Kenyan High Court Tells KRA to “hold its horses” on Minimum Tax

The High Court Monday issued conservatory orders restraining the Kenya Revenue Authority from implementing the minimum tax at a rate of 1 per cent of firms’ turnover.

The High Court Monday issued conservatory orders restraining the Kenya Revenue Authority from implementing the minimum tax at a rate of 1 per cent of firms’ turnover.

At the beginning of the current fiscal year, the government assented to the Finance Act, 2020 which amended the Income Tax Act by introducing a new Section 12D providing for the introduction of Minimum Tax at the rate of 1% of the gross turnover effective 1 January 2021.

However, Justice Geroge Odunga issued the conservatory orders restraining KRA “…from the implementation, further implementation, administration, application and or enforcement of the law…by collection and /or demanding payment of the Minimum Tax pending the hearing and determinations of  this petition.”

“Having considered the issues placed before me, it is my view and I find that this is an appropriate case for the 2nd Respondent to “hold its horses” for the time being as this Court navigates through the labyrinth of the respective contentions made by the parties herein,” Justice Odunga.

The respondents in the petition, The National Assembly, Commissioner General KRA, and the Attorney General, have been ordered to respond within 7 days and the petitioner to file supplementary and submissions within days. 

The petitioners in the case are registered officials of the Isinya East Sub County Bar Owners Association with businesses in Kitengela, Isinya, Athi River and Mavoko within the Counties of Kajiado and Machakos.

“The Petitioners, it was averred, will suffer untold prejudice because its gross turnover will be subjected to an excessive, discriminative and illegal tax. Moreover, the enforcement of the impugned legislations stands to kill their business and the livelihoods of millions of Kenyans operating small to medium enterprises which form the majority of the business community.

The death of a business is certainly not a damage that can be remedied by way of damages. As such, it is in the interest of Justice that the Honourable Court grants interim reliefs at the very least to preserve the businesses and livelihoods of the Petitioners and millions of SMEs pending the hearing and determination of this Application and Petition.

In the inverse, where the interim relief is granted, the Respondent will not suffer any prejudice whatsoever as where the Court finds the impugned minimum tax to be legal and Constitutional, the 2nd Respondent will be at liberty to collect all tax arrears due from the Petitioners and all other taxpayers together with interest and/or penalties.”

The petitioners through their lawyers Okwach & Company Advocates argued that the introduction of the Minimum tax is founded on the false belief that every business enterprise operating in Kenya generates a profit bottom line of 3.33 per cent at any given point. 

“This misconception in effect means that from the outset, enterprises with a lower profit margin than 3.33 per cent are at risk of being levied a tax higher than
the 30 per cent Corporate tax that companies above the expected bottom-line are levied. (based on production costs and operational expenses, some SMEs are at risk of paying 100% income tax or even more).”

The Kenya Association of Manufacturers, Retailers Association of Kenya and Kenya Flower Council had filed a similar case in Nairobi. “The orders granted in Machakos are applicable to the Petition filed in Nairobi and can be relied on by all Kenyans,” they said in a joint statement to Khusoko.

This order fully aligns with the petitions submitted to the courts by the above-mentioned Associations on the increased cost burden to businesses across the country. It also captures the mood and the spirit of the country as we grapple with the difficulties presented with navigating the COVID-19 pandemic. Additionally, the High Court sitting in Nairobi has now transferred the Nairobi Petition to Machakos to have the two Petitions consolidated and heard together,” they said.

In March, PwC Tax experts said the Minimum Tax is not unique to Kenya however, “The Government of Kenya could draw some lessons from international best practices and incorporate them in the local tax code, such as by reducing the rate of minimum tax as well as revising the tax base from gross turnover to an alternative base such as Earnings Before Interest and Tax (EBIT). Further, in a bid to enhance Kenya’s attractiveness as a hub in Sub-Saharan Africa and reduce the strain on startups and financially constrained entities, the minimum tax could be structured as an advance tax to be applied in future periods when businesses start making taxable profits.”