Ultimately, the court held that the imposition of taxes is Parliament’s constitutional mandate and dabbling in its affairs would be an error and untenable in light of the purposes of the Constitution of Kenya 2010 (Constitution), unless otherwise shown that due process was not followed.

Exportation of services has previously been exempted from VAT up until the Act’s enactment which moved VAT on exported services to being zero-rated but only in respect to “business process outsourcing” without defining this term. The implication of this was to subject all other exported services not sufficing as “business process outsourcing” to the 16% VAT chargeable to taxable supplies.

In the case before it, the court condensed the issues advanced by the petitioners as whether the imposition of the impugned taxes by the National Government was unconstitutional for being onerous and unconscionable. This, they alleged, was not in line with the principles of public finance such as public participation as envisaged under Article 201 of the Constitution.

The petitioners further contended that the Act would subject them to double taxation. They alleged that the zero-rate for exported services in respect to business process outsourcing meant that other exported services were subjected to VAT. Being a tax levied on final consumption in the taxing jurisdiction, the Finance Act defied this position by imposing VAT at the point of origin.

The court noted that it was undisputed that one of the constitutional functions of the National Government is the power to impose taxes and charges as envisaged under Article 209 of the Constitution. Notably, the interpretation of the court was that the provision did not articulate a floor or ceiling of how it can execute its mandate to impose taxes.

Overall, the court found the petitioner’s averments on lack of public participation and double taxation to be merely speculative and a product of apprehensions as no evidence was tabled to ascertain the claim. According to the court’s judgment, the petitioners neither showed how the impugned amendments contravened the constitutional mandate of Parliament in the enactment of laws nor proved violation of laid down principles of legislative process.

The judgment bears profound tax implications for businesses all over the nation engaged in exportation of services. It is a nod to the Government’s intention to increase revenue collection by expanding the tax base of businesses involved in the exportation of services.

It follows, then, that businesses will increase the cost of exporting services to cater for the VAT imposition. It also follows that businesses that were not charging 16% VAT on exported services from 1 July 2022 may be exposed to VAT assessments until when it is clear whether their services fall within the undefined term of “business process outsourcing”. Such businesses should carry out a review of the potential exposure and come up with strategies to counter any claims from the revenue authority.

An appeal to the Court of Appeal with a stay on the High Court decision would offer relief to affected businesses. Further the businesses offering exported services should come together to push for VAT on exported services to be zero-rated through an amendment in the VAT Act. The soonest this can be done appears to be through Finance Act 2023 with the effective date being 1 July 2023.

The decision by the High Court, unless reversed, may cause capital and revenue flight to neighboring nations who do not impose 16% VAT on exported services. Overall, service providers in Kenya may lose business which is ultimately detrimental to the taxman’s revenue collection objective.