Blow to KRA as High Court scraps Minimum Tax

The Kenya Revenue Authority (KRA) has suffered a setback after the High Court declared the Minimum Tax null and void, denying the taxman some Sh20 billion in annual revenues.

In a ruling delivered in the High Court earlier today, Justice George Odunga barred KRA from implementing or enforcing the provisions of Section 12d of the Income Tax Act that introduced the Minimum Tax earlier this year.

The ruling followed a constitutional petition filed by the Kitengela Bar Owners Association that sought to scrap the 1 per cent levy on gross turnover citing it as punitive.

The Minimum Tax was introduced through the Finance Act 2020 and came into effect from January 2021 with KRA targeting businesses that continually declare losses in their returns to avoid paying taxes.

“Conveniently, tax levied on business income is based on the profit made,” said KRA in guidelines to the new tax published earlier this year.

“When a business makes losses in a financial year, no taxes are payable, and the loss is carried forward to the next period. To address this inequity in tax payment, Minimum Tax was introduced,” explained the KRA.

The levy was supposed to be paid in quarterly instalments due on the 20th day of each quarter. KRA said it projected to collect Sh20 billion from Minimum Tax returns in the first financial year of its introduction.

However, the Kitengela Bar Owners Association argued that the Minimum Tax is unlawful and unconstitutional and if allowed will lead to the collapse of their businesses as well as that of majority of Small and Medium Enterprises (SMEs).

In its petition, the Association further challenged the categorisation of the Minimum Tax under income tax, since that is only chargeable on gains or profit not gross turnover as implied by KRA.

“It was contended that the impugned Minimum Tax introduced by Section 12d is contrary to and inconsistent with the meaning and purpose of income tax as provided under the Income Tax Act, ITA,” said the lobby in a petition in part.

“On one hand the ITA provides that income which is subject to tax under the ITA is income in respect to gains or profits having deducted all expenditure wholly and exclusively incurred int he production of that income while on the other hand minimum tax is chargeable on gross turnover including losses with no possibilities of deducting expenses or costs,” said the petition.

On its part, the KRA maintained that the Minimum Tax as enacted by last year’s Finance Act was passed following the laid down procedure and was thus constitutional.

“In the Authority’s view, the orders sought by the applicants are final in nature and shall be akin to determining the petition at this interim stage without hearing the parties on substantive issues,” argued the KRA in its defence.

Kenya’s business community welcomed the ruling as a win for the private sector and relief over the increased strain of taxation and unpredictability in state tax policy.

“This historic decision by the courts today provides much-needed relief to businesses that continue to strain under the weight of over-taxation and unpredictability in the country today, said the Kenya Association of Manufacturing (KAM), Kenya Flower Council and Retail Trade Association of Kenya (RETRAK) in a joint statement.

The business lobbies said the turnover tax would have negatively impacted low-margin businesses dealing in fast-moving consumer goods, capital intensive businesses with tax incentives, new firms and loss-making companies.

“With the appreciation that there is an urgent need to expand the tax base in the country, industry’s perspective is that this can be done differently and with minimal negative impact to already struggling businesses,” rest the joint statement.

Earlier this year auditing firm KPMG raised concern that the drafting of the law on Minimum Tax lacks legislative provisions to address how the levy will be implemented.

“One important point to note is the clarification in the guidelines that income from the insurance business and income from businesses whose retail price is controlled by the government is exempt from tax even though the Tax Laws (Amendment) (N0.2) Act 2020 had a drafting error which effectively subjected these businesses to Minimum Tax,” explained KPMG in a brief on the new taxes published earlier this year.