Pesapal, a payment service provider, has been unsuccessful in its attempt to dismiss a tax demand of Sh233 million following a tribunal’s decision that the commission earned through its technology is not exempt from taxes.
Pesapal offers online payment solutions through a platform that can be integrated with banks, mobile e-money transfer platforms like M-Pesa and Airtel Money, as well as other online payment channels such as Visa, Mastercard, and American Express. The company contended that it offers financial services to its merchants on a commission basis and should therefore be exempted from value-added tax (VAT).
However, the tribunal, presided over by Eric Wafula, stated that Pesapal does not fall under the category of a financial service provider as outlined in the VAT Act, and consequently, it does not qualify for an exemption.
“The only circumstance under which the Appellant (Pesapal) could be eligible to provide financial services would be if it were registered as a financial institution in accordance with Section 5 of the Banking Act,” ruled the tribunal.
Pesapal disputed the assessment made by the Kenya Revenue Authority (KRA), asserting that it interacts with both customers and merchants who are charged a commission for the service. The tribunal was informed that Pesapal engages in the collection and handling of funds on behalf of its merchants, earning commissions in the process. The tax authority argued that the service provider does not meet the criteria for exemption since it solely provides a payment platform. The tribunal learned that Pesapal does not lend, store, or receive money like traditional financial institutions. Instead, it facilitates processes from a technological perspective.
In its ruling, the tribunal made it evident that Pesapal acts as an intermediary for other parties. According to the tribunal’s perspective, an information technology system designed to enable payments for clients does not qualify as a financial service.
