In a significant ruling, the Tax Appeals Tribunal of Kenya has decided that default interest earned by banks from borrowers who delay loan repayments is not subject to excise duty. This decision provides relief to lenders who could have faced a substantial tax bill on income earned from overdue loans. The ruling was made in favor of M-Oriental Bank, which had been audited by the Kenya Revenue Authority (KRA) from 2019 to 2023.
The KRA had assessed M-Oriental Bank for excise duty, penalties, and interest on its default interest income, totaling about Sh1 billion. However, the tribunal found that default interest charged to customers who fail to repay loans on time constitutes “interest on loan” or “return on loan,” which are excluded from excise duty. This ruling gives lenders grounds to challenge similar tax assessments by the KRA.
The Excise Duty Act requires financial institutions to pay 20 percent excise duty on “other fees” earned from their licensed financial activities. However, the law expressly excludes interest on loans and returns on loans from the definition of fees subject to the tax. The tribunal rejected the KRA’s interpretation of the law, holding that default interest falls within the excluded categories of interest on loans and returns on loans.
The tribunal’s decision, made on September 18, 2026, provides key guidance to financial institutions on the treatment of default and penalty interest under the Excise Duty Act. According to Bowmans Kenya tax analysts, the judgment reinforces that default and penalty interest on loans should not attract excise duty. This ruling adds to the growing judicial guidance limiting KRA’s attempts to impose excise duty on default interest.
The case arose from a KRA audit of M-Oriental Bank, which had argued that default interest charged by the bank constituted “other fees” earned from its licensed financial activities and was therefore subject to excise duty. However, the tribunal found that default interest remained outside the excise duty charge because it constituted interest on a loan or return on a loan.
This decision is consistent with a previous High Court decision involving SBM Bank Kenya, which also found that excise duty does not apply to default interest. The court held that the default interest charged by banks is ‘interest’ and not ‘other fees’ for purposes of the Excise Duty Act and is therefore not subject to excise duty.
The ruling also considered changes to the tax law during the period covered by the dispute, including amendments made by the Finance Act, 2019, and the Finance Act, 2021. The decision provides relief to banks and gives them grounds to review and challenge similar tax assessments by the KRA.
Key points
- The Tax Appeals Tribunal has ruled that default interest on loans is not subject to 20% excise duty.
- The ruling provides relief to banks who could have faced a huge tax bill on income earned from overdue loans.
- The decision is consistent with previous judicial guidance limiting KRA’s attempts to impose excise duty on default interest.
