VAT On Insurance Agency And Brokerage Services Suspended By The High Court Of Kenya

• Published date: 30 September 2020
• Subject Matter: Insurance, Government, Public Sector, Tax, Insurance Laws and Products, Constitutional & Administrative Law, Sales Taxes: VAT, GST
• Law Firm: Anjarwalla & Khanna
• Author: Mr Daniel Ngumy, Kenneth Njuguna, Faith Macharia-Okaalo and Wangui Mwaniki

Introduction
The Tax Laws (Amendment) Act, 2020 (the TLAA), was enacted on 25 April 2020 (click here for highlights on the Act in our earlier Legal Alert). One of the amendments introduced by the TLAA was the deletion of "insurance agency and insurance brokerage services" from the list of exempt supplies under Paragraph 10 of Part II of the First Schedule to the Value Added Tax Act, 2013 (the VAT Act).

The effect of this deletion was to subject insurance agency and insurance brokerage services to Value Added Tax at the prevailing rate of 14 percent (noting that they were previously VAT exempt) In the insurance business, agents and brokers serve as intermediaries for the insurance companies to procure insurance business from customers for which they earn agency or brokerage commissions in return. The amendment effectively required the insurance intermediaries to start charging VAT on the agency and brokerage services they offer, with effect from 25 April 2020.

Insurance premiums, which form the bulk of insurance companies' income, are exempt from VAT. As a result, the VAT to be charged by insurance agents and brokers, under the TLAA, would be borne by insurance companies as they would not be able to recover the VAT cost from their clients. VAT is a consumption tax that should be borne by the final consumer (i.e. the policyholders) and therefore, since the insurance companies are not in a position to pass on the VAT cost, this will result in an unfair tax burden on their part.

The Association of Kenya Insurers (AKI) represented by A&K, challenged this amendment in a constitutional petition filed at the Constitutional and Human Rights division of the High Court. This was on the primary grounds that:

1. the amendment of the VAT Act by the TLAA created uncertainty to the extent that its application would go against the provisions of the Insurance Act which is the substantive law that governs insurance business prescribes the limits of the management expenses which can be incurred by insurance companies as well as the maximum agency and brokerage commissions which are payable to brokers;
2. the amendment was made without sufficient public participation on the Tax Laws (Amendment) Bill, 2020 by key stakeholders including those who would be directly affected (such as insurance companies); and

• the introduction of VAT on insurance agency and brokerage services imposed an unfair tax burden on insurance companies.

Pending the hearing and determination of the...