The High Court sitting in Nairobi has dismissed an appeal by Mars Logistics Limited contesting a charge of Value Added Tax (VAT) on transportation services among other claims.
Mars Logistics Limited had contested Tax Appeal Tribunal’s (TAT) decision that transportation of goods in transit attracts VAT at the rate of 16%. The TAT had also held that transportation services that end outside Kenya are not exported services and thus taxable.
The First Schedule to the VAT Act, 2013 exempts VAT from services offered in relation to goods in transit. In its decision of 27th February 2018, TAT had ruled in favour of KRA, that Mars Logistics Limited’s sole business offered transport services for transit goods that were taxable under the VAT Act. 2013.
The tribunal had further held that the company was not entitled to claim exempt status for the sale of motor bikes because the motor bikes were not exempt
Decision of the High Court
Last week, the Court held that under the VAT Act 2013, the determination of whether the services are exported out of the country is that the same must be for consumption outside Kenya.
Consumption is not determined by reference to the payer, location of the service payer or of the person who is requisitioning for the service, but the place where the services are consumed. In the instant case, the court found out that the transport services were consumed in Kenya and had not been exported.
In dismissing Mars Logistics Limited argument that regulation 20 of the Regulations made pursuant to the repealed Act continued to apply until the 2017 Regulations came into force, the Court held that ‘subsidiary legislation cannot override the express provisions of statute’. Under the VAT Act, 2013, transportation of goods in transit is not zero-rated nor was it exempt from VAT. The Court upheld the findings of the Tribunal that in order to qualify for zero-rated status, the service should be specifically provided in the law.
The Court emphasized that services offered in relation to goods in transit were previously zero-rated but under the VAT Act, 2013 they were not. The High Court also dismissed Mars Logistics Limited’s contention that the provisions of the Finance Act, 2014 on exemption from VAT of supply of services in respect of goods in transit as read together with the VAT Act, 2013 created ambiguity.
Further, the High Court held that Mars Logistics Limited did not demonstrate important principles applying to the construction of statutes including the presumption against absurdity, the presumption against unworkable or impractical result, and the presumption against unusual or illogical results.
On allowable deductions under the Income Tax Act, the Court held that one of the fundamental conditions that must be satisfied for an item of expenditure to be deductible, is that it must be incurred ‘wholly and exclusively’ for the purposes of the trade, profession or vocation. Mars Logistics Limited’s claim for input tax for exempt supplies was therefore disallowed.
The Court stated that the burden of proof was on Mars Logistics Limited to persuade the Commissioner for Domestic Taxes that the expenses were incurred, which burden was not discharged and the High Court therefore found no reason to fault the Tribunal’s decision.
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