KRA should tax income from corruption and fraud

National Treasury has for the 2016-17 fiscal year set an ambitious revenue collection target for the Kenya Revenue Authority (KRA). This calls for enhanced tax base and improved revenue administration processes. It's in line with this expectation that the taxman will have to employ the following strategies: the enforcement of the Tax Procedures Act, 2015 (TPA Act) and the widening of the tax dragnet to rope in income from illegal and immoral sources.

The Act aims to actualise the taxation principle of simplicity, with the overarching objective being to harmonise the tax administration process as one way of making tax compliance easier. It brings all the tax procedures in Kenya under one regime, with the exception of minimal specific procedures provided for under the specific tax legislations. It provides a punitive penalty amounting to double the tax avoided for those taxpayers who are guilty of involvement in tax avoidance schemes.

It introduces novel ideas that are crucial in simplifying the tax legislation and also significantly reduces room for doubt on both the part of the taxpayer and that of KRA, thus setting ground for a more robust and efficient tax regime. This will hopefully translate to more tax revenue. Under this law, and reminding us of the case of Al Capone the Chicago crime boss, it is now easy to secure a conviction for tax evasion than for corruption under the Anti-Corruption and Economic Crimes Act.

Taxation of illegal income has been a topic of debate in different jurisdictions. Tax authorities, in their zest to maximise revenue collection, have argued that proceeds of trade is income, even if the trade was illegal. To mention but a few are the celebrated cases of Mann - Vs - Nash and Commissioner of Inland Revenue - Vs - Aken.

Just recently in the Civil Appeal No. 55 of 2009 pitting KRA against Yaya Towers Limited, the court applied itself to Section 3 (1) of the Income Tax Act, Cap 472 and guided by the above cases ruled that the said section talks of all income legal or otherwise hence KRA has jurisdiction to tax profits from illegal services rendered and that doing so would not be breach public policy.

The income in Section 3(1) is clarified under 3(2) to include: gains or profits from business and employment or services, rent, dividends, interest, pension and capital gains. My interpretation is that income and gains from criminal activities for instance: money laundering, drug trafficking, prostitution, and smuggling would qualify for taxation as they fall under the rubric of the above classifications. The reason is that their principal purpose is to make commercial gains, although from illegal sources and evince characteristics of commercial venture.

Income from corruption, fraud, theft, embezzlement, extortion and by extension money laundering do not fall within the scope of classes of income stated in sub-section 3 (2) of the Act and thus are strictly interpreted not amenable to taxation. Parliament should take advantage of Article 209 (1) (a) and (2) of the Constitution to amend the Income Tax Act to have a "catch-all" provision for taxation of "all gains, profits and income from whatever source derived.

Taxation of this income would therefore bring fairness and equity, which are key cannons of taxation. Failure to tax illegal income would encourage taxpayers to have their business tainted with illegality for the purposes of securing tax exemption.

Matters of illegality raise complex questions of law that are not easy to resolve. This nevertheless should not dampen the call for the proposed amendments.