On 24 February 2026, the High Court of Kenya delivered a landmark judgment in Income Tax Appeal E077 of 2025: Commissioner of Legal Services v SBM Bank Kenya Ltd (SBM Bank). Bowmans acted for SBM Bank, successfully securing a positive decision that default interest levied on a borrower for late payment of a loan instalment is interest and is therefore not subject to excise duty.
Background
The Kenya Revenue Authority (KRA) audited the books of SBM Bank and assessed excise duty on default interest earned by SBM Bank from borrowers who failed to pay their loans on time. On appeal at the Tax Appeals Tribunal (Tribunal), SBM Bank opposed the excise duty assessment on default interest arguing that excise duty was not chargeable on interest. On 21 February 2025, the Tribunal made its determination agreeing with SBM Bank. Being dissatisfied with the decision, the KRA appealed the matter to the High Court.
Legal analysis
Provisions of the Excise Duty Act
Pursuant to Part II of the First Schedule to the Excise Duty Act, excise duty is chargeable on other fees charged by financial institutions at the rate of 20% Â of their excisable value.
Part III of the First Schedule to the Excise Duty Act defines the ‘other fees’ as ‘any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on loan or return on loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder’.
The Excise Duty Act does not define interest and this has been subject to dispute in several matters.
High Court decision
Despite the various issues raised by the parties, the Court reduced the issues in dispute into one, that is, ’whether additional interest for late payment of loans is excluded from definition of other fees under the Excise Duty Act’.Â
The High Court dismissed the KRA’s appeal and upheld the Tribunal’s decision in favour of SBM Bank. The Court confirmed that the default interest charged by SBM Bank is ‘interest’ and not ‘other fees’ for purposes of the Excise Duty Act and is therefore not subject to excise duty. In reaching this decision, the Court made the following key findings:
- Reference to the literal definition and the definition under the Income Tax Act: the Court affirmed that tax statutes must be interpreted based on their plain and literal meaning, where no definition is provided in the statute. Further, the Court also affirmed that the Tax Appeals Tribunal did not err by also referring to the definition of interest under the Income Tax Act.
- Ambiguity in tax law should be resolved in favour of the taxpayer: since the Excise Duty Act did not have a definition of ‘interest’, the Court held that any such ambiguity arising from interpretation must be resolved in favour of the taxpayer.
Practical implications for taxpayers
This judgment confirms that default interest charged by banks is not subject to excise duty.
Financial institutions that have been assessed on the payment of excise duty on default or penalty interest charged to borrowers should review those assessments in light of this decision. Where such interest has been properly characterised as interest on a loan in the relevant loan documentation, there is a strong basis to challenge any such assessment.
