Payment service provider Pesapal has failed in its bid to quash tax demand of Sh233 million after a tribunal ruled that commission earned through the technology is not tax-exempt.
Pesapal offers online payment services through a system that can integrate with banks, mobile e-money transfer platforms such as M-Pesa, Airtel Money as well as other online payment channels such as Visa, Mastercard and American Express.
The firm had argued that it provides a financial service on behalf of its merchants on a commission basis and should be exempted from VAT.
The tribunal chaired by Eric Wafula, however, said Pesapal is not a financial service provider as envisaged under the VAT Act and it does not, therefore, qualify for exemption.
"The only way through which the Appellant (Pesapal) could qualify to offer financial service would be if it were to be registered as a financial institution under Section 5 of the Banking Act," the tribunal ruled.
Pesapal rejected the assessment from the Kenya Revenue Authority (KRA), arguing that it engages with both customers and a merchant charged a commission for service.
The tribunal was informed that Pesapal deals with the receipt and dealing of money on behalf of its merchants on a commission basis.
The taxman argued that the service provider does not qualify for the exemption as it only offers a payment platform. The tribunal heard that Pesapal does not lend, store or receive monies as do financial institutions but rather facilitate processes from a technology enabling perspective.
In the decision, the Tribunal said it was clear that Pesapal supplies are on behalf of other parties.
According to the tribunal, an IT system that is intended to facilitate payments for its clients does not amount to a financial service.
