject to VAT were based on a misapprehension and/or misinterpretation of the facts and do not have legal basis. It submitted on the services performed by the card companies which had already been addressed in its statement of facts.

148. That in the case of Republic v Commissioner of Domestic Taxes large Taxpayers office Ex parte Barclays Bank of Kenya Limited (2012) eKLR, Justice Majanja stated as follows:“Consistent with the decision I have cited above, the duty of the respondent in assessing tax is to identify transactions or payments that attract tax liability especially where there are objections to such categorization ...... the respondent is obligated by law to state with clarity its claim and state how the transaction falls within the terms of the statute. The respondent cannot exercise its duty like a trawler in the deep seas expecting all the fish by casting its net wide. The respondent's decision in this respect falls below this standard and the transaction caught by the decision cannot be said to fall within the statutory definition of the tax."

(iii) Whether the Respondent's assessment is overstated and excessive 149. The Respondent submitted that in the objection letter, it explained to the Respondent that its assessment was overstated and excessive as it included other fees that were unrelated to its merchant acquirer business and the acquirer fee captured in the Respondent’s assessment was overstated and excessive.

150. That the Respondent's main contention in the objection decision was that it relied on information in the Trial Balances. Having clarified that not all the ledgers picked for the transaction/ assessment fees relate to the card payment business, it expected that the Respondent would amend its assessment downwards in the objection decision.

151. That the fact that the Respondent had not considered the clarifications made in the notice of objection and had not made any attempt to interrogate its assessment clearly displayed a preconceived mindset to issue an elevated assessment without due regard to arriving at a correct position. It therefore contended that the transaction/ assessment fees figures relied upon in coming up with the assessment were overstated and excessive and that the Respondent's assessment (which it objected to in toto) ought to be amended downwards.

(iv) Whether the Respondent’s demand is unreasonable in the circumstances and violates the Appellant's right to fair administrative action provided under article 47 of the Constitution. 152. The Respondent averred that Article 47 of the Constitution provides that every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair yet the Respondent has in its tax assessment and workings attempted to demand VAT from it on the gross MSC despite the undisputable fact that not all the gross MSC income accrues to it as the acquirer. It was manifestly unfair and unreasonable for the Respondent to demand VAT from it on fees that it did not earn.

153. In addition, that in the Respondent's workings, the acquirer fees figure was similar to the payments made to the Card Companies, which was factually impossible. The acquirer fees figure is an arbitrary figure that was literally plucked from the air and has no basis in law.

154. To buttress its position, the Respondent cited Republic v Kenya Revenue Authority Ex parte Jaffer Mujtab Mohamed [2015] eKLR. The totality of the foregoing was that the Respondent's action to demand VAT on the gross MSC from it in its capacity as an acquirer was unreasonable and in clear breach of its right to fair administrative action guaranteed under Article 47 of the Constitution.

155. The Respondent's objection decision confirming the VAT assessment on the gross MSC was erroneous and ought to be quashed. The decision appealed against was to the extent set out herein wrong in law, in breach of the Constitution, unjust in effect and therefore ought to be set aside.

156. The Respondent submitted as follows regarding the three issues it had identified for determination:

a. Whether the Appellant should pay VAT on the entire MSC. 157. The Appellant was both an acquirer and an issuer and as an acquirer it would contract with the merchants and perform functions like deployment of cards terminal, marketing activities risk assessments and settlement of disputes. It also provided payment network connectivity to its merchants in line with transaction obligations. The Appellant charged a fee referred to as MSC.

158. In certain instances, the Appellant would act as an issuer and therefore provide services in form of authorization settlement and clearance to the acquirer. In return for services rendered as an issuer it would earn interchange fee.

159. Card companies provided the infrastructure enabling credit and debit card transactions to take place. Card companies provide processing transactions between acquirers and issuers thereby allowing purchases to be authorised. The card companies receive dues and assessment fees for services provided. It is the merchant who bears the MSC and not the card holder. The merchant also need not have an account with the acquirer as acquiring business is not a preserve for banks.

160. It proceeded to explain the transaction flow in a card payment transaction and repeated some of the facts as outlined in its statement of facts. The Tribunal will not rehash the same.

ii. Whether card payment charges are subject to VAT. The Respondent submitted as follows regarding this issue for determination:

161. Imposition of VAT on MSC is provided for under the VAT Act. Section 2 of the VAT Act defines service as ‘anything that is not goods or money’.

162. Merchant services are not exempt from VAT as they are not the listed exclusions contained in Paragraph 1 of Part II to the First Schedule of the VAT act. Merchants bear the brunt of MSc from their sales proceeds.

163. That interchange fees earned constitutes fees earned for management and professional services and are therefore subject to VAT. The Appellant rendered co-ordination, managerial, professional and contractual services to the acquirers for which the latter pays.

164. It cited Commissioner of Domestic Taxes (Large Taxpayer Office)vs. Barclays Bank of Kenya Limited (Appeal No. 195 of 2017) to buttress its position and being guided by the holding in this case it is of the view that interchange fee earned constitutes management and professional fee and therefore it correctly raised the assessments.

165. It further cited the decision to in Commissioner of Domestic Taxes (Large Taxpayer Office) vs. Barclays Bank of Kenya Limited (Appeal No. 195 of 2017), the Court held that all management fees are fully exempt with full knowledge of the Stanbic and Transami judgements by the High Court. The Court of Appeal went on to hold that:-“In this appeal we have come to the conclusion that there is no ambiguity in the law and that the appellant sufficiently demonstrated that the payments made by the appellant to the card companies are “royalty” under the Act and further that the interchange fees made by the respondent in its capacity as acquirer to issuer banks were for management and professional services within the meaning of the Act.We are persuaded that the evidence on record properly established that the payments paid by the respondent to the card companies were royalty as denied in the Act and further that the interchange fees it paid to issuer banks were for management and professional services as defined in the Act and therefore both payments were subject to withholding tax under the Act.”

Whether the Respondent’s demand violates the Appellant’s right to fair administrative action as provided under Article 47 of the Constitution. The Respondent submitted as follows regarding this issue for determination:

166. It followed the TPA to issue assessments on 16th March, 2022. The Appellant was notified and informed of its rights to make an objection which it did on 14th April, 2022. Upon a detailed review of the objection it issued an objection decision on 10th June, 2022. The Appellant was heard before the objection decision was issued and the Appellant’s right to fair administrative action was not violated.

167. Section 56 (1) of the TPA provided that:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect”.

168. The same provision is echoed in Section 30 of the Tax Appeals Tribunal Act No. 40 of 2013 which provides as follows:-“In a proceeding before the Tribunal, the Appellant has the burden of proving:(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

169. The Appellant did not adduce evidence to discharge its burden of proving that the assessments were incorrect or excessive. It cited Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR to buttress its position. The following was held in this case:“By now it is trite that a taxpayer always has the burden of proof in tax proceedings regardless of whether it is a review of an objection decision or an appeal. It should be noted that the burden of proof is a different concept to the standard of proof.The taxpayer’s burden of proof comprises two parts- establishing with evidences the underlying facts on which the law is to operate (and in this regard the stand of proof to which each fact must be proved is relevant) and- that the operation of the law when applied to those facts establishes that the assessment is excessive or erroneous.”

170. The pronouncements in Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR were in conformity with the findings in PZ Cussons East Africa Limited v Kenya Revenue Authority [2013] eKLR wherein it was held that:“the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect and of course he has completely failed to do so. That is sufficient to dispose of the appeal which I accordingly dismiss with costs.”

Issues For Determination 171. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions found that the parties raised a number of issues in their respective cases beginning with whether MSC is earned by the acquirer, whether the services in card payment transactions are subject to VAT, whether the tax assessment was overstated and excessive and whether the demand was unreasonable and violated the Appellant’s right to fair administrative action provided under Article 47 of the Constitution.

172. The Tribunal having considered the able and elaborate submissions made by the parties has found that determination of the main issue on VAT will dispose the entire Appeal.

173. The single issue identified by the Tribunal as an issue for determination is:

Whether the Appellant is responsible for charging and remitting VAT on the entire amount of MSC that it has received. Analysis And Findings 174. The Tribunal has carefully considered the arguments of both parties as set out in detail hereinbefore and does not intend to restate them in the analysis. Suffice it to say the dispute herein is not new and a number of cases have been decided by the Tribunal, the High Court and in the Court of Appeal. These cases have touched on one aspect or other of taxation of MSC or interchange fees or acquirer fees for purposes of Income tax, excise duty and VAT in the hands of banks as either issuer or acquirer or both issuer and acquirer.

175. The Tribunal is of the view that the role of the Appellant herein is that of the acquirer and this is not in dispute. The subject matter is not only taxation of the fees earned for services it supplies in its role as an acquirer and the facets of those services such as whether it is a service for purposes of the VAT Act or it is excluded by virtue of the definition in the Act and/or exemption provisions but also whether it bears responsibility for charging and remitting the VAT on the entire amount it receives from the Merchant on behalf of the other parties in a credit card transaction.

176. The Tribunal has noted that the issues raised in para 179 have been addressed in previous decisions namely Barclays Bank of Kenya Ltd vs. Commissioner of Domestic Taxes (Tax Appeal No. 137 of 2016); NIC Group 8: NIC Bank Kenya PLC v Commissioner of Domestic Taxes [2020], which have provided useful precedents.

177. The Tribunal finds that in Barclays Bank of Kenya Ltd vs. Commissioner of Domestic Taxes (Tax Appeal No. 137 of 2016) it held as follows in Paragraph 37-40:“the issuing bank operates an account for its customer and as such its main function is confirmation that the customer has sufficient funds or credit for the transaction, debiting the customer’s account and finally transferring the funds to the acquiring bank for the onward transmission to the merchant’.38. The Appellant, as the issuing bank, undertakes these activities on behalf of its customers with whom it has a contractual relationship. The Respondent argues that these services are offered to the acquiring banks, a position we are disinclined to accept for a number of reasons. In the first instance, there is no relationship between the Appellant as an issuing bank and the acquiring banks. The Respondent wishes to impose and imply a relationship between the issuing banks and the acquiring banks where there exists none. Secondly, and perhaps more imperative to note, a transaction for transfer of funds is initiated by the issuing bank's customer and not the acquiring bank’s. Therefore, we find that the Respondent was incorrect in assuming a relationship between the issuing banks and the acquiring banks as the services undertaken by the Appellant as an issuing bank are done purely for the benefit of its customers.39. With regards to whether these services are vatable as the Respondent argues, we have had occasion to underscore the services offered by the issuing bank as ancillary to its core mandate, which is the transfer of the funds from its customers' accounts. Transfer of funds is expressly exempt from VAT as per the provisions of the Paragraph 1 (a) (b) (c) and (h) of the First Schedule to the VAT Act, 2013. In the circumstances we place reliance on our Judgement in Tax Appeal No. 361 of 2018, NIC Group & NIC Bank Ltd v Commissioner of Domestic Taxes as upheld by the High Court in Barclays Bank of Kenya limited v Commissioner of Domestic Taxes [2020] eKLR for the position that interchange fees charged by the issuing bank is not subject to VAT at the standard rate but rather it is exempt.40. The Respondent's assessment in this respect was erroneous and we therefore find that the services rendered by the Appellant, as the issuing bank, are not subject to VAT as per the Respondent's assessment."

178. Services, money and supply of services are outlined, pursuant to Section 2 of the VAT Act as follows:‘services” means anything that is not goods or money.“supply of services” means anything done that is not a supply of goods or money (emphasis ours) including-a.the performance of services for another person;b.the grant, assignment or surrender of any right’c.the making available of any facility or advantage; ord.the toleration of any situation or the refraining from doing any act.”“money” means-a.any coin or paper currency that is legal tender in Kenya;b.a bill of exchange, promissory note, bank draft or postal or money order;c.any amount provided by way of payment using a debit or credit card or electronic payment system;

179. The Tribunal has noted that the acquirer maintains the relationships with the merchant through the Merchant Services Agreement. The issuer on the other hand facilitates the card transaction by authorizing the sale and ensures that payments are made to the merchant on behalf of its customers.

180. The Tribunal further notes that the Appellant acted as an issuer or acquirer depending on the circumstances. The Tribunal agrees with the Respondent in its assertion that the merchant bears the brunt of the MSC. The Tribunal also agrees the acquirer is only entitled to the acquirer fee as it has elaborately indicated in its pleadings. However, according to the outline it has provided which is very detailed, it acts as a collector of the entire MSC since it is the one that has executed the Merchant Services Agreement in its capacity as the acquirer. This fact is not in dispute. The acquirer, is the party in the card transaction that collects the MSC then distributes it to other parties in the transaction.

181. This Tribunal finds that the issue of whether there is a service is not in dispute since the acquirer provides a service to the merchant, the card company and the issuing bank and it is entitled to the acquirer fee. The issue is whether the service provided by the acquirer is a financial service listed in Part II of the First Schedule to the VAT Act. The Tribunal in this instance has found that facilitation of payment is a financial service and is listed in Part II of the First Schedule of the VAT Act.

182. More particularly, Part II of the First Schedule to the VAT Act states the following:“The supply of the following services shall be exempt supplies—1. The following financial services—a.the operation of current, deposit or savings accounts, including the provision of account statements;b.the issue, transfer, receipt or any other dealing with money, including money transfer services, [emphasis ours] and accepting over the counter payments of household bills, but excluding the services of carriage of cash, restocking of cash machines, sorting or counting of money;c.issuing of credit and debit cards;d.automated teller machine transactions, excluding the supply of automated teller machines and the software to run it……….”

183. The credit card transaction involves a ‘transfer of money’ and the acquirer facilitates it as established in both Barclays Bank of Kenya Ltd vs. Commissioner of Domestic Taxes (Tax Appeal No. 137 of 2016) and Commercial Bank of Africa Limited vs. Commissioner of Domestic Taxes [No. 322 of 2018].

184. The Tribunal further notes that the acquirer facilitated payment through credit or debit cards on behalf of the merchant by providing the Point of Sale terminals, marketing and technical support and virtual payment processing amongst other services. The service it provided could be referred to as ‘facilitation of the transfer of money’. ‘Money transfer services’ are listed as exempt services in Paragraph II of the First Schedule to the Act. Accordingly, the ‘facilitation service’ by the acquirer is an exempt financial service in the context of the VAT Act. The acquirer provides facilities that enable payment through credit or debit cards, for example the provision of PDQ machines.

185. The Tribunal is of the view that in the instant Appeal, there is a taxable supply by the acquirer which is the ‘facilitation service’. It is of the further view that the ‘facilitation service’ is an exempt financial service which is therefore not subject to VAT.

186. The Tribunal therefore finds that the Appellant is not responsible for charging and remitting VAT on the entire amount of MSC that it has received since the services it provides as an acquirer are exempt from VAT.

Final Decision 187. The upshot of the foregoing analysis is that the Appeal is meritorious and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 10th June, 2022 be and is hereby set aside.c.Each party to bear its own costs.

188. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024ERIC NYONGESA WAFULACHAIRMAN**DELILAH K. NGALA CHRISTINE A. MUGAMEMBER MEMBERGEORGE KASHINDI ABDULLAHI M. DIRIYEMEMBER MEMBERSPENCER S. OLOLCHIKEMEMBER