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Kenya: Tax waivers issued via gazette notice are unconstitutional

28 March 2023
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In a Judgment delivered by the High Court on 17 February 2023 in Constitutional Petition No. E280 of 2021, the High Court in Mombasa declared that Section 13(2) of the Income Tax Act, Chapter 470 of the Laws of Kenya (Income Tax Act) is unconstitutional to the extent that it authorizes income tax waivers through a notice in the Gazette and for specified persons without regard to the provisions of Article 210 of the Constitution of Kenya 2010 (Constitution).

Brief facts of the case

The Constitutional Petition challenged, among others, the constitutionality of the Cabinet Secretary’s action through Legal Notice No. 15 of 2021 to grant income tax exemption on income accrued in or derived from Kenya by Japanese companies, Japanese consultants and Japanese employees involved in projects under specified financing agreements. The Cabinet Secretary was faulted for issuing tax exemptions through Gazette Notices and without legislation pursuant to section 13(2) of the Income Tax Act contrary to Article 210 of the Constitution.

The National Assembly was also faulted for acting in breach of Articles 10(2) and 118(1) of the Constitution by failing to subject to public participation the Legal Notice granting Japanese companies, Japanese consultants and Japanese employees the exemptions.

Determination

In allowing the petition, the High Court declared, among others, as follows:

  • section 13(2) of the Income Tax Act is unconstitutional to the extent that it authorizes income tax waivers through a notice in the Gazette and for specified persons as opposed to by way of legislation without regard to the provisions of Article 210 of the Constitution;
  • an exemption or waiver of income tax can only be granted by the National Assembly through national legislation after it passes as a money bill as provided under Article 114(3) of the Constitution after public participation and in strict compliance with Article 210 of the Constitution, which legislation will require that there be:
    • a public record of each waiver and the reason for the waiver;
    • each waiver and the reason for it shall be reported to the Auditor General; and
    • in compliance with Article 27 of the Constitution, there should be no waiver based on national origin, race, colour, marital status,  health status, ethnic society, religion, conscience, belief culture, dress, language or birth.
  • legislation on tax waiver involving country-by-country agreements must comply with the Constitution and must be on the basis of reciprocity, non-discrimination, equity and tax neutrality;
  • the National Assembly has no power to authorize waivers of tax other than through legislation as contemplated under Article 210 of the Constitution; and
  • the National Assembly breached the Constitution by waiving public participation.

Putting it into perspective

The import of this judgment is that section 13(2) of the Income Tax is unconstitutional. Accordingly, the Cabinet Secretary can no longer grant tax exemptions through gazette notices. This means that going forward, tax exemptions will have to be granted through specific legislation enacted in accordance with the Constitution. There must be public participation in enacting such legislation in accordance with Articles 10(2) and 118(1) of the Constitution and justification and disclosure of the reasons and records of the waiver in line with the provisions of Article 210 of the Constitution.

Regrettably, the Honourable Court failed to issue directions on the operation of existing Gazette Notices issued under the impugned provisions of the law. Examples of the Gazette Notices include the notices affecting the energy sector, such as:

  • Legal Notice Number 91 of 2015, which provides for exemption of withholding tax paid on loans from foreign sources for investing in the energy sector (among other sectors); and
  • Legal Notice Number 165 of 2015, which provides that payments for services rendered under a power purchase agreement by a non-resident person are exempt from withholding tax.

It is thus not clear whether exemptions granted under such Gazette Notice are still valid.

This judgment failed to consider the fact that legal notices are statutory instruments and, pursuant to the Statutory Instruments Act, 2013 is subject to: (a) consultation with persons likely to be affected by the instrument; and (b) parliamentary scrutiny.

Additionally, the judgment failed to consider the practicability of always turning to the National Assembly to legislate on a tax exemption whenever recommended.

We are not privy to whether an appeal has been filed and we shall be keen to update you on any development.