High Court Grants Fintechs VAT Exemption on Payment Services

Case Study: Pesapal Limited v Commissioner of Domestic Taxes (Income Tax Appeal E081 of 2023) [2025] KEHC 12284 (KLR) (Commercial and Tax) (27 August 2025) (Judgment)

Background

Pesapal Limited, a fintech payment services provider licensed by the Central Bank of Kenya under the National Payment System Act (NPSA), facilitates electronic payments for merchants. KRA assessed Pesapal for VAT on its commissions, arguing these were taxable services. Pesapal objected, claiming its services were exempt financial services under the VAT Act. The Tax Appeals Tribunal sided with the KRA, leading to this appeal.

Key Legal Issues

1. Whether Pesapal’s services constitute VAT-exempt financial services under Paragraph 1(b) and 1(m) of Part II of the First Schedule to the VAT Act.
2. The correct interpretation of the VAT exemption provisions for financial services, particularly concerning technology-enabled payment platforms.

Arguments

• Pesapal’s Argument: Its activities (sending, receiving, storing, processing payments) align with the exempt services of “issuing, transferring, receiving or any other dealing with money.” It provides these services on a commission basis for merchants, which is explicitly exempt under Paragraph 1(m). Being licensed under the NPSA confirms the financial nature of its services. The VAT Act focuses on the nature of the service, not the provider’s identity or the technology used.
• KRA’s Argument: Pesapal merely operates a technological platform that facilitates payments; it does not itself provide financial services. To be a financial service provider, an entity must be registered under the Banking Act. The phrase “any other dealing with money” must be interpreted narrowly alongside the preceding terms (“issue, transfer, receipt”) and does not include Pesapal’s technological facilitation.

Court’s Analysis & Decision

The High Court allowed Pesapal’s appeal, setting aside the Tribunal’s decision. The court’s reasoning was as follows:

1. Substance Over Form: The court focused on the substance of Pesapal’s activities rather than its legal form or the technology used. Its core functions—facilitating payments, processing funds, storing balances—are fundamentally “dealings with money.”
2. Alignment with VAT Exemption: These functions directly correspond to the services described in Paragraph 1(b) of the VAT Act’s exemption schedule. The NPSA, which regulates Pesapal, was enacted to govern precisely these types of digital financial services, confirming their financial character.
3. Commission-Based Services: The court found that Pesapal unequivocally provides these financial services on behalf of merchants (a third party) for a commission, which falls squarely within the exemption provided under Paragraph 1(m).
4. Statutory Interpretation: The VAT Act does not restrict the exemption based on the technology used or require registration under the Banking Act. It exempts specific activities. The court criticized the Tribunal for a narrow interpretation, stating that Parliament would have explicitly excluded digital platforms if that was the intent. Furthermore, any ambiguity in tax law must be resolved in favor of the taxpayer.
5. Error by the Tribunal: The High Court found that the Tribunal erred in law by misinterpreting the scope of the VAT exemption provisions and failing to properly apply the principles of statutory interpretation.

Final Order

The objection decision by the KRA dated November 26, 2021, which upheld the VAT assessment, was disallowed.

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