16% VAT on export services is now in enforcement.

Introduction

The finance Act 2022 was assented into law on 21st June 2022 with some sections coming into operation from 1st July 2022 and others being implemented from 1st January 2023.

The Act introduced a number of changes that aim at raising additional revenues as well as aligning tax legislations with government agendas.

Among the amendments that were made include:

• Imposing 16% VAT on exported services which was to take effect from 1^st August 2022.

Litigations on Export VAT and Determination by the High Court

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 be 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 subjected to public participation.

The high court gave out its ruling on 31st January 2023 stating that, section 30 of the Finance Act 2022 is constitutional.

We quote H.C Judge Imbosa;

“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,”

This ruling is coming at a time the tax authority is under pressure to collect more revenues for the government to finance its budgets.

Business Affected

The VAT Act defines an exported service as one that is used and consumed outside Kenya. This will therefore affect all business in the services sector including;

1. All consultancies e.g. Information Technology, Business Advisory, Engineering, Building and construction, Medical among others
2. Training, events and conferences; and
3. Technical Support e.g. Information Technology, Technicians etc.

Our perspective and conclusion

The High Court ruling remains in force until such a time when an appeal is lodged and successfully overturns the ruling.

Moving forward, we anticipate situations where KRA will deploy stringent tax collection measures on this matter. Our advice to businesses is to be in compliance with the regulation.

JM Associates will continue monitoring these developments and keep you updated.

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This information is for the purposes of general knowledge and guidance. JM Associates is not responsible for any damages arising from the use of this information. For more professional advice, kindly reach out to us on the contacts provide below.

info@jmassociates.co.ke  +254 733818835