January 12, 2022
Kenya High Court rules that insurance agencies, insurance brokerage and securities brokerage services should remain as VAT-exempt
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.
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:
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:
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.
As a result of the High Court's Decision:
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