Court Affirms VAT Exemptions for Fintech Firms, Setting Key Precedent in Kenya
The High Court overturns a multimillion-shilling VAT claim against Pesapal, clarifying how digital payment platforms operate in Kenya’s financial landscape.
The High Court has delivered a significant ruling for Kenya’s fintech sector, declaring that licensed payment service providers are entitled to value-added tax (VAT) exemptions on their commissions.
Justice Rhoda Rutto set aside a Tax Appeals Tribunal decision that had allowed the Kenya Revenue Authority (KRA) to claim Sh76.8 million from Pesapal Limited, stating that the firm’s operations fall squarely within VAT-exempt financial services.
The court held that Pesapal, being licensed under the National Payment System Act (NPSA), performs functions that are “functionally equivalent” to banks and other financial institutions. These include processing payments, storing balances, executing transfer instructions, and facilitating bill payments.
“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,” Justice Rutto noted. She added that delivering services through digital platforms does not change their essential nature as “dealings with money.”
KRA’s Argument Rejected
KRA had argued that Pesapal’s role was merely technological, integrating with banks, mobile money systems, and other platforms without directly providing financial services. The taxman maintained that the exemption should only apply to institutions listed under the Banking Act.
But the court disagreed, finding that the VAT Act’s language was deliberately broad to include a wide array of monetary operations, particularly those facilitating the movement of funds.
Wider Implications for Fintech
The ruling establishes an important precedent for how digital payment firms are treated under tax law. By affirming that fintech platforms like Pesapal qualify for VAT exemptions, the decision could shape the outcome of future disputes between revenue authorities and other payment service providers.
For an industry that has grown rapidly by bridging digital commerce and traditional finance, the High Court’s interpretation provides greater clarity on the tax obligations of firms operating at the heart of Kenya’s payments ecosystem.
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