When Are Withholding Tax & Excise Duty Not Applicable?

Case Study: Prime Bank Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E082 of 2025) [2026] KETAT 6 (KLR) (16 January 2026) (Judgment)

Background

• The KRA audited Prime Bank’s tax affairs for 2019-2022.
• An initial additional assessment of Kshs. 100,190,141 was issued (covering CIT, PAYE, Withholding Tax & Excise Duty, etc.).
• The Bank conceded and paid Kshs. 18,114,060 for some items but objected to the balance concerning CIT, Withholding Tax, and Excise Duty.
• KRA issued an objection decision on 19 Dec 2024, revising the demand to Kshs. 87,622,430 (excluding penalties/interest).
• The Bank, still dissatisfied with the WHT and Excise Duty components, filed this appeal.

Prime Bank Key Arguments

The Bank raised ten grounds, which the Tribunal consolidated into three core issues. Their main contentions were:

• On Withholding Tax (WHT):

1. WHT was wrongly assessed on interest paid to banks/financial institutions, which is exempt under Section 35(3)(b) of the Income Tax Act.
2. KRA failed to credit WHT payments already made (Kshs. 10.55m for 2020, Kshs. 80,258 for 2021).
3. WHT was assessed on operational expenses (e.g., goods purchases, repairs) that do not fall under WHT categories in Sections 10 & 35 of the ITA.
4. WHT was wrongly levied on payments to service providers in South Africa and UAE. The relevant DTAs have no specific article for management/professional fees, so such income should be taxed as business profits (only in the resident country unless a Permanent Establishment exists).
5. 2019 Year of Income: The law enabling KRA to collect unwithheld tax from the payer (Section 39A, Tax Procedures Act) only came into force on 7 Nov 2019. Therefore, assessments for periods before that date were unlawful

• On Excise Duty:

1. Excise duty was wrongly charged on income from cheque/bill discounting, card interest, late payment, and over-limit fees. These are interest income, which is expressly exempt under the Excise Duty Act.
2. Excise duty was wrongly charged on interchange fees from international card transactions. These are “exported services” (consumed outside Kenya) and are exempt under Section 7 of the EDA.
3. The assessment was based on unreconciled variances without proper consideration of reconciliations provided.

KRA’s Key Arguments

• Conceded that interest to financial institutions is WHT-exempt and acknowledged some computational errors.
• Stated it had adjusted and removed WHT for periods prior to 7 Nov 2019.
• Maintained that the remaining WHT assessment (Kshs. 9.15m) was valid for services falling under Sections 10 & 35 ITA, and that the Bank failed to provide requested contracts to prove otherwise.
• Argued that bill discounting fees, card interest, etc., were “other fees” under the EDA, not pure interest, relying on the African Banking Corporation case. They distinguished between interest (exempt) and fees incidental to obtaining a loan (chargeable).
• Contended that interchange fees were consumed by Kenyan cardholders, thus not “exported services.”
• Emphasized the taxpayer’s burden of proof to demonstrate the assessments were wrong.

Tribunal’s Analysis & Findings

The Tribunal identified three issues for determination and ruled overwhelmingly in favour of the Appellant:

1. On Lawfulness of Withholding Tax Assessments:

• Interest to Financial Institutions: Upheld the Bank’s argument. Section 35(3)(b) ITA provides a clear exemption. KRA’s failure to adjust its decision despite conceding the point rendered it legally unsustainable.
• Uncredited Payments: Found KRA erred by not crediting acknowledged WHT payments. Ignoring proven payments amounts to impermissible double taxation.
• Operational Expenses: Found KRA imposed WHT on expenses not listed in the charging provisions (Sections 10 & 35 ITA). The burden was on KRA to show they fell under these sections, which it failed to do.
• Payments under DTAs: Upheld the Bank’s argument. Citing precedent (McKinsey & Company, Total Kenya), it ruled that in the absence of a specific DTA article, management/software fees are business profits, not subject to Kenyan WHT without a Permanent Establishment.
• 2019 Year of Income: Upheld the Bank’s argument. The law enabling collection from the payer was not in force for most of 2019. Assessments for that period were beyond legal power.

2. On Lawfulness of Excise Duty Assessments:

• Interest Income: Upheld the Bank’s argument. Income from bill discounting, card interest, etc., is interest, which is excluded from excise duty. Distinguished KRA’s cited case (African Banking Corp) as dealing with ancillary fees, not interest itself.
• Exported Services: Upheld the Bank’s argument. Interchange fees for international transactions are exported services exempt under Section 7 EDA. Relied on precedents like Standard Chartered Bank Kenya.

3. On Compliance of Objection Decision with TPA:

• Found the objection decision legally defective under Section 51(8) TPA because it was internally inconsistent—it acknowledged errors but failed to correct them in the final computation.

Final Decision & Orders

• The Appeal was ALLOWED.
• The Respondent’s objection decision dated 19 December 2024 was set aside.