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Exporting Taxes: The VAT Conundrum and the Fight for Competitive Global Trade

The Kenyan High court made a fiery ruling on 31th January 2023 on a highly controversial case surrounding the imposition of Value-Added Tax (VAT) on exported services, in a move that has left businesses reeling. Petitioners had contested the VAT imposition, alleging that the Finance Act of 2022 was unconstitutional, with no public participation in the legislative process, and some of its provisions deemed unconstitutional.

A brief snippet of the Ruling

After a thorough examination of the matter, the court determined the following critical issues:

  • The constitutionality of the Finance Act 2022 coming into operation.
  • The invocation of the principle of sub-judice by the instant petition.
  • Whether the Finance Act, 2022, and the impugned Sections 30(b), 32, 35(b) (iii)(iv), (c), (6) and(7); 35(d)9ii) and imposition of excise duty at the rate of 10% on imported cellular mobile phones and on imported sim cards were subjected to public participation and if so, whether they are constitutional.
  • The constitutionality of the imposition of the impugned taxes by the 1st respondent (The National Assembly).

The court grappling with the rules of constitutional interpretation as set out in Article 259 of the Constitution. The petitioners in the case raised objections to the effective date stipulated by the finance act 2022, as it was published in the Kenya Gazette on the 8th of July 2022, with an effective date of commencement of 1st July 2022. The court, after careful consideration, found that the Finance Act 2022 was constitutional, as it had a clear and definite time frame for commencement. Moreover, the court took judicial notice of the fact that a full financial year in Kenya starts on the 1st July and ends on 30th of June of the following year.

The petitioners also argued that the amendments made on the Finance Bill had far-reaching consequences for the relevant stakeholders and the general public. The court, in its wisdom, found that the impugned amendments were in line with what was presented to the public and the scope of the Finance Bill, adhered to the legislative process, and thus did not violate the principle of public participation, and were accordingly constitutional.

The learned Judges were not swayed by the petitioners’ fervent pleas. They delved deep into the matter and interrogated the legitimacy of parliament’s power to impose taxes. The court referred to the constitution which clearly mandates the national government to impose taxes, but with no specification of how low or high they can be imposed.

What does this mean for businesses?

Businesses will have to increase the cost of exporting services to cater for the VAT imposition. It also follows that businesses that were not charging 16% VAT on exported services from 1 July 2022 may be exposed to VAT assessments until when it is clear whether their services fall within the undefined term of “business process outsourcing”. Such businesses should carry out a review of the potential exposure and come up with strategies to counter any claims from the revenue authority.

The ruling has also raised concerns that the imposition of the tax may make Kenyan businesses less competitive in the international market, ultimately leading to uncompetitive prices that could hurt the country’s economic growth. This has left businesses feeling the heat as they re-evaluate their strategies to navigate the new tax landscape.

Unless this decision of the High court is reversed, it may cause capital and revenue flight to neighboring nations who do not impose 16% VAT on exported services. Overall, service providers in Kenya may lose business which is ultimately detrimental to the taxman’s revenue collection objective.

While the ruling is a victory for Kenya Revenue Authority (KRA) and the National Treasury, businesses may struggle to keep up with the tax demands. The decision by the court is a landmark ruling that is sure to have a lasting impact on the country’s economy. As the dust settles on this case, only time will tell whether this scorching verdict will help or hurt the country’s economic prospects in the long run.


The information provided in this article is intended for general legal advice and does not constitute legal advice for any specific transaction or case. Since each transaction presents a unique legal context, it is advisable to retain a legal adviser for specific transactions.

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