The High Court has overturned a tax tribunal decision against payments firm Pesapal Limited, ruling that commissions the company earns from processing transactions are exempt from value-added tax (VAT).

“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,” Justice Rhoda Rutto said in her ruling.

KRA countered that Pesapal merely operates a technology platform that facilitates payments between customers and merchants. In its view, only institutions formally recognized as financial service providers under the banking law can benefit from VAT exemptions. The Tax Appeals Tribunal accepted this reasoning last year, prompting Pesapal to appeal.

Justice Rhoda Rutto sided with Pesapal and agreed that the functions performed by payment service providers including sending, receiving, storing, and processing money, align directly with VAT-exempt financial services, and that the use of digital platforms does not change their essential character.

“The VAT Act neither restricts eligibility for exemption based on the technology used, nor does it tie exemption to registration under the Banking Act. The Appellant’s (Pesapal) activities, facilitating merchant payments, processing client funds, storing balances, and executing payment instructions, are functionally equivalent to and mirror those of financial institutions albeit in a digital environment,” Justice Rutto averred.

The ruling affirms that digital payment processors can qualify for VAT exemption, removing a potential tax burden that might have raised costs for merchants and consumers. It also limits the tax authority’s scope to reclassify fintechs as mere technology operators, signaling that any expansion of VAT collection in the digital payments space will require an explicit change in legislation.