Lecture 5 · Pesapal won its VAT case. Parliament changed the law.

You are the chief financial officer of a licensed payment service provider in Nairobi. KRA says the commission you charge merchants is subject to VAT. You say it is an exempt financial service. With penalties and interest, the bill is KSh 110.7m.

Before you decide whether to fight, answer two questions. What exactly do you sell? And if you win, how long will the win last?

The case.

Agosta Liko started Pesapal in 2009, after his travel business struggled to accept payments online. By the time KRA audited it, Pesapal was licensed by the Central Bank of Kenya as a payment service provider under the National Payment System Act. Its income came from commissions: merchants paid it a percentage for collecting money from their customers.

KRA saw a technology company. In its view, Pesapal was software sitting between banks, card networks and mobile money, and a fee for software is taxable. Pesapal objected on 27 October 2021. A month later KRA confirmed KSh 76.8m in VAT, plus KSh 33.9m in penalties and interest.

The Tax Appeals Tribunal agreed with KRA. It described Pesapal as an “information technology system” that helps payments go through, and read its licence as permission to run a payment system rather than to provide financial services. Pesapal took the case to the High Court in July 2023.

The ruling.

On 27 August 2025, Justice Rhoda Rutto set aside both the Tribunal’s judgment and KRA’s objection decision.

The VAT Act exempts dealings with money in paragraph 1(b) of Part II of its First Schedule, and the court read that wording as broad and open-ended. Paragraph 1(m) exempts financial services provided for others on commission, which describes a business that collects money for merchants and keeps a percentage. The test, the court held, is the nature of the activity. The statute does not ask what technology delivers it, or whether the provider is a bank. The judge drew on the High Court’s 2023 decision in Commissioner of Domestic Taxes v Bank of Africa, and added that where a tax law is ambiguous, the doubt goes to the taxpayer.

Then the law moved. The Finance Bill 2026 proposed bringing digital payment services into VAT. The Finance Act 2026, signed on 23 June, made them taxable at 16% from 1 July 2026 where a payment service provider supplies them over a software or digital platform for a fee or commission. MPs on the Finance Committee pushed to keep person-to-person money transfers exempt, and the final law kept them out of the tax.

Exhibit 1: VAT on payment services from 1 July 2026

Applies where a payment service provider supplies the service over a software or digital platform for a fee or commission. Source: Finance Act 2026.

The idea: this is not a pipe

In 1929 the Belgian painter René Magritte painted a tobacco pipe and lettered beneath it “Ceci n’est pas une pipe”: this is not a pipe. He was right. It was a picture of a pipe. You could not fill it or smoke it.

The Tribunal made Magritte’s argument about Pesapal. What the company did looked like finance, it reasoned, but it was really a picture of finance: software that let banks and mobile money do the real work. The High Court looked at what happened to the money. It arrived from a customer, sat with Pesapal, and went out to a merchant, less a commission. Whatever the screen looked like, that was dealing with money.

Finance professors train executives in the same habit: distrust the label and follow the money. The court followed the money, and Pesapal won.

Then Parliament reminded everyone who owns the labels. A court reads the law as written. Parliament writes it, and can rewrite it in a single budget cycle. The judgment settled the past. The Finance Act took the future.

That distinction carries real money. In a discounted cash flow valuation, the years beyond the explicit forecast, known as the terminal value, often account for more than half of what a company is worth. An investor who read the August 2025 judgment as a permanent exemption and carried it into those years was valuing a tax position that lasted 10 months.

Lessons for the boardroom

1. Describe what you sell in the statute’s words. Your pitch deck calls it a platform. The VAT Act asks whether you deal with money.
2. A court win settles the past. Parliament decides the future. Budget for both.
3. Keep tax wins out of the terminal value. Model the year an exemption disappears, and see what the company is worth then.
4. Read the tax clause in every customer contract. Inclusive or exclusive decides who pays when the rate changes.
5. Show up at the Finance Bill stage. The argument that decides June is made in May, in front of the committee.

Pesapal’s lawyers won the argument about what a payment company is. Since 1 July 2026, the question that matters more to every provider is what the next Finance Act will say it is.