PwC Encourages Taxpayers to Challenge Financial Laws that Infringe on their Constitutional Rights


Professional services consulting firm, PwC, is encouraging taxpayers to be more aware of their rights. In their January Tax Alert, PwC says that where legislation is not consistent with constitutional provisions, there is room to challenge laws that infringe on clearly identified constitutional rights. The alert cites a High Court judgment delivered on 16th December 2021, as part of a recent trend that shows that courts are willing to consider the process, application and implications of amendments to legislation and to ensure that the Constitution is upheld.

The judgement relates to a case in which the Association of Kenya Insurers (AKI) filed a petition against the Kenya Revenue Authority (KRA) over the implementation of the Tax Laws Amendment Act, 2020 which came into effect on 25th April 2020. The new law introduced VAT on insurance brokerage and agency services by removing the services from the list of VAT exempt services under the First Schedule of the VAT Act.

In its ruling, the High Court found that “paragraph 10 of part II of the First Schedule to the Value Added Tax Act as amended by the Tax Laws Amendment Act, 2020 is unlawful and unconstitutional. The effect of the amendment was to impose Value Added Tax (VAT) on insurance agency, insurance brokerage and securities brokerage services.”

AKI in their petition argued that the introduction of VAT at a standard rate on insurance and brokerage services will affect the compliance of insurance companies with the provisions of the Insurance Act by breaching the prescribed limits on management fees to be charged by insurance companies as imposed by the Insurance Act. They also cited a lack of adequate public participation, openness, accountability, and dissemination of relevant information in the legislative process and a breach of several articles of the constitution including 10 (2)(a), 10 (2) (d), 27 and 201 (a)(b)(i) of the Constitution of Kenya, 2010.

KRA challenged the petition claiming the association’s lack of capacity to enter a petition, jurisdiction of the high court and argument that laws emanating from parliament enjoyed an irrefutable presumption of constitutionalism. While the court dismissed AKI’s claims on inadequate public participation, it found that among the practical effects of the amendment, the most relevant was the actual cost of the imposition of VAT on insurance brokerage and agency services would be borne by the members of AKI.

This would controvert the spirit of the Constitution, by creating a situation full of uncertainty and unpredictability. In practice, the Court noted that the VAT expense would increase the management expenses of the insurance companies above the limits prescribed by the Insurance Act. PwC says :  “This is a welcome judgment and is a relief to the insurance and securities brokerage sectors as standard VAT will not be applicable on insurance brokerage, insurance agency and securities brokerage services.”

KRA has appealed against the Judgement at the Court of Appeal. In the absence of stay orders, the High Court judgment remains binding on KRA and taxpayers alike. Several questions however arise following the judgement rendered by the High Court:  Can taxpayers seek refunds for the tax paid during the period within which an unconstitutional statute was in force to when conservatory orders were issued? Can taxpayers who had continued to fully comply with the amendment obtain a refund of the VAT paid to KRA?

According to PwC, these questions raise remedial issues that were not deliberated by the court. Further, the judgment rendered by the court was not explicit in stating that a refund should be made to taxpayers who had made VAT payments to KRA. However, there are probable grounds for a refund application on the basis that the law was null and void, meaning that the tax ought not to have been paid in the first place. Affected taxpayers may consider pursuing a refund with KRA.



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