Kenya: High Court Declares VAT On Insurance Agency And Brokerage Services Unconstitutional

Introduction

Honourable Mr. Justice Makau of the High Court on 16 December 2021 declared the amendment introduced by The Tax Laws (Amendment) Act, 2020 (the TLAA) to Paragraph 10 of Part II of the First Schedule to the Value Added Tax Act, 2013 (the VAT Act) by deletion of "insurance agency and insurance brokerage services" unlawful, unconstitutional and in contravention of Articles 1, 27, 35 & 201 (b) (i) of the Constitution of Kenya.

ALN Kenya | Anjarwalla & Khanna represented the Association of Kenya Insurers (AKI), the Petitioners in the petition that was filed at the High Court at Nairobi in June 2020 and interim orders obtained in July 2020 suspending implementation of VAT on insurance agency and brokerage services.

The effect of the amendment to the VAT Act was to subject insurance agency and insurance brokerage services that were previously VAT exempt to VAT at the prevailing rate of 16 percent.

In 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 impugned amendment effectively required the insurance intermediaries to start charging VAT on the agency and brokerage services they offer as of 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, by virtue of the TLAA, would be borne by insurance companies. This is because the insurance companies would not be able to recover this VAT from their clients. VAT is a consumption tax that should be borne by the final consumer (i.e., the policyholders) therefore, the inability of the insurance companies to recover or pass on the VAT cost to policyholders would result in an unfair tax burden on their part.

Conclusion

The declaration by the High Court has provided relief for insurance companies and the insurance industry in Kenya in general as insurance agency and brokerage services will not be subject to VAT.

A detailed legal alert will follow shortly.

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