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When fintech meets fairness—Kenya’s High Court redefines the rules, unlocking a new era for digital finance. Read the article below for further insights.
By Moses Mutethia - Associate, Tax
Background:
In a landmark judgment for Kenya's fintech sector, the High Court has overturned a decision of the Tax Appeals Tribunal, ruling that commissions earned by licensed Payment Service Providers ("PSPs") constitute VAT-exempt financial services.
The case, Pesapal Limited v Commissioner of Domestic Taxes, centered on a VAT assessment of Kshs. 76.8 million plus penalties and interest issued by the Kenya Revenue Authority ("KRA") against Pesapal Limited, a PSP licensed by the Central Bank of Kenya.
The Dispute
KRA's Position: KRA argued that Pesapal merely operated a technological platform that integrated with banking systems and mobile money services to facilitate payments. It contended that this service was not a "financial service" as defined under the VAT Act but was akin to an IT service. Therefore, the commissions earned were subject to VAT.
Pesapal's Position: Pesapal maintained that its core activities sending, receiving, storing, and processing payments on behalf of merchants constituted "dealing with money." It argued that these services were VAT-exempt under Paragraph 1(b) of Part II of the First Schedule to the VAT Act, 2013.
These services were provided to merchants on a commission basis, they were also exempt under Paragraph 1(m).
The Tax Appeals Tribunal's Initial Ruling
The Tax Appeals Tribunal initially sided with the KRA, holding that Pesapal’s platform was an "information technology system" and not a financial service.
The High Court's Landmark Decision (2025)
On appeal, the High Court set aside the Tribunal's judgment. The Court's analysis reached several key conclusions:
- Payment services provided by PSPs qualify as financial services under the VAT Act.
- Commissions earned on behalf of merchants are VAT exempt under Paragraph 1(b) and 1(m).
- Ambiguities in tax law must be resolved in favor of the taxpayer. Thus, Pesapal's VAT assessment was set aside.
My Thoughts on the Ruling and Potential Implications:
- This ruling is a significant victory for the rule of law and Kenya's burgeoning fintech industry. The Court's reasoning was sound and forward-looking.
- Substance Over Form: The Court correctly looked at the substance of the service "dealing with money" rather than the form of its delivery through a digital platform. This principle-based approach is crucial for regulating fast-evolving technologies.
- Clarity and Certainty: The judgment provides much-needed clarity and tax certainty for "PSPs" and fintech companies, allowing them to operate without the looming risk of massive retrospective VAT assessments on their core revenue.
Potential implications for companies are profound
Fintechs and PSPs should review their tax positions and may have grounds to file for refunds for VAT previously paid on similar commission income. This decision effectively reduces the cost of doing business for these entities, making their services more competitive and sustainable.