The Tax Appeals Tribunal on September 18, 2026 ruled that default interest charged by lenders is “interest on loan” or “return on loan” and therefore not subject to excise duty, giving banks a basis to challenge similar Kenya Revenue Authority (KRA) assessments.
The decision arose from a KRA audit of M-Oriental Bank covering 2019 to 2023, where the tax authority had assessed the bank for excise duty, penalties and interest on its default-interest income totalling about KSh1 billion.
KRA had argued that the default interest constituted “other fees” earned from licensed financial activities and thus fell within the 20 per cent excise duty charge under the Excise Duty Act.
The tribunal rejected that view, holding that default interest falls within the Act’s explicit exclusions for interest on loans and returns on loans, which are not defined as “other fees”.
Although the Finance Act, 2019 amended the definition of “other fees” to expressly exclude fees or commissions earned in respect of a loan, the Finance Act, 2021 later removed that exclusion with effect from July 1, 2021, the tribunal nevertheless found that default interest remained outside the excise duty charge because it is interest on a loan.
Bowmans Kenya tax analysts said the September 18 decision provides key guidance for financial institutions on the treatment of default and penalty interest under the Excise Duty Act and advised lenders that any excise duty assessments on such interest should be reviewed in light of the ruling.
The tribunal’s ruling adds to earlier judicial guidance, including a High Court decision in March involving SBM Bank Kenya that also concluded excise duty does not apply to default interest.
