The Court has invalidated the VAT Regulations, 2017, which were made on March 30, 2017, for legislative procedural defect.
In a ruling dated January 30, 2022, the court found that the regulations did not have the force of law for failure by the Cabinet Secretary for the National Treasury to table them before the National Assembly for approval. The Court therefore annulled the Regulations for this procedural defect.
This follows a case filed by WEC Lines (K) Limited, a local shipping agent that has been in a tussle with KRA over tax refunds. The court found that its maritime agency services qualified as exported for VAT and that, consequently, the company was entitled to refund of excess input tax occasioned by zero-rating.
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WEC Lines (K) Limited is the exclusive local shipping agent of WEC Lines DV, a Dutch entity dealing in international maritime transportation of containerized goods.
WEC Lines (K) Limited considered its agency services to WEC Lines BV as exported and therefore, at various dates, sought a refund of excess input tax occasioned by zero-rating from the Kenya Revenue Authority (KRA).
However, the KRA rejected the refund claims on grounds that the services did not meet the export of service threshold. The Company objected and the KRA reaffirmed its view that the Company was not entitled to refunds.
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WEC Lines (K) Limited then proffered an appeal at the Tax Appeals Tribunal which appeal was determined in favour of the Company. Aggrieved by the Tribunal’s decision, the KRA challenged the Tribunal’s decision at the High Court.
In respect of the applicability of the VAT Regulations, KRA, while admitting that the VAT Regulations, 2017 were never tabled before the National Assembly, contended that they were not found to be unprocedural or illegal and thus they were valid.
Dismissing KRA’s appeal, the Court found that there was no privity of contract between the company and the importers of cargo who contract with its principal. The High Court concluded that the greatest/ultimate consumer of the company’s marketing, customer care and post landing services was its principal WEC BV, in the Netherlands. As such, the Court was persuaded that the company’s services met the export of service threshold and that the Company was entitled to refund of excess input tax.
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The Court further found the VAT Regulations, 2017 to have been invalid for a procedural defect. This was
because the Cabinet Secretary for The National Treasury failed to table the Regulations before the National Assembly contrary to the requirement of Section 11(4) of the Statutory Instruments Act, 2013.
The invalidity of the Regulations was within eight days after publication of the Regulations, the court ruled.
“The invalidity of the VAT Regulations, 2017 which is a matter that has previously been subject to debate. The judgment concludes that the Regulations, together with subsequent amendments should not be considered as forming part of the tax laws in Kenya. In effect, any decisions that the KRA may have made based on the regulations lack legal merit,” said Deloitte, a financial services company.
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The invalidation of the VAT Regulations, according to Deloitte, may also pose questions as to whether the Regulations under the repealed VAT Act (CAP 476) continued to apply during the period prior to invalidation of the VAT Regulations, 2017 by the High Court. This is because the transitional provisions of the VAT Act, 2013 required that the Regulations under the previous VAT regime continue to apply until new regulations were enacted.
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