First published in the Business Daily on March 27, 2018.
The Tax Appeals Tribunal recently ruled that disposal of salvage motor vehicles by insurance companies is not a taxable supply subject to Value Added Tax.
During the hearing, KRA argued that the disposal of salvage motor vehicle by insurance companies constituted a supply of taxable goods within the meaning of Section 2 of the VAT Act, 2013 hence subject to VAT at 16 per cent.
However, the Tribunal, quite rightly, did not agree with KRA’s interpretation. To use a phrase that has recently become the butt of many a joke, the law is very clear!
First, the VAT law exempts insurance and reinsurance services from VAT, except where the services relate to management and insurance related consultancy services, actuarial services and services of insurance assessors and loss adjustors.
If the disposal of salvage motor vehicles was intended to attract VAT, nothing would have prevented Parliament from specifically stating so.
Secondly, the Insurance Act defines insurance business to include, inter alia, any business incidental to the insurance business. It is obvious that the insurers find themselves in possession of salvage vehicles by virtue of the insurance arrangement upon compensating the insured.
As such, the disposal of salvage motor vehicles is an incidental part of insurance business. Thirdly, the doctrine of subrogation implies that there is no supply when an insurance company assumes the roles of the insured and acquires the right to the salvage property.
It is seen as an attempt to minimise the loss incurred in indemnifying the insured. Subsequently, any disposal thereof should not be deemed a supply since the insurer is merely disposing of what would have otherwise been disposed of by the insured.
Fourthly, insurance contracts are contracts of indemnity. This means that the insurer’s liability is limited to the actual loss incurred by the insured.
The insured cannot recover more than his loss no matter how much premiums he has paid. How then would this doctrine be achieved if the insurer is not allowed to take possession of the salvage property after indemnifying the insured?
Fifthly, claims by the insurance company against third parties who caused the loss are instituted in the name of the insured. The insurer sues in the name of the insured but keeps any monetary compensation awarded by the court to itself since it has already indemnified the insured. The insurer therefore disposes of the salvage in the name of the insured, but keeps the proceeds.
Sixthly, there is no actual transfer of legal ownership of the salvage property from the insured to the insurer upon indemnification of the loss.
The property is not transferred or registered in the name of the insurer even at the time of disposal. The insurer merely acquires the right of disposal. This in fact is one of the exceptions to the nemo dat quod non habet rule (you cannot give what you do not have)..
As such, there is no way a subsequent disposal can be deemed to be a supply by the insurer for VAT purposes, in line with the doctrine of subrogation.
Finally, it is a well-established principal that taxation can only be done on clear wording of the law and not on what the tax authority assumes it to have intended. In the event of any ambiguity in a tax law, the interpretation should always be in favour of the taxpayer.