Treasury faces clash with Judiciary over tax dispute deposit plan

National Treasury

The National Treasury Building in Nairobi. Treasury faces clash with Judiciary over tax dispute deposit plan of Tax Procedure Act to introduce a requirement that a party in a dispute with KRA deposits a portion of the amount.

Photo credit: Pool

A proposal by the Treasury that firms and individuals deposit 20 percent of disputed tax before sung the Kenya Revenue Authority (KRA) clashes with an order by Supreme Court earlier this year barring imposition of conditions before a matter is heard.

The Finance Bill 2023 proposes changes to the Tax Procedure Act to introduce a requirement that a party in a dispute with KRA deposits a portion of the amount as part of a strategy to encourage out-of-court settlements amid complaints that the KRA is unable to collect billions pending the conclusion of suits that take years to conclude.

“Provided that where a party is not the Commissioner, that party shall deposit with the Commissioner an amount equivalent to twenty percent of the disputed tax before filing the appeal” the Finance Bill stated in part.

If the Court decides in favour of the taxpayer, the KRA would be required to credit the amount or security within 30 days after the determination of the appeal, according to the proposal.

The proposal however conflicts with a February 17, 2023, Supreme Court order by Deputy Chief Justice Philomena Mwilu that prohibited such preconditions on suits to be heard in court.

“A declaration be and is hereby made that the order for the security of costs made in civil application No.37 of 2017 delivered on December 8, 2017, is unreasonable as it impedes the appellant’s access to justice by imposing a condition precedent before a matter can be heard contrary to Articles 48,50 and 159 of the Constitution of Kenya,” the lady Justice said following an appeal by Westmont Holdings SDN BHD against three respondents including the Central Bank of Kenya(CBK), Kamlesh Mansukhlal Pattni and Uhuru Highway Development Company.

The appeal followed an application by the CBK that Westmont Holdings deposits security for costs in the sum of Sh. 87,620,000.00, on the basis that it had been awarded costs by the High Court. The Court of Appeal allowed CBK’s application and ordered the appellant to deposit Sh 20,000,000 as security for costs, failure to which the appeal would be struck out.

Aggrieved by the ruling of the Court, the Westmont filed the instant appeal before the Supreme Court, claiming that the order for security for costs violated various provisions of the Constitution including Article 48 (access to justice), Article 50 (right to a fair hearing), Article 159 (duty of the court to disregard technicalities in dispensing justice), and Article 259 (duty of the court to promote the purpose, values, and principles of the Constitution and to advance the rule of law, human rights, and fundamental freedoms).

The latest proposal in the Finance Bill 2023 marks a reduction from the 50 percent deposit that had been proposed by the former Treasury Cabinet Secretary Ukur Yatani last year.

MPs however shot down the 50 percent deposit proposal arguing that it would harm businesses.

Courts have over the years determined whether KRA’s demands for security are justifiable and then set the amount to be given either as a deposit or bank guarantee.

The KRA has been pushing for deterrent measures such as the deposits amid concern that cases worth billions of shillings have been pending before the courts for years, hurting its ability to increase revenue collections.

The proposal is, however, likely to face opposition due to its anticipated impact on the cash flows of businesses caught up in the tax wars with the KRA.

The KRA has vouched for alternative dispute resolution in a bid to ease hitches hurting efforts to recover taxes.

The Alternative Dispute Resolution mechanism is largely seen as the first layer of resolving disputes arising from tax audits before they are escalated to the Tax Appeals Tribunal and the courts.

The tax arbitration process, however, locks out cases that are criminal such as tax evasion, malpractices, and fraud.

Official data shows that KRA resolved 319 cases referred to arbitration in the first half of the financial year that ended in June 2022. This represented 57 percent of the cases referred to arbitration in the first half of the current financial year ending compared with 49.29 percent in the previous period.

The taxman says ADR recorded an 11 percent growth in revenue during the first half of 2021/2022, unlocking Sh10.4 billion compared to Sh9.4 billion collected during a similar period in 2020/2021.

Before the implementation of the ADR process, which is handled within the KRA, taxpayers aggrieved with tax assessments appealed to the Tax Appeals Tribunal which came to force in 2013 before escalating to the High Court if not satisfied.