Kenya’s Tax Appeals Tribunal (TAT) has dealt a blow to the Kenya Revenue Authority (KRA), providing consumers and businesses with a much-needed reprieve by ruling that foreign exchange (forex) margins are exempt from excise duty.
This decision overturns KRA’s longstanding position that profits from currency conversion are taxable fees, potentially lowering transaction costs but complicating the tax agency’s revenue collection efforts.
The verdict removes a 20% excise duty burden from forex margins, which could significantly reduce costs for businesses and individuals engaged in cross-border trade, remittances, and international transactions. Banks and forex bureaus, no longer required to absorb or pass on the tax, may now adjust their pricing strategies to attract clients, fostering increased competition in the financial sector. However, this ruling also raises fiscal challenges. KRA, already grappling with revenue shortfalls, may need to address the gap by enforcing other levies more strictly or introducing new taxes, possibly straining businesses and consumers in other ways.
“This decision significantly enhances certainty and clarity for financial institutions by confirming that forex margins from currency conversion transactions are not classified as ‘other fees’ and are therefore not subject to excise duty,” audit firm PwC said in a report analyzing the ruling.
PwC further noted that the ruling underscores the importance of accurately defining taxable transactions and reaffirming tax law principles, ensuring that levies are imposed strictly based on the wording of statutes rather than broad interpretations.
For businesses and retail traders navigating Kenya’s often volatile forex market, this ruling comes as a welcome relief. Small and medium-sized enterprises (SMEs), which rely heavily on cross-border transactions, stand to benefit from reduced forex costs, improving their cash flow and competitiveness. Additionally, lower transaction fees could spur increased foreign remittances, one of Kenya’s key sources of foreign currency by making transfers cheaper for the diaspora community.
The decision could prompt banks to adjust their forex pricing structures. Currently, banks like Absa and Co-operative Bank maintain forex margins of 10.5% and 7.7%, respectively, significantly higher than forex bureaus, where margins range between 1.36% and 2.7%. With the tax burden lifted, competition in the sector may intensify, encouraging financial institutions to offer more favorable rates to customers. More competitive forex rates will benefit corporate clients and everyday consumers who frequently exchange currency for travel, education, and business purposes. Lower costs could also improve liquidity in the forex market, making it easier for businesses to access foreign currency.
While the ruling promotes market efficiency, it presents a setback for KRA, which has relied on excise duty from forex transactions as a steady revenue stream. Financial market analysts believe that the tax agency, already under pressure to meet its collection targets, will need to recalibrate its strategy to make up for lost revenue.
KRA has already introduced or increased levies on various goods and services. Excise duty on imported sugar, for instance, has risen to Sh7.5 per kilogram from Sh5 per kilogram, while cigarette taxes have increased from Sh3,825.99 to Sh4,100 per thousand sticks.
Additionally, the taxation of digital services provided by non-residents, now subject to excise duty, Value Added Tax (VAT), and income tax, has also broadened KRA’s revenue base, though it risks raising costs for businesses in Kenya’s growing tech sector.
Despite the revenue concerns, the ruling is unlikely to trigger immediate fiscal instability. The Central Bank of Kenya (CBK) has maintained robust forex reserves, currently at $10.001 billion (about Sh1.29 trillion), equivalent to 5.1 months of import cover, providing a buffer against short-term shocks.
The Kenyan Shilling has shown resilience, with the USD/KES exchange rate averaging 129.3 in early 2025. However, analysts at Cytonn Investments project further volatility, expecting the Kenya Shilling to weaken to between Sh134.4 and Sh140.5 against the USD by year-end, driven by external pressures such as global .interest rate shifts and fluctuating oil prices. The CBK’s interbank rate, currently at 10.64 percent, reflects ongoing efforts to stabilize the currency, though forex reserves remain the primary cushion against depreciation risks.
While the TAT’s ruling aligns with Kenya’s historical tax policy, where forex margins have traditionally been excluded from excise duty to avoid double taxation, it also deepens the tension between market liberalization and the government’s revenue collection needs. KRA may respond with heightened enforcement of alternative taxes, potentially straining compliance among businesses. Already, mandatory electronic tax invoicing (eTIMS) and reverse invoicing for small businesses are being rolled out to curb evasion, though they require significant system upgrades and staff training. Additionally, recent court interventions, such as the suspension of excise duty adjustments for petroleum products due to procedural flaws, highlight the ongoing friction between the tax authority and the private sector.
