MasiboLaw

By Meshack Masibo

The High Court has delivered a landmark decision reshaping VAT rules for Kenyan fintechs and digital payment platforms. In Pesapal Limited v Commissioner of Domestic Taxes, Justice Rhoda Rutto ruled that fintechs licensed under the National Payment System Act (NPSA) qualify for VAT exemptions for financial services—even if they are not banks.

This ruling provides much-needed clarity for payment service providers, many of whom have faced ongoing disputes with the Kenya Revenue Authority regarding the VAT exemption status of their commissions and transaction fees.

Background: What Sparked the Dispute?

Pesapal, a leading payment service provider, operates a digital platform that facilitates merchant payments, executes payment instructions, stores balances, and processes funds.

Despite being licensed under the NPSA, the KRA assessed Pesapal for KES 76.8 million in VAT, plus KES 33.9 million in penalties and interest, arguing that its merchant commissions were not exempt under the VAT Act.

• KRA’s Position: Pesapal is simply a technology platform enabling transactions, not a direct provider of financial services.
• Tax Appeals Tribunal (TAT): Agreed with KRA, ruling that Pesapal’s commissions were taxable.

Pesapal challenged this interpretation by appealing to the High Court.

High Court Ruling: Why This Case Matters

Justice Rhoda Rutto overturned the TAT’s decision, making several critical findings:

1. Nature of the Service, Not the Licensee’s Category, Determines VAT Exemption The Court held that exemption hinges on what the provider does, not who they are. If a fintech facilitates payments, executes instructions, or processes funds, these are core financial services—even if provided via a digital platform.
2. Pesapal’s Activities Are Financial Services under the VAT Act
3. Facilitating merchant payments, storing balances, and executing payment instructions fall squarely within “dealing with money” services exempted under the First Schedule of the VAT Act.Operating on a commission basis qualifies under paragraph 1(m), which explicitly exempts commission-based financial intermediation.
4. Digital Delivery Does Not Change the Legal Character of the Service The Court rejected KRA’s “platform” argument, clarifying that the medium—whether physical or digital—does not strip financial services of their exempt status.
5. Tax Ambiguity Resolved in Favor of Taxpayers Where doubt exists, the law must be interpreted in the taxpayer’s favor, a principle that strengthens certainty for businesses in emerging sectors.

Why This Is a Game-Changer for Fintechs

This ruling has significant implications for fintechs, SaaS platforms with embedded payments, and other digital businesses:

• VAT Relief: Commissions and transaction fees may fall within the exemption scope if tied to financial intermediation.
• Regulatory Recognition: Being licensed as a payment service provider now entitles a c company to claim exemptions, removing the restrictive bank-centric interpretation.
• Reduced Compliance Risk: This case offers precedential clarity, reducing the likelihood of KRA recharacterizing fintech revenue streams as VAT-taxable.

At MasiboLaw LLP, we view this case as a pivotal development in fintech taxation in Kenya. It underscores the value of a strong legal strategy and the need to challenge regulatory positions that may hinder innovation.

MasiboLaw LLP: Partnering with Tech Companies for Growth

MasiboLaw LLP has extensive experience advising fintechs, startups, and digital-first companies as they navigate Kenya’s evolving regulatory and tax environment.

• We help tech businesses structure transactions.
• We advise on compliance under the National Payment Systems Act, Data Protection Act, and other digital economy laws.
• We defend clients in tax disputes and appeals, ensuring their innovations are not stifled by outdated regulatory interpretations.

Contact us today for a consultation.