The High Court has reversed a tax tribunal’s ruling against Pesapal Limited, a payments company. The court held that commissions received from transaction processing are not subject to value-added tax (VAT).
The Kenya Revenue Authority (KRA) assessed that Pesapal owed KSh 76.8 million in unpaid VAT and an additional KSh 33.9 million in penalties and interest, which Pesapal contested.
Pesapal’s argument
The company maintained that, even when provided via digital channels, its primary functions—such as receiving, transferring, and storing funds on behalf of merchants—fit neatly under the VAT Act’s exemption for financial services.
According to Pesapal, a provider can still be eligible for the exemption without being a bank or holding a Banking Act license.
“It is critical to underscore that the VAT Act defines exempt services by the nature of the activity, not by the institutional classification, without recourse to other statutes. In my view, implying such classification would amount to judicial legislation, which is contrary to the constitutional imperative that bestows upon Parliament the legislative mandate,” Justice Rhoda Rutto said in her ruling.
KRA’s defence
KRA retorted that Pesapal only runs a technological platform that enables payments between consumers and merchants. It holds that the only organisations eligible for VAT exemptions are those officially recognised as financial service providers under banking law. Pesapal filed an appeal after the Tax Appeals Tribunal upheld this reasoning last year.
Justice Rhoda Rutto agreed with Pesapal that the activities carried out by payment service providers, such as sending, receiving, storing, and processing money, are directly related to financial services exempt from VAT and that using digital platforms does not alter their fundamental nature.
“The VAT Act neither restricts eligibility for exemption based on the technology used nor ties exemption to registration under the Banking Act. The Appellant’s (Pesapal) activities, facilitating merchant payments, processing client funds, storing balances, and executing payment instructions, are functionally equivalent to and mirror those of financial institutions, albeit in a digital environment,” Justice Rutto averred.
What this verdict means for fintechs
The decision eliminates a potential tax burden that could have increased expenses for retailers and customers by confirming that digital payment processors are eligible for VAT exemption.
It also restricts the tax authority’s ability to reclassify fintechs as merely technology operators, indicating that an apparent legislative change will be necessary for any growth in VAT collection in the digital payments sector.