By Sam Alfan.
A payments solution provider has been saved from paying Sh110 million in tax as demanded by Kenya Revenue Authority (KRA).
In a win for Pesapal ltd, Justice Rhoda Rutto overturned a decision by Tax Appeals Tribunal directing the firm to pay the taxman VAT amounting to Sh76,836,162, plus penalties and interests of Sh33.9 million.
In the judgment, Justice Rutto ruled that the Tribunal failed to consider the substance of Pesapal’s services or the legislative intent behind the VAT exemption provisions.
The court further found that the Tribunal misapprehended the legal provisions governing VAT exempt to financial services, leading to an erroneous conclusion.
The judge added that Pesapal”s services clearly fall within the scope exemption captured in the VAT Act.
“Accordingly, the Tribunal’s judgment delivered on 26th May 2023 is set aside the effect of which is that the objection decision by the Kenya Revenue Authority dated 26th November 2021 is equally disallowed,” Judge Rutto said.
The court said it was important to note that the VAT Act is silent on whether digital or electronic services disqualify an entity from exemption.
“The principle of statutory interpretation presumes that Parliament does not legislate in vain. Had Parliament intended to exclude digital platforms or PSPs, from VAT exemption, it would have done so explicitly appreciating the modern dynamics increasingly driven by fintech innovations,” said the judge.
Judge Rutto further said that it is critical to underscore that the VAT Act defines exempt services by the nature of the activity, not by the institutional classification, without recourse to other statutes.
“To imply such classification would, in my view, amount to judicial legislation, which is contrary to the constitutional imperative that bestows upon Parliament the legislative mandate,” said the judge.
Pesapal ltd moved to the High Court after the Tribunal that upheld KRA’s decision demanding VAT and the penalties.
KRA based its assessment on commissions earned by the Pesapal from merchants for the provision of financial services.
Pesapal contended that the commission it earns are solely for financial services rendered on behalf of third parties, merchants, who have registered to use the Appellant as a payment service provider.
The company argued that these commissions qualify for VAT exemption under the First Schedule to the VAT Act.
However, taxman maintained that the company operates as a payment platform that integrates with banking IT systems, mobile e-money transfer platforms, and other online payment channels through which financial services may be offered.
KRA asserted that Pesapal merely facilitates processes such as lending, storing, or receiving money on behalf of clients, merchants, or customers, activities it likens to those of a banking software vendor.
KRA told the court that Pesapal’s services do not fall within the scope of financial services exempted under the Act, and the assessment was rightly confirmed.
