On 30th June 2020, the President of the Republic of Kenya assented to the Finance Act, 2020 introducing Section 12D of the Income Tax Act, Cap 470 (‘the Act’). Section 12D of the Act provides for the introduction of Minimum Tax at the rate of 1% of a business’ gross turnover effective 1st January 2021.
The Petitioners through the Constitutional Petition No. E005 of 2021 challenged the constitutionality of the imposition of Minimum Tax. The Petitioners contended that the MT is unconstitutional as it does not fall within the category of taxes imposable by the National Government, that the amendment imposes an unfair tax burden on the public and that the guidelines on Minimum Tax are invalid.
The Honourable Court while considering the issues raised in the petition stated that the introduction of Minimum Tax violates the principle that the burden of taxation is to be shared fairly. It reiterated Article 201(b) (i) of the Constitution of Kenya, 2010 (‘the Constitution’) which provides that one of the principles guiding public finance is that the burden of taxation is to be shared fairly.
The Honourable Court in its analysis stated that the imposition of the said tax has the potential of not only subjecting the people to double taxation but also unfairly targeting people whose businesses are in loss making positions, to pay taxes from their capital rather than from their profits. It set out that a system of taxation that lends itself to the possibility of double taxation cannot be said to be fair.
On the guidelines on the Minimum Tax, 2021,the Honourable Court found that the failure by the Respondents to comply with the provisions of the Statutory Instruments Act, No.23 of 2013 rendered the Minimum Tax Guidelines null and void and of no effect. Section 11(4) of the Statutory Instruments Act, No.23 of 2013 provides that the consequence of failing to table an instrument before the National Assembly within the stipulated period is that it ceases to have effect immediately after the last day for it was to be presented. The Honourable Court stated that in the absence of the Guidelines, section 12D of the Income Tax Act could neither be implemented nor operationalized.
The Honorable Court found that a fiscal legislation must be precise and must be specifically targeted to meet its objective. In its determination, it set out that although the Minimum Tax is meant to deal with those companies which, though are in tax loss position, are not necessarily in a trading loss position, it also affects businesses that are in trading loss position. To that extent, the Honourable Court found that the tax also violates the right to dignity under Article 28 of the Constitution since it assumes that all those in tax loss position are evading taxes.
The Honourable Court in its determination issued orders prohibiting the Kenya Revenue Authority from implementing and administrating Section 12D of the Act by collecting and/or demanding payment of the Minimum Tax. It further issued a declaration that Section 12D of the Act be declared null and void and a declaration that the failure by the Respondents to comply with the provisions of the Statutory Instruments Act renders the Minimum Tax Guidelines null and void and of no effect.
The Kenya Revenue Authority, which is one of the Respondents in the petition, has lodged an appeal challenging this finding. We shall keep you posted on any developments in this regard.
The High court decision can be found here. Please contact us at info@cfllegal.com should you require further information.
