In a groundbreaking decision, Kenya’s High Court has exempted fintechs from value-added tax (VAT) on payment services, setting a major precedent in how digital financial services are taxed.
Case Background: Pesapal vs. Kenya Revenue Authority
The case centred on Pesapal, a licensed payment service provider (PSP) under Kenya’s National Payment System Act (NPSA). The Kenya Revenue Authority (KRA) had demanded roughly KES 76.8 million (approximately $526,000) in unpaid VAT, penalties, and interest, asserting that Pesapal did not qualify for VAT exemption as it was not registered under the Banking Act. This decision followed a June 2023 ruling by the Tax Appeals Tribunal, which had sided with KRA.
Judgment Highlights
On September 2, 2025, Justice Rhoda Rutto overturned the Tribunal’s ruling. The High Court held that VAT exemption hinges on the nature of the service, not the provider’s regulatory label or delivery method. She concluded that licensed PSPs like Pesapal render services—such as payment processing, bill payments, balance storage, and merchant transaction handling—that are functionally equivalent to those offered by traditional financial institutions. As such, they are VAT-exempt under the law.
Justice Rutto’s ruling emphasised:
- The VAT Act does not restrict exemptions based on technology used nor tie them to Banking Act registration.
- Licensed digital payment providers carry out essential monetary services that fall squarely under VAT exemption, regardless of digital platform use.
Implications for the Fintech Sector
This ruling delivers a major win for digital finance firms in Kenya:
- Regulatory clarity: It confirms that fintech platforms are not tech intermediaries but legitimate providers of financial services for tax purposes.
- Cost relief: Exemption from VAT removes a substantial financial burden, allowing lower operational costs and potentially cheaper services for users.
- Legal precedent: The judgment reinforces that function matters over form, setting a potentially protective standard for fintechs nationwide.
KRA’s Position and Path Forward
While this favourable outcome stands, KRA still holds the right to appeal. The decision, however, constrains the tax authority’s ability to classify fintechs as mere technology platforms for VAT purposes unless Parliament amends the law to explicitly narrow the exemptions.
For fintech operators(including startups and established PSPs) this judgment provides much-needed legal predictability, encouraging further innovation and investment in Kenya’s digital financial ecosystem.
