Are Financial Service Providers Exempt from VAT?

Pesapal Limited v Commissioner of Domestic Taxes [2025] KEHC 12284 (KLR)

Background

• KRA issued a VAT assessment against Pesapal for commissions earned from merchants, comprising a principal tax of Kshs. 76,836,162 and penalties/interest of Kshs. 33,982,992.
• Pesapal objected the VAT assessment, arguing its services were VAT-exempt financial services.
• The Tax Appeals Tribunal dismissed Pesapal’s appeal.
• The Tribunal in its decision held that Pesapal’s platform was merely an “information technology system” to facilitate payments and did not constitute the provision of a financial service exempt from VAT.
• Dissatisfied with the Tribunal’s decision, Pesapal appealed to the High Court on several grounds, primarily centering on the misinterpretation of the law.

Issue

The core legal issue for High Court’s determination was:

Whether the services provided by a licensed Payment Service Provider (PSP) under the National Payment System Act qualify as VAT-exempt “financial services” under Paragraph 1(b) and 1(m) of Part II of the First Schedule to the Value Added Tax Act.

Legal Provisions

The High Court applied and interpreted the following key legal provisions and principles:

Value Added Tax Act, 2013, First Schedule, Part II, Paragraph 1: This provides the list of exempt financial services:

• 1(b): Exempts “the issue, transfer, receipt or any other dealing with money, including money transfer services… but excluding [certain logistical services].”
• 1(m): Exempts “the provision of the above financial services on behalf of another on a commission basis.”

High Court’s Ruling

• The High court rejected KRA’s argument that operating a technological platform automatically disqualified Pesapal.
• The functions of “sending, receiving, storing, [and] processing of payments are, in substance, the exact same as “issue, transfer, receipt or any other dealing with money” (from the VAT Act exemption).
• The High Court held that the VAT exemption is tied to the nature of the service, not the legal status of the provider.
• There is no requirement in the VAT Act that an entity must be a bank or financial institution under the Banking Act to qualify for the exemption.
• The High Court found that Pesapal acted on behalf of merchants (third parties) and earned a commission matching the VAT Act which exempts financial services provided “on behalf of another on a commission basis.”
• The High Court allowed the appeal setting aside the judgment of the Tax Appeals Tribunal and disallowed the KRA’s objection decision that had confirmed the tax assessment.

CONCLUSION

This judgment is a landmark ruling for Kenya’s burgeoning fintech industry.

It establishes that:

• 1. Licensed Payment Service Platforms provide VAT-exempt financial services. Their core activities constitute “dealing with money” as defined in the VAT Act.
  2. The exemption is based on the substance of the service, not the technology used or the specific license held. The digital nature of a service does not negate its financial character.

This case provides crucial legal certainty for fintech companies in Kenya, aligning the tax treatment of digital financial services with their traditional analogues and recognizing the evolution of the financial sector.