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Judge: Financial service providers are entitled to VAT exemptions
KRA had argued that Pesapal’s licence as a payment service provider authorised it to offer payment systems only, and the Tribunal was correct in holding so.
The High Court has set aside a decision by the Tax Appeals Tribunal, which had allowed the Kenya Revenue Authority (KRA) to claim Sh76.8 million from payment services firm Pesapal Limited on commissions earned, ruling that such firms are entitled to exemption from value-added tax (VAT).
Justice Rhoda Rutto stated that Pesapal, being a licensed payment service provider as defined under the National Payment System Act (NPSA), qualifies for VAT exemption as stipulated in the Act.
“Importantly, the VAT Act neither restricts eligibility for exemption based on the technology used, nor does it tie exemption to registration under the Banking Act. The Appellant’s (Pesapal’s) 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,” said Justice Rutto.
The VAT-exempt services include the issuance, transfer, receipt, or any other dealing with money, including money transfer services, and the acceptance of over-the-counter household bill payments.
Justice Rutto said the fact that Pesapal’s services are delivered through digital platforms does not alter their essential nature and character, which are in substance “dealings with money.”
The court held that the Tribunal misapprehended the legal provisions governing VAT-exempt financial services, leading to an erroneous conclusion in favour of the revenue collection agency.
KRA had argued that Pesapal’s licence as a payment service provider authorised it to offer payment systems only, and the Tribunal was correct in holding so.
On whether the services offered by Pesapal were VAT exempt, the commissioner contended that for the company to qualify for exemption, it must provide one of the financial services listed under Paragraph 1 of Part II of the First Schedule of the VAT Act.
It was KRA’s position that while Pesapal’s system had been registered by the Central Bank of Kenya under the NPSA to facilitate payments, this did not qualify as the provision of financial services for purposes of VAT exemption.
KRA said that Pesapal’s online platform integrates with banking IT systems, mobile money transfer services, and other electronic payment channels, thereby serving as a technological enabler rather than a financial service provider.
But the court said the wording of the Act was clearly intended to capture a wide array of monetary operations, particularly those that facilitate the movement of funds.
The verdict sets a precedent for how digital payment platforms are classified under tax law, potentially influencing future disputes between fintech firms and revenue authorities.
