Invalidation of VAT Regulations, 2017

The High Court recently delivered its judgment in Income Tax Appeal No E84 of 2020: Commissioner of Domestic Taxes v W. E. C. Lines (K) Limited . The Court declared the Value Added Tax Regulations, 2017  herein referred to as VAT Regulations, 2017 invalid. In a case between Kenyan-resident shipping agent (W.E.C. Lines Kenya Limited) and Commissioner of Domestic Taxes, the Court maintained the taxpayer’s position that agency services provided by the Company to its non-resident principal shipping line were considered services exported out of Kenya for Value Added Tax (VAT) purposes. These services were zero-rated during the period covered by the judgment (February 2015 to January 2018) which was before the enforcement of Income Tax Act 2021. 

The Commissioner of Domestic Taxes had relied on the provisions of the VAT Regulations, 2017 in submitting that the services were not services exported out of Kenya.

High Court findings:

In arriving at this decision, the High Court:

1. Established that, the Cabinet Secretary (CS) – National Treasury did not table the VAT Regulations, 2017 before National Assembly within seven days of their publication as stipulated by section 11(1) of the Statutory Instruments Act, 2013.The Court therefore held that the VAT Regulations, 2017 ceased to have any effect on the 8th day after the CS – National Treasury failed to table them before the National Assembly.
2. Further to the invalidation of the VAT Regulations, 2017, the Court emphasized that a subsidiary legislation (VAT Regulations, 2017) could not repeal or contradict express provision of the VAT Act 2013, hence the Commissioner of Domestic Taxes erred in fact and law by pegging His argument on the subsidiary legislation.
3. Maintained the position that, in line with other jurisprudence like, Commissioner of Domestic Taxes v Total Touch Cargo Holland HC ML ITA No. 17 of 2013 [2018] eKLR,, for a service to be deemed an exported service, it is immaterial weather the services was performed in Kenya or outside Kenya but the defining factor is the location where that service is the final place of consumption.
4. Resolved that the services provided by the taxpayer were therefore exported services consumed outside Kenya since the non-resident shipping line was the beneficiary of the services and hence qualified to be zero rated as per the first Schedule of VAT Act 2017.

Implication of the ruling to the tax payer

This ruling brings to an end the doubt on the validity of the VAT Regulations, 2017 as it states clear that it was never tabled before the National Assembly. This ruling implies that any actions or failure to act based on the VAT Regulations, 2017 are invalid.  Taxpayers should also asses how this ruling will affect their previous actions based on the VAT Regulations, 2017.

We are aware that Kenya Revenue Authority has intentions to appeal this decision. The VAT Regulations, 2017 remain invalid unless the decision is overturned by the Court of Appeal.

Related: Rights of the Tax Payer