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Kenya: Minimum tax declared unconstitutional

24 September 2021
– 5 Minute Read


On 20 September 2021, the High Court of Kenya declared the amendment of the Income Tax Act and the resultant imposition of minimum tax unconstitutional.

Minimum tax was introduced by an amendment of section 12D to the Income Tax Act (the Amendment), as a tax charged at the rate of 1% of the Gross Turnover of specified individuals. The Amendment was intended to take effect on 1 January 2021. To implement the Amendment, KRA published “Guidelines on Minimum Tax” (the Guidelines) whose main purpose was the definition of Gross Turnover. 

Summary of the Petition and judgment

Honourable Mr. Justice George Odunga delivered his judgment in a petition filed against the National Assembly, Kenya Revenue Authority (KRA) and the Attorney General in Machakos High Court Petition No. E005 of 2021 – Stanley Waweru, Samwel Gitonga, Benard Oranga and Paul Mukono Kuria (Suing as Officials of Kitengela Bar Owners Association) and 2 others versus The National Assembly and 2 others (consolidated with Petition No. 1 of 2021) challenging the constitutionality of the Amendment and the Guidelines.

The petitioners argued that even though it was introduced as an amendment to the Income Tax Act, minimum tax is contrary to and inconsistent with the purpose of income tax which is charged on income in respect of gains or profits after deduction of expenditure. In their view, minimum tax is unconstitutionally chargeable on gross turnover of the specified individuals (which may include losses) with no possibility of deducting expenses or costs.

The Petitioners also argued that the Amendment discriminates against businesses with lower profit margins but high turnover such as those in the manufacturing, sale and distribution of consumer goods.

The Respondents, in opposition to the petition, argued that minimum tax is aimed at leveling the playing field for businesses ensuring that all businesses contribute towards the government’s goal of mobilizing resources for growth and development of the country.

The Respondents’ in their submissions, contended that minimum tax was introduced to capture delinquent businesses who report losses in their year of income to abscond from their tax obligations. According to KRA, the minimum tax gave the government an alternative method of ensuring all businesses contribute to economic development.

In brief, in its judgment the High Court held:

  • The Guidelines are of no effect because in their publication, the Respondents did not comply with the provisions of the Statutory Instruments Act. Those provisions emphasize the need for consultation where the proposed statutory instrument is likely to have a direct, or a substantial indirect effect on business. In the absence of the Guidelines the Amendment cannot be implemented.
  • The Amendment violates the Constitution and the principle that the burden of taxation is to be shared fairly. In the court’s view, imposition of the tax has the potential to subject certain people to double taxation and unfairly targeting people whose businesses, for whatever reason, are in loss making positions.
  • People who genuinely make losses will be forced to fall back on their capital to pay the minimum tax. The court was clear that taxation legislation which has the potential effect of diminishing capital for those making losses while those making profits have an untouched capital base is unfair and unconstitutional. 

Ultimately the High Court allowed the Petition and declared the Amendment unconstitutional and granted an order prohibiting KRA from implementing the Amendment by collecting and/or demanding payment of minimum tax.

Putting it into perspective

Kenya is not the first jurisdiction in Africa that has sought to introduce a minimum tax regime. African governments have resorted to minimum tax as a measure to plug revenue shortfalls which have since been exacerbated by the effects of the COVID -19 pandemic. Tanzania and Nigeria both have minimum tax regimes while Uganda has sought to introduce minimum tax for several years. 

The Government’s priorities remain to ensure that it increases revenue collection and addresses the dishonest filing of tax returns declaring losses by some entities. The Government is unlikely to relent in this effort but for the near future, it has been expressly barred from enforcing a minimum tax regime as set out in the Amendment and it would have to revert to the drawing board on how best to achieve its objectives.  However, KRA has the power to investigate and enforce cases of tax evasion and the court felt that a minimum tax would in effect allow them to take the easy way out.

Taxpayers may breathe a sigh of relief as their investment and capital continue to be protected from imposition of minimum tax. The High Court remained alive to the reality of the manifest unfairness of taxation of loss-making businesses on their gross turnover without due consideration of losses that arise because of a myriad of reasons that may include heavy capital expenditures, global factors affecting prices of goods or key resources, political instability, natural disasters among other reasons which may not be the businesses doing.

In this regard, the court noted that a situation where taxes are paid from capital instead of from profits by certain businesses amounts to unfairly targeting these taxpayers since it will lead to an erosion of capital for these businesses.

How does the judgment impact your business?

KRA has indicated that it intends to file an appeal challenging the judgment and it is to be seen if the Court of Appeal will agree with the findings of the High Court.

After this declaration of unconstitutionality, taxpayers who had already paid minimum tax, should apply for a refund from KRA. This should, however, pend the determination on whether any interim orders will be issued staying the execution of the judgment pending the determination of the appeal.