Kenyan Fintech Pesapal Hit With Steep Tax After Losing Tense Battle

By  |  June 20, 2023

Kenyan payment service provider Pesapal’s attempt to dismiss a tax demand of KES 233 M (~USD 1.6 M) has been unsuccessful. A tribunal has ruled that the commission earned through their technology is not eligible for tax exemption.

Founded in 2007 by Agosta Liko, Pesapal provides a comprehensive suite of online payment services, leveraging a versatile system capable of seamless integration with prominent financial institutions including banks, popular mobile e-money transfer platforms like M-Pesa and Airtel Money, and renowned online payment channels such as Visa, Mastercard, and American Express. This broad spectrum of connectivity options empowers users to conveniently transact across various digital platforms, ensuring flexibility and convenience in the rapidly evolving realm of electronic payments.

In its defence, Pesapal contended that its operational model, centred on facilitating financial transactions for merchants while earning commissions, warranted an exemption from Value Added Tax (VAT). However, the tribunal, presided over by Eric Wafula, concluded that Pesapal does not fall within the purview of a financial service provider as stipulated in the VAT Act, reports Business Daily. Consequently, the tribunal determined that Pesapal does not meet the criteria for VAT exemption, thereby disallowing the firm’s argument.

“The only way through which the Appellant (Pesapal) could qualify to offer financial service would be if it were to be registered as a financial institution under Section 5 of the Banking Act,” the tribunal ruled.

Pesapal disputed the evaluation presented by the Kenya Revenue Authority (KRA), asserting that its operational dynamics encompass interactions with both customers and merchants, with the latter being subject to a commission fee for the services rendered. By highlighting the dual nature of its engagements, Pesapal aimed to counter the notion that it solely acts as a financial intermediary. The firm’s contention revolved around the premise that its comprehensive involvement in the transaction process should merit consideration in determining its tax liability.

During the tribunal proceedings, evidence was presented to establish that Pesapal actively engages in the collection and management of funds on behalf of its merchants, operating under a commission-based framework. This information shed light on the role played by Pesapal in facilitating financial transactions, thereby emphasizing the value it adds to the overall payment ecosystem. By elucidating the nature of its involvement in the receipt and handling of funds, Pesapal aimed to demonstrate the depth of its contribution within the realm of merchant services.

The Kenya Revenue Authority (KRA) put forth its argument asserting that Pesapal does not meet the criteria for tax exemption since its role is primarily that of a payment platform provider. The KRA contended that Pesapal’s operations differ from those of financial institutions as it does not engage in activities such as lending, storing, or receiving funds. Instead, Pesapal’s primary function is to facilitate payment processes from a technological standpoint, rather than directly participating in financial transactions.

In its verdict, the tribunal resolutely acknowledged that Pesapal acts as an intermediary, providing its services on behalf of other entities. The tribunal further emphasized that the provision of an information technology (IT) system designed to enable payment facilitation for clients does not constitute a financial service as per their discerning interpretation.

Based on this analysis, the tribunal concluded that Pesapal’s core offerings fall outside the realm of traditional financial services, thus precluding the company from qualifying for tax exemption.

Featured Image Credits: Pesapal

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