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Kenya: High Court rules that the National Treasury Cabinet Secretary cannot abandon taxes without KRA recommendation

25 October 2022
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In a Ruling delivered on 16th September 2022 in the case of Republic vs Commissioner of Domestic Taxes and London Distillers (k) Ltd (HCITA/004/2022), a Judicial Review Application through which the Applicant sought Orders to stop the Kenya Revenue Authority (KRA) from enforcing the collection of excise duty in the amount of KES 517,118,680, the High Court held that pursuant to section 37 of the Tax Procedures Act, 2015 (TPA), any application for abandonment of taxes must first be made to the Commissioner of Domestic Taxes for determination, after which it shall be referred to the Cabinet Secretary for the National Treasury (the Cabinet Secretary) for approval. Accordingly, through this holding, the process of tax abandonment starts with the Commissioner and, as such, the Court concluded that the Cabinet Secretary’s purported abandonment without the involvement of the Commissioner was null and void.

In this case, the Company collected excise duty in the amount of KES 517,118,680 in the course of its business for the period January 2020 to August 2021 and filed self-assessment returns in support of the same. The KRA claimed that the declared taxes had not been remitted to it, and it consequently demanded the taxes. The parties agreed on a settlement of the amount. However, the Company thereafter unilaterally applied to the Cabinet Secretary for abandonment of the principal tax and penalties. Section 37 of the TPA allows the Commissioner, with the prior written approval of the Cabinet Secretary, to abandon taxes that cannot be recovered on specific grounds, occasioning doubt or difficulty in recovery. In addition, section 89 allows the Commissioner to remit penalties and interest on specified grounds upon application in writing, provided that for amounts above KES 1,500,000, the Commissioner requires the Cabinet Secretary’s prior approval.

The National Treasury allowed the Application and approved abandonment of 80% of the principal tax and waived 100% of penalties and interest. The KRA opposed the approval and sought to enforce the demand on the basis that the Application did not meet the threshold under section 37 of the TPA. Further, the KRA urged that the process of abandonment of taxes should be initiated through the Commissioner, who then, if satisfied that the Application meets the criteria for abandonment, will seek the Cabinet Secretary’s approval for the abandonment, and not vice versa. It is upon KRA’s action to enforce the demand that the Applicant lodged the Judicial Review Application.

Implication

The TPA grants the Commissioner powers to refrain from collecting an unpaid tax, with the prior approval of the Cabinet Secretary, where the following grounds exist.

  1. it may be impossible to recover an unpaid tax; 
  2. there is undue difficulty or expense in the recovery of an unpaid tax; or 
  3. there is hardship or inequity in relation to the recovery of an unpaid tax. 

The implication of the Ruling in the cited case is that any application for the abandonment of unpaid taxes by a taxpayer must first be made to the Commissioner, who must then determine that one of the above three grounds exists, prior to referring the same to the Cabinet Secretary for approval to abandon the same. An application that is made directly to the Cabinet Secretary by the taxpayer will not succeed.