Kenya: VAT on exported services is standard rated at 16% (court decision)

A case concerning imposition of value added tax on exported services by Finance Act 2022

A case concerning imposition of value added tax on exported services by Finance Act 2022

The High Court issued a judgment in a case concerning the imposition of value added tax (VAT) on exported services by the Finance Act 2022. The High Court dismissed the appeal finding that Parliament acted within its constitutional mandate to introduce the amendments in the Finance Act. According to the court, the petitioners did not demonstrate the constitutional violations alleged in the petitions.

The case is: Mwaura Kabata & 4 Others v The National Assembly & Others (Consolidated Petition No. E338 of 2022)


The Finance Act, 2022 introduced amendments to various tax laws including the Value Added Tax Act, 2013.

The petitioners filed five separate petitions challenging various provisions of the Finance Act. The court having identified similarities between the five cases, consolidated the petitions.

The petitioners, in the second petition challenged the constitutionality of Section 30(b) of the Finance Act, which amended the First Schedule to the Act by deleting the export of services from the list of zero-rated services. This deletion effectively made the export of service subject to VAT at the standard rate of 16% effective 1 July 2022.


The court considered whether the additional amendments introduced in the Finance Act ought to have been re-submitted to the public for public participation.

According to the court, Parliament is empowered to introduce amendments to a bill at the committee stage provided that the amendments are in line with the subject matter of the bill that has already been agreed to.

In this case, the Finance Bill, which was subjected to public participation, was intended for the amendment of tax laws. The amendment of the VAT Act fell within the scope of the purpose of the bill. The amendment cannot therefore be said to be contrary to the object and purpose of the bill.

On the issue of whether the imposition of VAT on export of services would subject taxpayers to double taxation, the court associated itself with the Organization for Economic Cooperation and Development’s (OECD) paper: Addressing the Tax Challenges of the Digital Economic (2014).

In this paper the OECD noted that “the exercise of tax sovereignty may entail conflicting claims from two or more jurisdictions over the same taxable amount, which may lead to juridical double taxation.” Bilateral tax treaties address instances of double taxation by allocating taxing rights between the contracting states.

In dismissing the claim for double taxation, the court opined that Kenya has various double taxation avoidance agreements in place to address the issue of double taxation in two jurisdictions.

KPMG observation

The main issue before the High Court was the constitutionality of the Finance Act, 2022, the decision rendered appears to sanction a departure from the destination principle that provides for allocation of taxing rights to the jurisdiction when final consumption occurs.

As to whether the VAT on export of services would expose taxpayers to double taxation, tax professionals view that such exposure cannot be addressed by double taxation agreements (DTAs) primarily because DTAs assign taxation rights on direct taxes and not indirect or consumption taxes such as VAT.

Based on this decision, taxpayers who export taxable services must be required to charge VAT at the rate of 16%. The imposition of VAT on export of service has put Kenya at a competitive disadvantage compared to its counterparts Tanzania, Uganda, Rwanda and even South Africa which zero rate export of service.

The petitioners have filed a notice of appeal before the Court of Appeal. It is expected that the issue of double taxation must be canvassed before the appellate court. In the meantime, when a taxpayer offers a taxable service which is not classifiable as a business process outsourcing, such taxpayers must be expected to charge and account for VAT on the service.

Read a March 2023 report prepared by the KPMG member firm in Kenya


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