Court Declines to Suspend the Declaration Invalidating Twinning of Capital Gains Tax and Stamp Duty by the Taxman

Justice John Mativo in his ruling on 21st September, 2017 declined to suspend the declaration of invalidity of paragraph 11A of the Income Tax Act Chapter 470, Laws of Kenya earlier declared invalid on 14th March, 2017 by the same court.

The Kenya Revenue Authority (KRA) had made an application to have the court suspend the implication of the declaration of invalidity of paragraph 11A which was to prohibit the KRA from demanding for Capital Gains Tax (CGT) before registration of a transfer instrument.

The grounds cited by KRA in seeking such orders included:

  1. They intend to lodge an appeal;
  2. They stand to suffer undue hardships in the event the appeal succeeds; and
  3. Other tax modules linked to the CGT would be affected by the de-link.

The court in considering whether to grant the prayers sought was guided by amongst other considerations whether suspending the declaration of invalidity would serve a pressing and substantial need and whether there would be a legal vacuum created by the declaration of invalidity of paragraph 11A that needed to be avoided.

The court in this instance stated that KRA had not met the threshold to warrant the grant of the order of suspension sought. Further, that the suspension sought would infringe on the citizens’ right to property moreover, that KRA has numerous fall back options as there is no lacunae created by the declaration of invalidity of paragraph 11A.

Further, the court noted that KRA is yet to file an appeal six (6) months later from when the judgement declaring the said paragraph invalid was issued and thus invoking the court’s jurisdiction at this point may not be viable as the court has become functus officio.

The effect of this ruling is that KRA should not demand for the payment of CGT as a precondition for payment of stamp duty and CGT is therefore payable after the transfer of the property.

We are keen to observe KRA’s next step and their approach in implementing the orders given invalidating paragraph 11A.

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Authors: Emma Kyalo

                 Roselyne Muyaga