Kenyan High Court has ruled that fintech companies should be exempt from value-added tax (VAT) on payment services. This decision overturns an earlier tribunal ruling in a case involving the payments startup Pesapal and the Kenya Revenue Authority (KRA). Justice Rhoda Rutto determined that digital payment providers are “functionally equivalent” to banks, marking a significant setback for the tax authority.

The court’s ruling nullified a decision by the Tax Appeals Tribunal that had allowed the KRA to pursue a claim of KES 76.8 million (approximately $568,000) against Pesapal. The court found that companies licensed as payment service providers (PSPs) under Kenyan law are entitled to the same VAT exemptions granted to traditional financial institutions, such as commercial banks.

This ruling establishes a legal precedent by classifying licensed fintech operators as providers of essential financial services rather than merely technology firms. This classification could protect the sector from substantial tax liabilities and position it on equal footing with commercial banks and mobile money services.

Justice Rutto stated, “The VAT Act neither restricts eligibility for exemption based on the technology used, nor does it tie exemption to registration under the Banking Act.”

She added, “Pesapal’s activities facilitating merchant payments, processing client funds, storing balances, and executing payment instructions are functionally equivalent and mirror those of financial institutions, albeit in a digital environment.”

While Kenya’s VAT Act provides exemptions for financial services, including those offered by payment providers licensed under the National Payment System Act (NPSA), the KRA maintained that smaller fintechs did not qualify. The court ruling challenged this position, clarifying that the exemption applies based on the function of the service, not the size or type of provider.

The KRA argued that Pesapal’s license authorized it only to offer a payment system, not financial services. They contended that eligibility for a VAT exemption was strictly limited to institutions providing specific services listed in the VAT Act.

KRA claimed that despite Pesapal being registered by the central bank under NPSA, it acts merely as a technological enabler, integrating with banking and mobile money infrastructure rather than offering exempt financial services.

However, Justice Rutto countered that the wording of the Act is “clearly intended to capture a wide array of monetary operations, particularly those that facilitate the movement of funds.”