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Kenya: High Court temporarily suspends Minimum Tax

20 April 2021
– 3 Minute Read


In a ruling delivered by the High Court on 19 April 2021 in Constitutional Petition No. E005 of 2021, the High Court in Machakos granted conservatory orders restraining the Kenya Revenue Authority (the KRA) from enforcement of minimum tax pending the hearing and determination of a petition challenging minimum tax filed at the High Court (the Petition).

The High Court in Nairobi has directed that in view of the conservatory orders granted in this Petition, a similar petition filed by the Kenya Association of Manufacturers, Retail Trade Association of Kenya and Kenya Flower Council challenging the imposition of minimum tax be consolidated with this Petition and heard before the High Court in Machakos on 27 April 2021.

Minimum tax was introduced with effect from 1 January 2021 and is payable at the rate of 1% of the turnover of a person if the instalment tax payable by that person is lower than minimum tax payable. Minimum tax does not apply to (i) persons whose income is exempt from income tax, (b) person’s whose income is subject to employment taxes, residential rental income tax, turnover tax or capital gains tax, (c) income chargeable under the ninth schedule of the Income Tax Act (extractives industry), (d) persons engaged in business whose retail price is controlled by the Government, and (d) persons engaged in insurance business.

The petitioners are seeking a declaration that minimum tax is unlawful and unconstitutional since it does not fall within the category of taxes that may be imposed by the national government under the Constitution, was enacted without the approval of the Senate, violates the right to property and life, results in inequitable sharing of the tax burden and creates uncertainty due to contradictions with the Income Tax Act and the Minimum Tax Guidelines published by the KRA.

The petitioners have also sought an order prohibiting the KRA from collecting and/or demanding payment of minimum tax.

Putting it into perspective

The temporary suspension of minimum tax provides a short-term reprieve for taxpayers given the adverse impact that minimum tax would have (a) on taxpayers that are in a tax loss position, and (b) businesses with high turnovers and low margins which would have to pay taxes based on their turnover rather than the profits they make.

The High Court did state in its Ruling that notwithstanding the conservatory orders, if the High Court were to find that minimum tax is legal and constitutional, the KRA would be at liberty to collect all tax arrears due from taxpayers together with interest and/or penalties.

Taxpayers who were liable to pay minimum tax by virtue of the instalment tax payable by them being lower than minimum tax payable, should now pay instalment tax. The first instalment tax for taxpayers whose financial year ended on 31 December 2020 is due on 20 April 2021. Such taxpayers may offset the instalment tax against minimum tax payable if the High Court rules that the tax is legal and constitutional.

Taxpayers who are not in a position requiring payment of instalment tax should await the decision of the High Court and where possible, make provisions in their books for the minimum tax amount. It should be noted that the Tax Procedures Act also empowers the KRA, with the approval of the Cabinet Secretary for Finance, to refrain from recovering unpaid taxes where there is hardship or inequity in relation to the recovery of an unpaid tax.