VAT on Exported Services

Background of the Case

The Finance Act 2022 amended the VAT Act by deleting exported services from the exempt list (First Schedule). This therefore meant that exported services became vatable at 16% excluding those relating to business process outsourcing “BPO” services effective from 1st July 2022. As a result, a consolidated petition was lodged at the High Court. The petitioners specifically wanted the amendments to the VAT Act (as contained in the Finance Act 2022) to be declared unconstitutional as they did not undergo public participation amongst other prayers.

Court Ruling

The Court Ruled that the Finance Act 2022 went through public participation and that it did not violate the Constitution. It further ruled that charging VAT on exported services would not amount to double taxation as had been argued by some of the petitioners. This in effect means that exported services are vatable at 16% with an exception of those in respect of business process outsourcing (BPO); which are zero rated.

What this Means for you

The VAT Act does not define what BPO is and this has led to various interpretation by taxpayers. One of the definition that has frequently been used is contained in the Special Economic Zones Act (“business processing outsourcing” means the provision of outsourcing services to business for specific business functions or processes such as back office support services in human resources, finance, accounting and procurement amongst other services.) It is therefore prudent that you review the exported services offered and see whether they fall under the ambit of this definition otherwise, they become vatable at 16%. Alternatively, taxpayers can seek the interpretation of KRA with regards to the applicability of this section through a private ruling. It is also interesting to see whether KRA will demand back taxes from those companies who had not charged VAT pending a determination of the Court.

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