TechSavana Salaries Case; Outsourcing Firms Must Charge Vat on Full Service Fee

Case Study: Commissioner of Domestic Taxes v Techsavana Company Limited (Income Tax Appeal E228 of 2023) [2025] KEHC 6643 (KLR) (Commercial and Tax) (23 May 2025) (Judgment)

Background

The KRA conducted a tax audit (2016–2019) and assessed Techsavana for

1. VAT: Kshs 73,856,356 (on outsourced labor services).
2. Withholding Tax: Kshs 3,546,60

Techsavana objected, arguing that it acted as an agent, merely facilitating payments (disbursements) to developers, and thus the amounts were not subject to VAT.

The Tax Appeals Tribunal sided with Techsavana, prompting the KRA to appeal to the High Court.

Techsavana’s Arguments

• It sourced developers as per clients’ specifications.
• Clients (e.g., Safaricom) controlled and supervised the developers.
• It only processed salaries (disbursements) and earned a 16% commission, which it was willing to pay VAT on.
• Since it did not add value, the salaries were not consideration for a supply under VAT law.

KRA’s Arguments:

• The contract was for “provision of outsourced developers” (a service).
• Techsavana managed payroll, recruitment, and supervision—proving it was more than a facilitator.
• The 16% agency margin was part of the Service Fee, meaning the full amount (including salaries) was subject to VAT.
• Invoices did not separate disbursements from service fees, implying VAT applied to the whole sum.

High Court’s Findings (23/05/2025):

• Techsavana did more than just pass on salaries. It managed employment, meaning it supplied a service.

20 In summary, to answer the question posed herein above, it is the Respondent who held the purse strings. It is as clear as day that the Respondent, a software development company, entered into a contract to provide a service to its customers, which service was to identify and second qualified personnel to its customers for purposes of developing software for them.

• As such, VAT applied to the full amount (salaries plus the margin)

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