How VAT export ruling will hit Kenyan firms, multinationals

Times Tower in Nairobi, the Kenya Revenue Authority headquarters. FILE PHOTO | DENNIS ONSONGO | NMG

Multinationals and persons who export services from Kenya including cross-border consultancies have been dealt a blow after the High Court threw out a petition challenging the imposition of Value Added Tax (VAT) on their services, bringing to an end protracted court battles with the taxman.

This means Kenyans exporting services to other jurisdictions will become less competitive due to the additional taxes now imposed on their services in a ruling that will embolden the taxman to go after big tech companies and other multinationals operating in Kenya.

The Finance Act 2022 expunged exported services from the first schedule of the VAT Act 2013 effectively reclassifying them from VAT-exempt status to the standard rate status, which made them taxable by the consumption tax at 16 percent from July 1 last year.

The VAT Act defines an exported service as one that is used and consumed outside Kenya.

“There are two challenges here. First is to question why are goods for export zero rated yet services are being rendered subject to VAT at 16 percent?,” says Christine Kahema, a tax consultant with Alpha Tax and Business Advisory.

“The canon of equity provides that taxation should be distributed equitably without discrimination. The second is the Draft National Tax Policy states that VAT will follow the destination principle and this means that the taxing rights are with the person receiving the service, not the one offering it,” Ms Kahema adds.

The imposition of VAT on exported services was challenged through consolidated petition No. E338 dated July 8, 2022, filed by Viva Africa Consulting at the High Court.

The petition sought to have Section 30 of the Finance Act 2022 declared unconstitutional and Kenya Revenue Authority directed to refund any money collected through VAT on exported services.

The underlying argument of the petition was that subjecting exported services to VAT would amount to double taxation and that its inclusion into the Finance Act 2022 was not subject to public participation.

“It is my humble view that allowing the petitioner’s argument that the imposition of the taxes is unconstitutional when the imposition of taxes is parliament’s constitutional mandate would be an error unless it is otherwise shown that due process was not followed. I, therefore, find that the inclusion of the amendments in the Finance Act 2022 was constitutional,” a ruling delivered by High Court Judge Hedwig Ong’undi Imbosa, on January 31, 2023 states.

“The fundamental issue at hand is addressing where has a service been consumed. If it has been consumed outside Kenya it should be VAT zero-rated otherwise it becomes very uncompetitive and it is unlikely anyone will be willing to source services from Kenya because of the cost implication. We need clarity on the policy objective here,” says Robert Waruiru who is the Chairperson of the Institute of Certified Public Accountants Public Finance Committee.

The High Court ruling on VAT on export services marks a major win for the Kenya Revenue Authority and the National Treasury given the ambitious targets set by the Draft Budget Policy Statement regarding VAT.

The Draft Budget Policy Statement provides for the closing of the VAT revenue gap from 38 percent to 19 percent implying the tax man will be expected to collect at least an additional Sh154 billion through VAT in the financial year 2023/24.

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