Nairobi, Kenya; The High Court has suspended imposition of Value Added Tax (VAT) on insurance agency and insurance brokerage services.
This follows a Constitutional petition by the Association of Kenya Insurers(AKI) challenging sections of the Tax Laws(Amendment Act 2020) which introduced this new provision.
Previously, these services were exempt under provisions in the VAT Act(2013). On 25 April 2020, the President of Kenya assented to an Act of Parliament, the Tax Laws (Amendment) Act, 2020.
The Act amends the VAT status of insurance agency, insurance brokerage and securities brokerage services from exempt to a rate of 14%.
The Tax Laws (Amendment) Act, 2020 deleted “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 amendment effectively required the insurance intermediaries to start charging VAT on the agency and brokerage services they offer, with effect from 25 April 2020.
The Association of Kenya Insurers (AKI), 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 the amendment of the VAT Act 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.
AKI said 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 constitutional petition by the High Court, AKI sought conservatory orders to suspend further implementation, administration, application and enforcement of the amendment to the VAT Act considering the impugned amendment has been in place since 25 April 2020.
The High Court, in a ruling delivered on 16 July 2020, found in favour of AKI and granted conservatory orders pending hearing and determination of the main petition.
The grant of the conservatory orders has provided relief for insurance companies and the insurance industry in Kenya in general as the insurance agency and brokerage services will not be subject to VAT pending the hearing and final determination of the constitutional petition that challenges the amendment to the VAT Act.
The constitutional petition is set for hearing on 3 November 2020.
Available data from EY Tax Global indicates that Kenya has a total of 49 insurance companies, 5 reinsurance companies and 198 insurance brokers.
There are a total of 5,155 insurance agents in Kenya.
The minimum paid-up capital has been set at KSh 600 Million, KSh 400 Million, KSh1 Billion and KSh 500 Million for the general, long term, general business reinsurance and long term business reinsurance.