Paragraph 10 of Part II of the First Schedule to the Value Added Tax Act as amended by the Tax Laws (Amendment) Act 2020, declared unconstitutional for contravening articles 1, 27, 35, 201(b)(i) of the Constitution

Brief facts

The petitioners filed the instant petition seeking among others; that the court should declare that paragraph 10 of Part II of the First Schedule to the Value Added Tax Act as amended by the Tax Laws (Amendment) Act, 2020 (VAT Act) was unconstitutional. In April 2020, amendments to VAT Act amending paragraph 10 of Part II of the First Schedule to the VAT Act came into operation. The petitioner and 2^nd interested party challenged the process and substance of the impugned legislation. They contended that the impugned amendments were unconstitutional because the National Assembly failed to facilitate meaningful participation and genuinely consider public views in its enactment. The petitioner further averred that they were discriminated against by the respondents actions.

The petitioner contended that the impugned amendment was introduced at a time when the Government was giving tax incentives to Kenyans to cushion them against the adverse effects of the Covid19 pandemic on the economy. They further argued that the effect of the impugned amendment was that instead of the petitioner enjoying the tax incentives, it had been subjected to additional tax burdens.

 The respondents opposed to the petition and filed grounds of opposition and claimed that the impugned amendment made to paragraph 10 of Part II of the First Schedule to the Value Added Tax Act, 2013 to remove insurance agency and brokerage services from the list of Value Added Tax (VAT) services effective April 25, 2020 enjoyed the general presumption of constitutionality. The respondents also claimed that there was meaningful public participation prior to the promulgation of the impugned Act.

Issues

1. What was the nature of public participation in the legislative process?
2. What were the factors to consider in determining the constitutionality of legislation? Whether the imposition of value added tax on the insurance sector while other sectors were enjoying tax reliefs amounted to violation of the right to equality and freedom from discrimination. 
3. Whether the Association of Kenya Insurers was discriminated against as its members could not claim credit for input VAT which was enjoyed by other tax payers as its members were exempt from VAT. 
4. Whether the imposition of input VAT on insurance companies which were not able to pass the input VAT cost charged by the insurance agents and brokers to the insurance policy holders was a violation of the principle that the burden of taxation should be shared fairly. 

Held

1. The guiding values and principles of governance which included the rule of law, accountability, democracy, and participation of the people enshrined in article 10(2) of the Constitution of Kenya, 2010 (Constitution) should be adhered to. In examining the constitutionality of a statute, it had to be assumed the Legislature understood and appreciated the needs of the people and the law it enacted was directed to problems which were made manifest by experience and the elected representatives assembled in a Legislature enacted laws which they considered to be reasonable for the purpose for which they were enacted. The presumption was therefore in favour of the constitutionality of an enactment.
2. The constitutionality of legislation was a rebuttable presumption; and where the court was satisfied that the legislation failed to meet the constitutional muster, nothing barred the court from declaring it to be unconstitutional. Parliament had a constitutional obligation to take legislative and policy measures to ensure that there was progressive realization of each and every right guaranteed by the Constitution.
3. Public Participation was embodied in article 10(2) of the Constitution which established the founding values which included, among others, transparency, accountability and participation of the people. The Constitution contemplated a participatory democracy that was accountable and transparent and made provisions for public involvement in legislative affairs.
4. The law was not that all persons had to express their views or that they had to be heard and that the hearing had to be oral. Similarly, the law did not require that the proposed legislation had to be brought to each and every person wherever the person could be. What was required was that reasonable steps be taken to facilitate the participation. Once that was done, the court would not interfere simply because due to peculiar circumstances of an individual, he or she failed to get the information. In other words, what was required was that a reasonable opportunity be afforded to the public to meaningfully participate in the legislative process. Therefore, even in cases where there were oral public hearings the mere fact that a particular person had not been heard did not necessarily warrant the whole process being nullified.
5. Considering the averments by the petitioners that there was no public participation because the National Assembly did not invite the petitioner to a public forum, that had no basis in law. Consequently, the enactment of the Tax Laws (Amendment), Bill, 2020 did not violate the principle of public participation under the Constitution or at all. The respondents had demonstrated that there was public participation before the impugned amendment to paragraph 10 of Part II of First Schedule of the Value Added Tax Act, 2013 was introduced.
6. Article 2(4) of the Constitution provided that any law including customary law, that was inconsistent with the Constitution was void to the extent of the inconsistency, and any act or omission in contravention of the Constitution was invalid. In construing the Constitution, article 259 enjoined the court to interpret the Constitution in a manner that promoted its purposes, values, and principles; advanced the rule of law, and the human rights and fundamental freedoms in the Bill of Rights; permitted the development of the law; and contributed to good governance.
7. One of the ingredients of the rule of law was certainty of law. The most focused deprivations of individual interest in life, liberty or property had to be accompanied by sufficient procedural safeguards that ensured certainty and regulation of law. That was a vision and a value recognized by the Constitution and it was an important pillar of the rule of law.
8. The services of the petitioners members under paragraph 2 of Part II of the First Schedule to the VAT Act were VAT exempt. The actual cost of the imposition of VAT on insurance agency and brokerage services would be and was borne by the petitioners members whose services were VAT exempt under the VAT Act. The petitioner had provided copies of invoices received by its members from the intermediaries evidencing that. The law, if applied as the respondents averred; it would be that on one hand, it provided that the services of the petitioners members were VAT exempt, yet on the other hand through the impugned Amendment it subjected the otherwise exempt services to VAT.
9. The respondents contention that article 209 of the Constitution empowered the National Assembly to impose taxes and charges. Such taxes including income tax, VAT, customs duties and other duties on import and export goods and excise tax was not a response to the issue raised therein related to uncertainty, ambiguity and absurdity created by the impugned amendment.
10. Under article 209 of the Constitution, the Legislature retained wide authority to define the scope of the tax. The imposition of taxes was a constitutional imperative and the power to impose taxes was reposed in the Legislature. The imposition of tax by statute could not, of itself, amount to arbitrary deprivation of property contrary to article 40 of the Constitution. No tax or licensing fee could be imposed, waived or varied except as provided by the legislation.
11. Elementary justice demanded legal certainty of rules affecting the citizen. A legislation or provision could be unconstitutional on grounds of cause and effect otherwise known as purpose or effect. Where the purpose or effect resulted into unconstitutional effects the provision or statute could be nullified for being unconstitutional.
12. To determine the constitutionality of a section of a statute or Act of Parliament, the court had to consider the purpose and effect of the impugned statute or section thereof. If its purpose did not infringe a right guaranteed by the Constitution, the court had to go further and examine the effect of the implementation. If either its purpose or the effect of its implementation infringed a right guaranteed by the Constitution, the impugned statute or section thereof should be declared unconstitutional.
13. The court upon finding that the impugned amendment created uncertainty, ambiguity and absurdity was obligated to declare it as unconstitutional as the effect of the implementation would infringe a right already guaranteed under the Constitution, in particular, rights under article 10(2)(a) and 10(2)(d) of the Constitution.
14. The uncertainty and ambiguity of the impugned amendment made it impossible for the petitioners members to plan for the tax burden that had been indirectly imposed on their services which were VAT exempt. The insurance on its part had no way of passing on the cost of VAT to policy holders. The imposition of VAT would therefore be a significant increase in the expenses of the petitioners members whose income was already adversely affected by the Covid-19 pandemic.
15. It was not clear, nor was the petitioner aware of the basis upon which Parliament decided to subject the insurance sector to additional tax burden during the Covid-19 period whilst omitting the other sectors of the Kenyan economy by stating that the insurance sector had come of age and needed to contribute to government revenue.
16. VAT was a consumption tax that should be borne by the final consumer of the supply. Section 17 of the VAT Act allowed VAT registered tax payers to claim a credit for input VAT against their output VAT to ensure the input VAT was effectively passed to the final consumer (in the instant case the insurance policy holders). The VAT charged by the insurance brokers and agents would be output VAT for them and would be passed to the petitioners members which would be classified as input VAT.
17. However, section 17(6) and 17(7) of the VAT Act limited the amount of input VAT claimable where input VAT was used to make exempt supplies. The insurance sector was therefore unfairly targeted by imposition of the novel tax in the form of VAT while other sectors were enjoying tax reliefs. That was a complete contravention article 27(1) of the Constitution.
18. The impugned amendment, discriminated against the petitioners members who would not be able to claim a credit for input VAT as provided for in the VAT Act and which was enjoyed by other tax payers as the petitioners members were exempt from VAT and would therefore not be able to effectively pass that input VAT to the final customer who were the insurance policy holders. That was in effect contravention of article 27(1) of the Constitution.
19. The main income for insurance companies was VAT exempt insurance premiums; in view wherefore the insurance companies could not pass the input VAT cost charged by the insurance agents and brokers to the final consumer of their supply who were the insurance policy holders hence resulting in a heavier tax burden to the petitioners members and in violation of article 201(b) (i) of the Constitution.
20. The court was clothed with jurisdiction to hear and determine the issues raised in the instant petition. Whenever legislation was challenged on grounds that Parliament did not adopt it in accordance with the provisions of the Constitution, courts were obliged to consider whether the Parliament in enacting the law in question had given effect to the constitutional obligations.
21. One of the effects of the impugned amendment was that it created uncertainty, ambiguity, and absurdity contrary to the principle of the rule of law as set out in article 10 of the Constitution. The law on one hand provided that the services of the petitioners members were VAT exempt, yet on the other hand through the impugned amendment, was subjecting the otherwise exempt services to VAT. The petitioner had a right to certainty of the law and the court could not condone such situation nor allow the ambiguity and uncertainty to persist any more.