Proposed tax unfair to loss-making businesses

The High Court ruling declaring the proposed “minimum tax” illegal is a major relief for loss-making businesses that risked suffering double jeopardy in case the levy was implemented. On paper, the policy sought to eliminate tax cheating, given that some businesses have learnt tricks of reporting perennial losses, hence avoid paying levies.

The minimum tax was introduced in January last year through an amendment of the Income Tax Act and the object was to levy at least one per cent tax on firms’ gross turnover, irrespective of business performance. Conventionally, tax is paid on incomes and, for businesses, profits that accrue from trading.

However, the minimum tax was to be charged on every business; hence, firms that made losses would be forced to dig deep into their coffers to get additional cash to pay Kenya Revenue Authority (KRA). For the tax collector, this was a major avenue stream for raising additional cash, estimated at Sh21 billion annually, which would be a major boost to its portfolio.

But as we have argued before, it’s unfair to penalise businesses that make losses. Such taxation ends up hurting businesses and makes ours a hostile environment for trading. This is the point Justice George Odunga’s judgment buttressed when he declared the tax illegal.

KRA is, understandably, under pressure to ramp up its tax revenues. It has consistently failed to meet tax collection targets. This explains why it’s devising diverse tactics to up its tax incomes. Key to this is reining in tax evaders and ensuring that all payments made are correct.

However, that does not give it a reason to introduce punitive measures. There are better strategies for collecting taxes. Moreover, there are ways and means of nailing down tax cheats. At any rate, major tax cheats are known and it only requires strong will to seize them.

KRA should seal all loopholes through which it loses revenues but spare ordinary businesses from unlawful tax collections.