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January 12, 2022
2022-0058

Kenya High Court rules that insurance agencies, insurance brokerage and securities brokerage services should remain as VAT-exempt

Executive summary

Kenya's High Court recently held that the 2020 tax laws amendment that required insurance agencies, insurance brokerage and securities brokerage services to change from Value Added Tax (VAT) exempt status to taxable status at 16% is unlawful and unconstitutional. The Decision was issued on 16 December 2021.

This was following the enactment into law of the Tax Laws (Amendment) Act 2020 (that was effective 25 April 2020) which deleted insurance agencies, insurance brokerage and securities brokerage services from the VAT exemption list under Paragraph 10, Part II of the First Schedule-VAT Act 2013. This deletion from the VAT exemption list in effect therefore, imposed VAT on these services.

Detailed discussion

Background

The Petitioner filed a Notice of Motion with the High Court on 17 June 2020 seeking stay orders on the enactment and administration of paragraph 10 of Part II of the first Schedule of the Value Added Tax Act, 2013 as amended by the Tax Laws (Amendment) Act, 2020 to allow for a hearing and determination of the Petition, which was granted.

The Petitioner later filed a petition with the High Court to determine whether the disputed amendment was in violation of Articles 1,10, 27, 35, 118 (1) (b), 201 (b) (i) and 232 (1) (d) of the Constitution. The petition set forth:

  • Article 1 stipulates that all sovereign power belongs to the people of Kenya and should be exercised in accordance with the Constitution of Kenya. The process of making laws should be in conjunction with the right of the Kenyan people to exercise their sovereign power as envisaged in the Constitution.
  • Article 10 presents the need to uphold the national values and principles of governance that binds all state organs, state officers, public officers, and all persons whenever any of them enacts, applies or interprets any law, such as transparency and public participation. According to the Petitioner, the National assembly failed to facilitate meaningful public participation and failed to consider public views thus violating Article 10(2) of the Constitution.
  • Article 27 provides that every person is equal before the law and has the right to equal protection and equal benefit of the law. The Petitioner viewed the amendment by the National Assembly of Kenya as discriminating against its members in that additional tax burden was introduced to the insurance sector only while omitting other sectors.
  • Article 35 identifies the rights of citizens to access information held by the state or another person necessary for protection of any right and fundamental freedom. The Article also provides for the right to correction or deletion of untrue or misleading information that affects the person. Article 35 further requires the state to publish important information affecting the nation to allow access to information by members of the public.
  • Article 118 (1) (b) provides that the Parliament shall facilitate public participation and involvement in the legislative and other business of Parliament and its committees.
  • Article 201 (b) (i) stipulates that the public finance system should promote an equitable society by sharing the taxation burden fairly. The amendment was introduced at the period when the Government was providing tax incentives because of the COVID-19 pandemic. Thus, the removal of VAT exemptions was considered unfair.
  • Article 232 (1) (d) provides that the principles and values of public service include involvement of the people in the policy making. This stresses the need for public views and opinions in the legislative process.

The Petitioner's position

The Petitioner asserted that the Tax Laws Amendment Bill (which was later enacted into an Act) did not meet its claimed intention. The Petitioner stated that the bill proposed to make amendments of tax laws to bolster the economy and Kenyans against the economic effects of the COVID-19 pandemic. The Petitioner contended that the purpose of the amendment was clear, however its intention ended up creating uncertainty, ambiguity, and absurdity. The Petitioner alluded to the fact that insurance services are exempt from VAT under Paragraph 2 of Part II, First Schedule of the VAT Act, hence questioned the amendment whose purpose was to impose a VAT burden on the same. Due to this, the actual cost of the VAT introduced would be borne by the insurance companies who would not be able to pass the VAT burden to final consumers since their services are exempt from VAT.

The Petitioner further asserted that the Court should consider the purpose and effect of implementation of the impugned statute or section thereof. If the intended purpose or effect of implementation infringes a right granted or guaranteed by the Constitution, the impugned statute or section thereof should be declared unconstitutional. The Petitioner stated that the introduction of VAT on insurance agency and brokerage services created uncertainty, absurdity, and ambiguity on the administration of management expenses by insurance companies. This implied that:

  • It is impossible for the insurance companies to plan for their management expenses which are capped not to exceed a certain limit pursuant to section 70 (1) of the Insurance Act. The limit is set in the previous year making it impossible for insurance companies to plan for the tax burden (additional cost) introduced by the disputed statute.
  • Section 17 (6) of the VAT Act, 2013 limits the extent of claiming input VAT on exempt services. Therefore, the input VAT incurred by the insurance companies cannot be passed to final consumers (policy holders). This creates absurdity as it increases management expenses which Section 70(1) of the Insurance Act provides a capping on. Any attempt by insurance companies to increase these management services beyond the capping under Section 70(1) of the Insurance Act would be a criminal offense on their part.

Moreover, the Petitioner asserted that the tax amendment process was in violation of the principles of public service, for instance, openness, accessibility, accountability, and responsibility. The petitioner claimed that the Tax Laws Amendment Bill intention was to bolster the economy against the effects of COVID-19. However, it ended up introducing an additional tax burden on the insurance sector. As such, Parliament did not act in an open, accountable, and responsive manner. In this regard therefore the amendment was introduced in disregard of the applicable national values and principles of good governance.

There was also the contention that the Bill was discriminatory since the additional tax burden was only imposed on the insurance sector whereas other sectors of the economy were not impacted. This additionally therefore violated Article 10(2) of the Constitution.

The Respondent's position

The Respondents asserted that Article 209 of the Constitution conferred the power to impose and charge taxes to the National Assembly. The Respondents stated that tax administration is a matter conferred to Parliament and the courts have no authority to interfere with the same. Thus, the National Assembly had not violated the Constitution by administering tax through the Tax Laws (Amendment) Bill 2020. The Respondents also asserted that uncertainty of the disputed amendment is not a matter of right but subject to judicial interpretation and decision.

The Respondents further asserted that the Tax Laws Amendment Bill, 2020 was a way of eliminating unfairness in tax incentives to comply with Article 201 (b) (i) of the Constitution which promotes fairness in sharing tax burdens.

High Court Decision

The High Court established that VAT is a consumptive tax which ought to be borne by the final consumer of the supply. The Court noted that VAT charged by insurance agents and brokers would be an output to them and an input to the members of the Petitioner pursuant to Section 17 of the VAT Act which allows claiming of input tax. Section 17(6) and Section 17(7) further limit the claims of input to the extent of exempt supplies. As such, the Court found that the insurance sector was unfairly treated on the ground that they would not enjoy the right to claim input tax which is a tax relief provided to other sectors in the economy. The High Court merited this as a form of discrimination through unfair imposition of the novel tax (VAT) and held that it was in contravention with Article 27 (2) of the Constitution.

The Court further noted that insurance income is exempt from VAT and the VAT charged by insurance agents and brokers cannot be passed to insurance policy holders. This therefore would result into an additional tax burden to members of the Petitioner. This was found to be in contravention with Article 201 (b) (a) of the Constitution.

Based on the above facts, the High Court held in favor of the petition, and it was established that Paragraph 10 of Part II of the First Schedule of the VAT Act as amended by the Tax Laws (Amendment) Act 2020 is unlawful, unconstitutional and contravenes the provisions of Articles 1, 27, 35, and 201 (b) (i) of the Constitution.

Implications

As a result of the High Court's Decision:

  1. The amendment (deleting insurance agency, insurance brokerage and securities brokerage services from the VAT-exemption list) is nullified.
  2. Insurance agencies, insurance brokerage and securities brokerage services are exempt from VAT under the ruling.
  3. Insurance agents, brokers and securities brokers that had started charging VAT on their services should stop charging VAT.
  4. Insurance agents, brokers and securities brokers that had registered for VAT on account of these services being removed from the VAT exemption list should consider VAT de-registration if they do not have any other taxable income streams.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

Ernst & Young Société d'Avocats, Pan African Tax – Transfer Pricing Desk, Paris

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Ernst & Young LLP (United States), Pan African Tax Desk, New York

 

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