The High Court in Machakos has barred the taxman from implementing and enforcing minimum tax on Kenyan businesses.
Justice George Odunga made the decision after finding that section 12D of the Income Tax Act is unconstitutional.
The suit had been filed at the Machakos High Court by the Kitengela Bar Owners Association (KBAO). The petition against the National Assembly, the Kenya Revenue Authority (KRA) and Attorney-General Paul Kihara Kariuki sought to have the levy declared unconstitutional.
Minimum tax would have been applicable to businesses regardless of whether they make a profit or not.
But on Monday, Justice Odunga agreed with the lobbies that implementation of the new levy would harm businesses.
The judge ruled that the new levy would be unfair to businesses that make losses as they would still be forced to part with one per cent of their total sales.
Justice Odunga also faulted the National Assembly for not involving the Senate before introducing minimum tax because some counties had already implemented a similar levy, hence there was risk of exposing several businesses to double taxation.
The National Assembly had last year amended the Income Tax Act to give KRA powers to collect minimum tax starting January, 2021.
Had the court dismissed the petitions, businesses would have had to pay the tax to KRA once every quarter.
Catch tax cheats
The National Assembly had argued that the new levy was aimed at netting tax cheats who cook their books to indicate losses so as to lower their liability to the taxman.
“Whereas the respondent (National Assembly) may have identified the virus that infected the revenue collection system as being dishonest loss-making return of some entities, it was the vaccine that was developed that was inappropriate in dealing with that virus. The solution was not to cast the net wide in order to catch the culprits as well as non-culprits as was done, but to develop a system which was tailored to target only the culprits,” Justice Odunga said.
“The impugned amendment will clearly lead to favourites and sacrificial victims. Those who are able to pay taxes from their profits will not have their capital affected while those who are genuinely in loss-making positions will be sacrificed at the altar of those dishonestly concealing their profits,” the judge added.
KBAO filed its petition in Machakos, but shortly after other business associations also filed petitions in Nairobi. The petitions were transferred to Machakos and consolidated with the bar owners’ case.
Justice Odunga has now held that the National Assembly should have prepared legislation to specifically catch tax cheats without causing too much collateral damage.
“The respondents have instead of putting in place systems that can enable them detect the dishonest entities opted for an easier way out by casting the revenue net in the deep sea without bothering what the net will catch as long as the culprits are caught. With all due respect, that is not how to enact a fiscal legislation,” the judge said.
Relief for businesses
The decision will come as a relief to several businesses already reeling under the rise in fuel costs.
Minimum tax, along with other levies, was part government's plan to widen its revenue base by introducing new tax measures. It required persons or companies, whether making profits or losses, to pay a minimum tax of one per cent.
The controversial tax, which was introduced through Finance Bill 2020, sought to have companies making revenues of at least Sh50 million pay 1 per cent of their gross turnover, irrespective of whether they make profits or losses.
Business stakeholders had faulted the government for introducing a new tax regime at a time when firms and the economy in general are struggling due to disruptions caused by Covid-19 pandemic.
Additional reporting by Peter Mburu and Joseph Wangui