By Samuel Migele
The High Court in Nairobi 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.
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Regulations made pursuant to the repealed Act continued to apply until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
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.