PesaPal, a supplier of payment services, has experienced a setback in its tax dispute with the Kenya Revenue Authority (KRA) worth Sh232.2 million.
PesaPal’s appeal was dismissed by the tax appeal tribunal after it was assessed Sh232.2 million in tax arrears by the Commissioner of Domestic Taxes. PesaPal had alleged in court documents that the Commissioner of Domestic Taxes had violated the law by adding VAT to the commission it received.
“The commission is earned as a consideration for providing financial services which are exempt from VAT in accordance with the first schedule part 2 paragraph 1 (m) of the VAT Act, 2013,” said PesaPal in its Memorandum of Appeal dated 5 January last year.
PesaPal stated that because it performs a financial service on behalf of its merchants on a commission basis, the commission is free from VAT in line with the First Schedule of the VAT Act 2013. As a result, PesaPal prayed for the tax tribunal to decide in its favor.
Additionally, it provided bank records from Kenya Commercial Bank to demonstrate that the bank handled money on behalf of its merchants and wasn’t just a conduit for payments, as the Commissioner of Domestic Taxes had claimed.
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“The VAT Additional Assessment Order of 26th February 2021 assessing VAT on the commissions earned was not proper in law and not issued within the precepts of the law.”
On March 3, 2021, the Commissioner of Domestic Taxes assessed PesaPal for income stated in its financial statements for the years 2015 through 2019.
The taxman said that because PesaPal merely provides a payment platform, it is ineligible for the exemption.
PesaPal holds a “Payment Service Provider” authorization under the National Payment System Act, No. 39 of 2011, however it is not an authorized dealer. 48. The VAT Act of 2013 stipulates that the activity or service, not the person providing the service, is exempt.
“It should be clear that even if PesaPal was a financial (or payment) service provider, the activity carried on by its business does not fall within the financial services (activity) which are exempted under the First Schedule to the VAT Act, 2013 Part II(1),” said the Taxman.
“We have a right in assessing VAT on PesaPal platform. The company has neither demonstrated that its product is exclusively a financial service nor made the distinction between the technology and the financial service.”
The tribunal determined that PesaPal is a payment service provider in assessing whether the tax collector erred by increasing the VAT tax assessments against the company.
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“The Tribunal is in the circumstances of the view that the Appellant is not a financial service provider as envisaged under the VAT Act and therefore does not qualify for exemption.”
“On the basis of the foregoing analysis the Tribunal finds that the Appeal is not merited and therefore fails.”
