Kenya’s insurance agencies and brokerage services could start attracting up to 18% value added tax (VAT) by as early as July 2024, as the government lines up sweeping changes in the country’s taxation regime to shore up revenues. The East African nation has published a draft medium-term tax revenue strategy in which the National Treasury is proposing a departure from the current practice where all insurance services are exempt from VAT.
“Taxation of insurance services at the general rate will expand the tax bases and hence raise VAT revenue as a percentage of GDP; therefore, the government will introduce VAT on insurance services,” reads the draft in part. The move, if approved, looks set to put pressure on the margins of agencies and brokers in a market where insurance penetration is below 3%, and major insurance classes like motor and medical have been returning underwriting losses.
VAT in Kenya is currently charged at 16% but this could rise to 18% as the state, in the financial year 2024-2025, eyes to match what is charged on goods and services by other East African Community bloc members including Uganda and Tanzania.
The proposal marks the latest attempt by the state to introduce VAT in a sector that is struggling with fraud, price undercutting and a low penetration rate. The Association of Kenya Insurers (AKI), a lobby for all underwriters in the country, showed penetration stood at 2.33% last year. Between June 2020 and December 2021, the AKI went to court to protest the Tax Laws Amendment Act, 2020, which deleted insurance agencies, insurance brokerage and securities brokerage services from the VAT exemption list.
The AKI argued that the country’s VAT laws exempted insurance and brokerage services from VAT, and that the actual cost of the VAT introduced would be borne by the insurance companies who would not be able to pass the tax burden to final consumers, since their services are exempt from VAT. Government had argued that the move was a way of eliminating unfairness in tax incentives and promoting fairness in sharing tax burdens.
In December 2021, Kenya’s High Court ruled that the deletion of insurance agencies, insurance brokerage and securities brokerage services from the VAT exemption list was unlawful and unconstitutional. This was a rare win for insurers, who have seen a number of decisions go against them in the past, including their push to bar brokers from handling premiums. But the latest attempt to introduce VAT on these services has the potential of increasing premiums for policyholders unless the insurance companies opt to absorb the cost.
The Finance Act 2023, which overcame legal hurdles on its way to implementation, already introduced a new sub-section to section 17 of Kenya’s VAT Act to allow for owners of taxable supplies who are compensated for the loss of goods to pay VAT at 16%. The move had been opposed by insurers who said such a tax was against the VAT Act that classifies insurance as tax-exempt. However, the change sailed through.
In their analysis, KPMG Kenya said the introduction of VAT on compensation for the loss of the taxable supplies will impact compensation from insurance following the loss of taxable supplies where input VAT had already been claimed. “In cases where the compensation includes VAT, the owner will be required to declare the compensation and remit the VAT; if the compensation does not include VAT, the owner would have to declare the compensation and subject it to VAT, then remit the tax to the Commissioner,” said KPMG.