Kenya’s High Court on Monday struck down the implementation of minimum tax at a rate of 1 per cent of firms’ turnover and said it was unconstitutional as the law would lead to double taxation and unfair targeting.
“The minimum tax has not only the potential to subject the people to double taxation but also, to unfairly target people whose businesses, for whatever reason, are in loss-making position, Justice George Odunga said.
“Those who are able to pay taxes from their profits will not have their capital affected while those generally in loss-making position will be sacrificed at the altar.”
Treasury Cabinet Secretary Ukur Yatani proposed the minimum tax in 2020, charged at the rate of one per cent of total annual sales, to be paid by businesses whose tax obligation is below one per cent of their gross sales.
“The intention of this is to bring onboard companies who earn income from Kenya, but end up declaring losses perpetually to avoid payment of corporate taxes,” Yatani explained to Parliament then.
Consequently, through the Finance Act, 2020, Parliament amended the Income Tax Act by introducing a new Section 12D providing for the introduction of Minimum Tax at the rate of 1 per cent of the gross turnover effective 1 January 2021.
However, in April, the court issued conservatory orders restraining the Kenya Revenue Authority from implementing the law pending the hearing and determinations of the petition filed by 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.
In the ruling, Justice Odunga agreed with the petitioners who had argued that they “will suffer untold prejudice because its gross turnover will be subjected to an excessive, discriminative and illegal tax”.
Justice Odunga ruled that the state ought to put in place systems to detect tax cheats and not opt for blanket taxation.
“The assumption is that all these companies in loss-making positions have avoided taxes. Will all due respect, that is not how to enact fiscal legislation,” Justice Odunga added.
The Kenya Association of Manufacturers, Retailers Association of Kenya and Kenya Flower Council who had been enjoined in the case lauded the decision.
“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 KAM Chairman Mucai Kunyiha in an emailed statement.
“It not only ensures that many businesses remain open and productive but provides space for businesses to bounce back and generate the much-needed revenue to support our country.“