RULING

Blow for KRA as court strikes out minimum tax

The taxman introduced the 1 per cent tax in January 2021, as part of its tax expansion programme

In Summary
  • Justice George Odunga yesterday issued an order restraining the Kenya Revenue Authority(KRA) from implementing the provisions of the minimum tax.
  • The ruling comes as a relief to businesses who were wary of paying the 1 per cent tax on total sales while still coping with the Covid-19 economic fallout.
Machakos High Court Resident Judge Justice George Odunga delivering the minimum tax landmark ruling at Machakos High Court on September 20
Machakos High Court Resident Judge Justice George Odunga delivering the minimum tax landmark ruling at Machakos High Court on September 20
Image: GEORGE OWITI

The Kenya Revenue Authority(KRA) will lose an average of  Sh21billion in revenue annually after the high court declared its new minimum tax unconstitutional.

The taxman introduced the 1 per cent tax in January 2021, as part of its tax expansion programme.

KRA has been on a plan to raise revenue to fund the government's Sh3.03 trillion budget and cut the widening budget deficit that has reached Sh953 billion this year.

The tax expansion programmes have been paying off as KRA surpassed its revenue collection target in the financial year 2020/21.

The taxman collected Sh1.669 trillion compared to Sh1.607 trillion collected in financial year 2019/20, despite the economic effects of the Covid-19 pandemic.

However on the other hand, the ruling comes as a relief to businesses who were wary of paying the tax on total sales even in a loss making position while still coping with tough economic times occasioned by the Covid-19 pandemic.

Justice George Odunga yesterday issued an order restraining the Kenya Revenue Authority(KRA) from implementing the provisions of the tax.

Odunga said that while KRA wanted to nab dishonest return of losses by some entities, the introduction of minimum tax was not appropriate in dealing with that issue.

“The minimum tax has the potential of not only subjecting the people to double taxation but also unfairly targeting people whose businesses for whatever reason are in loss-making positions to pay taxes from their capital rather from their profits,” said Odunga.

He ruled that it was unfair to bundle loss-making companies into the same basket as those with a history of tax evasion.

“The solution is not to cast the net wide in order to catch all businesses as was done but develop a system which is tailored to target only the culprits,” said Odunga.

Odunga said in the implementation of the one per cent tax, those who were able to pay taxes with their profits would not be affected while those who are genuinely loss-making would be sacrificed at the altar of those dishonestly concealing their profits.

He faulted KRA for coming up with a system which instead of detecting the dishonest entities opted for an easier way out by casting the revenue net without bothering what the net will catch as long as the culprits are caught.

“In all due respect, that is not how to enact a fiscal legislation, a fiscal legislation must be precise and must be specifically targeted to meet its objective,” said Odunga.

Reacting to the ruling, KRA said it respectfully disagrees with the findings of the Court and will appeal.

"This is to ensure that KRA continues to review and improve on tax policies in order to reduce the tax burden while ensuring that every citizen contributes their fair share of tax," said KRA.

In April, the High Court temporarily barred KRA from collecting the tax after three officials of the Kitengela Bar Owners Association challenged it arguing that enforcement of the tax is unconstitutional and would harm their businesses.

The petition was filed against the National Assembly, KRA and Attorney-General Paul Kihara Kariuki.

Industry players have welcomed the ruling, saying the tax would have  affected small business

“This is good news and makes complete sense. Minimum tax would have been a blow to the economy,” said Nikhil Hira, an economist.

Kenya Association of Manufacturers(KAM) Chairman Mucai Kunyiha said the decision by the court to repeal the tax provides much needed relief to businesses that continue to strain under the weight of over-taxation and unpredictability in the country.

“With the appreciation that there is an urgent need to expand the tax base in the country, industry’s perspective is that this can be done differently and with minimal negative impact to already struggling businesses, ” said Kunyiha.

He said the decision not only ensures that many businesses remain open and productive but provides space for businesses to bounce back and generate the much-needed revenue to support the country.

Financial expert Mihr Thakar said the introduction of minimum tax was not thought through as it had the potential of deterring investment.

“A tax on turnover paid from the capital base is a further unproductive cost on capital,” said Thakar

He said the ruling is a welcome relief for the economy, although structural and macroeconomic issues are likely to remain a deterrent to investment and hence the euphoria from the ruling will be short-lived.