Executive summary

In Pesapal Limited v. Commissioner of Domestic Taxes (Income Tax Appeal E081 of 2023) [2025] the High Court, on 27 August 2025, overturned a previous Tribunal's decision that had upheld a value-added tax (VAT) assessment. In issuing the assessment, the Kenya Revenue Authority (KRA) contended that commissions Pesapal (the Appellant) earned for facilitating payments were not exempt from VAT because payment service providers (PSPs) are not recognized as financial institutions licensed under the Banking Act and Pesapal mainly provided a platform rather than financial services.

The High Court, however, determined that commissions Pesapal earned arose from facilitating payments classified as financial services eligible for VAT exemption, regardless of the provider's licensing status.

Detailed discussion

Background

The key issue was whether Pesapal's commissions for processing merchant payments were exempt from VAT.

Pesapal Limited is a PSP licensed under the National Payment System Act (NPSA) to facilitate electronic payments by integrating with banks, mobile money platforms and international card schemes, earning commissions from merchants for each transaction processed through its platform. The KRA audited Pesapal for the period 2015—2019 and issued a VAT assessment of 76.8 million Kenyan shillings (KES76.8m) plus penalties and interest on commissions the Appellant earned by providing financial services to merchants.

Pesapal objected to the assessment, arguing that the commissions at issue were earned solely for financial services rendered on behalf of third-party merchants registered to use the Appellant as a PSP, and therefore qualified for VAT exemption under the First Schedule to the VAT Act.

The KRA confirmed the assessment, taking the position that Pesapal merely offered a technology platform that enabled payments, rather than financial services, and therefore did not qualify for the VAT exemption.

Pesapal appealed to the Tax Appeals Tribunal (TAT), which held that Pesapal's platform was an information technology service facilitating payments rather than directly providing financial services.

Dissatisfied with the Tax Appeals Tribunal decision, Pesapal appealed to the High Court.

Appellant's arguments

The Appellant argued that (1) neither the VAT Act nor the tax authorities provide a clear, exhaustive definition of "financial services" and (2) the definition of a payment services provided under Section 2 of the NPSA closely mirrors the financial services listed under Part II of the First Schedule to the VAT Act.

The Appellant further maintained that, although it was not registered under the Banking Act, its services — receiving, storing, paying and transferring money on behalf of merchants for a commission — were akin to those of a financial institution qualifying as VAT exempt financial services under subparagraphs 1(b) and 1(m) under Part II of the First Schedule to the VAT Act.

Additionally, the Appellant asserted that the VAT Act does not exclude from the VAT exemption financial services delivered via technology platforms. The Appellant criticized the Tribunal for not clarifying differences between the VAT Act and the NPSA that would justify denying the VAT exemption and asserted that the mere presence of ambiguity in the statutory provisions ought to be resolved in its favor.

Respondent's arguments

The Commissioner (Respondent) contended that the Appellant operated as a technology platform integrated with banking and mobile money systems to facilitate payments, positioning it as a technological enabler rather than a provider of financial services defined under sub-paragraph 1(b) of Part II of the First Schedule to the VAT Act, 2013.

The Respondent argued that to qualify for exemption from VAT, the Appellant must provide a financial service specified among the exempt services under the VAT Act and be registered as a financial institution under the Banking Act.

The Respondent maintained that being licensed as a PSP does not automatically qualify an entity to offer financial services nor does it grant eligibility for the VAT exemption under the VAT Act.

High Court's decision

The High Court stated that the VAT Act does not restrict VAT eligibility based on the technology used or registration under the Banking Act. The Court also noted that both the definition of a PSP in the NPSA and the Appellant's digital operations were comparable to financial services exempt from VAT as per Paragraphs 1(b) and 1(m) of Part II of the First Schedule to the VAT Act, 2013.

Additionally, the High Court found that providing financial services via digital platforms or the institutional category of those services does not change their fundamental characteristics, which are considered "dealings with money" and thus exempt from VAT according to the VAT Act.

Based on these findings, the Court overturned the Tribunal's judgment and determined that the Appellant's services qualify for VAT exemption.

Implications for the fintech sector

This judgment clarifies that technology-based financial services are still considered as financial services exempt from VAT under the VAT Act, thereby offering enhanced clarity for stakeholders in Kenya's expanding fintech sector.

The High Court's judgment clarifies that technology-based financial services are still considered financial services under the VAT Act, providing certainty to Kenya's fintech sector. It may also shield licensed PSPs from major VAT liabilities, addressing longstanding tax concerns about digital payment services.