Treasury shoots itself in the foot in attempt to boost tax revenues

Treasury CS Henry Rotich at Treasury Building on June 14, 2018. [David Gichuru]

Activist Okiya Omtatah stole the thunder from Treasury Cabinet Secretary Henry Rotich’s power to tax Kenyans on the midnight of June 30, making it practically imposible for the taxman to meet revenue targets.

Rotich had tried to reclaim the glory days when the Executive could hold its cards close to its chest and on the budget day, unleash new taxes that would spin the market, trying to absorb and adjust to the Finance Bill.

He wrote a piece of legislation, Provisional Collection of Taxes and Duties Act allowing him to impose taxes even before Parliament had a chance to look at his new proposals.

However, Omtata’s suit last year voided this move when Justice Winfrida Okwany ruled that a Bill cannot be implemented until it is processed to be an Act of Parliament.

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“A declaration that Finance Bill, or any other parts or provisions thereof, including on taxation, cannot be implemented before the Bill becomes the Finance Act after it goes through the parliamentary legislative process laid out in the Constitution for approval and adoption by Parliament, and assent by President,” ruled Justice Okwany.

This means that even if new taxes are announced during the budget speech, they may only become applicable after Parliament goes through the proposals, passes the law and gets President Uhuru Kenyatta to sign it.

“Going forward, the important lesson for the budget-making process is the effective dates – the Finance Bill can only take effect once passed by Parliament and assented to by the President,” said Robert Waruiru, Associate Director Tax & Regulatory Services KPMG Advisory Services Ltd.

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“This has a major impact on an effective date especially of VAT and excise tax changes which have historically taken effect on midnight of the budget day.”

Now, Kenyans wait for his 2019 budget not with bated breath but with three months to adjust to any new tax measures CS Rotich has dreamed up.

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“This then means that with no law providing for provisional collection of taxes in the run-up to the Bill being assented into law, there was no basis for the proposed taxes to be implemented.

This now leaves the second question, once the Bill becomes law, can it now be applied retroactively,” Kunal Ajmera Chief Operating Officer Grant Thornton said. While the ruling has been appealed, the Finance Bill 2018, the first finance bill to be challenged successfully in court is irredeemable and contradictory.

The legislation became law in September, however, in fine print, it is applicable from July when it did not exist as a law.

This has given Kenya Revenue Authority, which is unable to meet tax targets an avenue to pressure taxpayers especially financial institutions which refused to collect taxes from their customers on behalf of KRA.

“KRA says it’s only an administrator and it is following the law as it is, we challenged it in court and we have protection from the claims. The matter will be heard in June,” Kenya Bankers Association CEO Habil Olaka said.

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According to the schedules of the Finance Act, sections came into effect on different dates from July 1, October 1 in 2018 and January 2019. The taxman claims that the law allows them to collect backdated taxes on the basis of the effective date.

KRA says it is implementing the law as it is despite the consternation from the institutions receiving the claims. “Yes, there have been disputes, especially now that KRA has been actively looking at the financial services sector. To my knowledge, none of the disputes has been resolved,” said Waruiru.

We asked KRA how much money they believe they could collect from backdating the tax dates and how it affected tax collection planning, KRA did not reply by the time of going to press.

“The question then is, can a law that never existed before 21 September 2018 come into force on July 1, 2018? In my view, a law cannot take effect before it existed – the law must exist before it can take effect,” said Waruiru.

“Thus, for example, a bank cannot logically be expected to have charged 20 per cent excise duty on a transaction that happened on July 1, 2018, when in fact the bank only got to know of this obligation on September 21, 2018, and the law came into existence on the very same day!,” the KPMG Associate said. Ajmera said international best practice principles prohibit retroactive application of the law.

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“From a practical perspective it would be unfair to require taxpayers to account for taxes on business that was transacted before the law was even published,” he said.

“For instance, we only became aware of the 20 per cent Excise duty chargeable by banks when the Finance Act was published on September 28, 2018. For KRA to insist that the banks should account for the tax as from July 1, is not practical as the tax was not even in the Bill.”

By refusing to collect the money, banks had taken a huge gamble that almost backfired on them.

When their parallel suit was joined with the suit by Omtatah since they failed to charge customers for the period, the case was in dispute and they feared a collapse of the civil law activist could affect their case and expose them to huge tax bills.

The lenders’ fear to pay for the Treasury’s ‘Robin Hood’ tax should their case fail even prompted them to warn customers they would recover the deductions from their accounts should the High Court rule that the levy ought to have been paid.

While urging the court not to consolidate their case with that of Omtatah’s, KBA claimed that delays and doubts about the strength of the latter’s case could force them to foot the accrued duty or to recover the money from their customers for the period from July to September last year.

“The more the delay, the more difficult recovery will be,” he said.

Tax experts urge Treasury to learn from the confusion when drawing this year’s Finance Bill to be read alongside the budget.

However, the solution according to Mr Ajmera is to bring the money bill early enough rather than continue the tradition of keeping tax intentions secret to be unleashed on the budget day.

Bringing the Finance Bill on Budget day means the piece of legislation is delayed since that will be its First Reading.

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Finance BillHigh CourtTreasury CS Henry Rotich