In a ruling that could sharpen the tax treatment of revenue earned through medical scheme administration, the court dismissed Minet’s appeal against value-added tax (VAT) and allowed a cross-appeal by the Kenya Revenue Authority (KRA) for excise duty.

“I find that the tribunal erred in law by holding that hospital discounts were outside the scope of excise duty. In the circumstances, I find the commissioner’s cross-appeal succeeds on this point,” the judge said.

The court reinstated the excise duty assessment against Minet for the 2018 to 2021, with interest and penalties, and reconfirmed the VAT assessment on the hospital discounts.

“Minet is a licensed insurance intermediary and medical insurance provider under the Insurance Act. It is registered for VAT. The evidence on record shows Minet receives medical claims, validates them and expedites payout using its operational infrastructure under Section 150A of the Insurance Act. The retention of a percentage of the invoiced amount (the discount) is the direct consideration earned for providing this service,” the court said.

“While financial services under Part II of the First Schedule to the VAT Act are generally exempt, specified administrative and trade-financing services of this nature do not enjoy statutory exemption. Minet failed to discharge its burden under Section 56(1) of the Tax Procedures Act, 2015 to demonstrate a specific statutory provision exempting these administrative earnings from VAT.”

The dispute followed a KRA audit of Minet’s tax affairs for January 2017 to December 2021. It produced additional assessments of Sh67.38 million in excise duty and Sh73.2 million in VAT.

At the centre of the dispute was money Minet retained from amounts payable to medical service providers after settling their invoices.

Minet called these amounts “hospital discounts” and said they were commercial discounts offered for early payment.

Minet argued that the discounts did not arise from a service supplied to hospitals and, therefore, should not attract VAT. It said the payments were not fees arising from its licensed activities and should not attract excise duty.

KRA, however, said Minet earned the amounts through medical insurance administration, claims processing and faster payments to hospitals. It said the payments were consideration for a taxable service and constituted “other fees” connected to Minet’s licensed activities.

The Tax Appeals Tribunal partly agreed with Minet in May 2024. It upheld VAT on the hospital discounts but quashed the Sh32.9 million excise duty assessment for 2018 to 2021 it had found wrongly imposed.

The tribunal characterised the arrangement as a financial service similar to invoice discounting. It found that Minet was not licensed to provide invoice discounting or similar financial services and concluded that the income did not arise from its licensed activities.

The High Court said the tribunal introduced the invoice-discounting description without it being pleaded or supported by evidence.

“The true test under Part III of the First Schedule to the Excise Duty Act is not whether an entity holds a specialised standalone licence for discounting, but whether the fee earned relates to its licensed activities,” the court said.

It found that Minet’s role as a medical insurance provider and scheme administrator enabled it to receive, verify and settle hospital claims.

The court also upheld VAT, saying Minet provided hospitals with accelerated cash flow and liquidity through early settlement of claims.

“I find no fault in the tribunal’s finding that Minet provides a clear ‘facility or advantage’ to medical service providers, namely, accelerated cash flow and liquidity through early claim settlements,” the judge said.

The court held that the VAT Act includes making a facility or advantage available within the definition of a service. Minet had failed to identify a statutory exemption covering the income.

On excise duty, the court rejected Minet’s argument that a separate licence for invoice discounting was necessary. It said the income stemmed from Minet’s licensed medical-insurance administration work.

“The statutory definition of ‘other fees’ in the Excise Duty Act is deliberately broad. It captures all non-premium fees, charges and commissions derived from licensed operations,” it said.

The ruling reinstated the Sh32.9 million Excise Duty assessment and reconfirmed VAT on the discounts.

Insurance Regulatory Authority data for 2024 shows medical insurance generated Sh73.4 billion, representing 35.97 per cent of non-life insurance revenue, making it the largest non-life insurance business.