New tax measures loom as KRA loses minimum levy appeal

Times Tower. KRA

Times Tower in Nairobi, the headquarters of Kenya Revenue Authority.

Photo credit: File | Nation Media Group

 The Treasury is expected to introduce new tax measures after it lost an appeal to retain the Sh21 billion it targeted to earn in annual minimum levies.

The Court of Appeal yesterday dismissed an appeal by the Kenya Revenue Authority (KRA) seeking to allow the introduction of a 1 per cent minimum tax on gross revenues.

This means the Treasury will have to look elsewhere to fill the gap even as the government aims to increase revenue collection and cut reliance on borrowing to fund the budget. The National Treasury earlier this year told the International Monetary Fund (IMF) that it will introduce new tax measures to replace the Sh21 billion it earns in annual minimum taxes if the government loses an appeal against a court ruling that stalled its implementation last year.

The IMF revealed Kenya will find a way to raise at least Sh8 billion of the lost tax revenue from alternative measures. The National Assembly had in 2020 amended the Income Tax Act (ITA) to give the Kenya Revenue Authority (KRA) powers to collect minimum tax starting January 2021.

A three-judge bench of Justices Daniel Musinga, Hellen Omondi, and Kibaya Laibuta upheld the decision made by High Court judge George Odunga in September last year that declared plans to introduce the minimum tax illegal.

Minimum tax

Parliament introduced the minimum tax at the rate of one percent of the gross turnover, with businesses expected to pay the tax to the KRA once every quarter.

However, Justice George Odunga found that the government’s plan to impose a minimum tax on corporate sales, even when a company reports losses, unconstitutional following an application by business lobby groups including the Kenya Association of Manufacturers (KAM), the Retail Trade Association of Kenya (Retrak) and the Kenya Flower Council.

The petitioners partly anchored their argument on a move by the Treasury to exempt some companies from paying the tax, including the national carrier Kenya Airways Plc, whose business was hit by pandemic-related lockdowns. Businesses whose pricing is controlled by the government, such as fuel marketers and Kenya Power, were also exempted.


In its judgment, the High Court stated that the amendment was null and void as it violated Article 201 (b) of the Constitution; and that failure to comply with the Statutory Instruments Act, rendered the Minimum Tax Guidelines null and void.

The Court, in restraining the KRA from collecting the tax, said the tax had the potential of subjecting people to double taxation, and that the amendment unfairly targeted businesses that were in genuine loss-making positions.

KRA, however, challenged the ruling at the Court of Appeal on 25 grounds, among them that the Court failed to appreciate the concept of double taxation and misconstrued the provisions of the Income Tax Act in respect of gains and profits thus contradicting the express provisions of Section 3(2) of the Income Tax Act.

The Court of Appeal upheld Justice Odunga’s decision and ruled that levying the minimum tax on gross turnover as opposed to gains or profit would lead to a situation where a loss-making taxpayer, would bear a heavier burden than other taxpayers contrary to Article 201 of the Constitution.

 Announcing losses

The Court dismissed claims that businesses are deliberately making announcing losses to evade paying tax, arguing that KRA is well equipped with the necessary mechanisms to carry out auditing to determine entities that are avoiding payment of tax.

“We share the same sentiments with the respondent on this aspect that punishing entities who are already battling with a stifled economy because of a few miscreants is the epitome of unfairness,” says the ruling.

“Having carefully considered the record of appeal as put to us, the impugned judgment, the statute law on taxation as amended, the respective written and oral submissions of the parties, and the cited authorities, we reach the inescapable conclusion that the appellant’s appeal fails and is hereby dismissed,” the Court added.

The government hoped to use the minimum tax strategy to ensure companies that had over the years reported losses as a tax-avoidance ploy to also contribute to the exchequer.

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