Court ruling on income tax to hurt KRA’s target

Justice George Odunga. [George Njunge ,standard]

The Kenya Revenue Authority (KRA) yesterday suffered a major setback after the High Court declared a section of legislation allowing minimum tax unconstitutional.

In effect, the judgment by Justice George Odunga takes away Sh21 billion from KRA’s basket and dents its plan to hit its tax collection target.

The judge faulted the National Assembly and KRA for assuming that loss-making firms declare losses to evade taxes.

He was of the view that instead of punishing everyone for the sins of others, they should come up with systems to ensure that there is no default and if there is any, the defaulters are easily punished for it. 

“The impugned amendment will clearly lead to favourites and sacrificial victims. Those who are able to pay taxes from their profits will not have their capital affected while those who are genuinely in a loss-making position will be sacrificed at the altar of those who dishonestly conceal their profits,” Justice Odunga ruled.

He declared section 12D of section 12D of the Income Tax Act unconstitutional and permanently barred KRA from implementing minimum tax guidelines.

Justice Odunga continued: “The respondents have, instead of putting in place systems that can enable them to detect the dishonest entities, opted for an easier way out by casting the revenue net into the deep sea without bothering what the net will catch as long as the culprits are also caught. With due respect, that is how not to enact fiscal legislation. Fiscal legislation must be precise and must be specifically targeted to meet its objective.”

Parliament amended the Income Tax Act and introduced the minimum tax in section 12D. This would be charged at a rate of one per cent of the gross turnover from January, this year.

Firms and business persons were required to pay this in installments on the 20th day of each period ending the 4th, 6th, 9th, and 12th month of the income year.

KRA argued that the minimum tax was meant to ensure that all share the tax burden equally, whether one has earned a profit or not.

In the case, Kitengela Bar Owners Association, Stanley Waweru, Samwel Gitonga, and Bernard Oranga argued the tax would burden businesses and kill others in the event of default.

The court heard that National Assembly passed the contested tax law without consulting the Senate, even as counties introduced the same levy on businesses running in devolved regions. 

Kenya Association of Manufacturers (KAM), the Kenya Flower Council, and the Retail Trade Association of Kenya (Retrak) had also contested the minimum tax law before the Milimani High Court in March, this year. 

The cases were then consolidated with the case before the Machakos High Court.

The court heard that minimum tax cannot be deemed as an income tax.

The petitioners argued that the effect of the minimum tax was to have taxpayers use some of their capital to foot KRA’s bill or worse still have to get the money from their pockets.

Justice Odunga heard that businesses are struggling from the Covid-19 pandemic effects.

“Essentially, what this means is that the impugned tax cares less of the ability of the taxpayer to pay, yet an elementary principle in taxation is the principle of economic capacity which states that the percentage of the income of the taxpayers that can be legitimately affected by a tax must not be excessive than the wealth objectively available,” he heard.

The tax minimum was introduced through the Finance Act, 2020.