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Justice George Odunga said Section 12D introduced by the Finance Act and amended by the Tax Laws (Amendment) (No. 2) Act, 2020 “violates Article 201(b) (i) of the Constitution and as such null and void.”/FILE


Odunga nullifies minimum tax citing inconsistency with the Constitution

NAIROBI, Kenya, Sep 20 – The High Court has invalidated a newly enacted provision of the Income Tax Act requiring the payment of minimum tax at the rate of 1 per cent of gross turnover which came into effect on January 1.

The provision, seen as a plan by government to narrow a fiscal deficit estimated at about 7.5 per cent of the Gross Domestic Product, made it mandatory for payment of tax even when a business makes loses, sparking condemnation from owners of small and medium enterprises.

In a decision delivered on Monday, Justice George Odunga said Section 12D introduced by the Finance Act through the Tax Laws (Amendment) (No. 2) Act, 2020 “violates Article 201(b) (i) of the Constitution and as such null and void.”

He was rendering a judgment in Petition No. E005 of 2021 filed in Machakos by official of Kitengela Bar Owners Association, Kenya Association of Manufacturers, Retail Trade Association of Kenya and the Kenya Flower Council.

Article 201 of the Constitution provides that “(b) the public finance system shall promote an equitable society, and in particular — (i) the burden of taxation shall be shared fairly.”

Under Section 12D, the minimum tax charged at the rate of 1 per cent of gross sales is applicable on persons whose gross turnover is more than Sh1 million but less than Sh50 million in a given year.

The court prohibited the Kenya Revenue Authority or its agents from further implementation, administration and enforcement of the annulled provision by collecting minimum tax.

The Kitengela Bar Owners Association had told the court that the sustenance of Section 12D assented to by President Uhuru Kenyatta in June 2020 would lead to the “absolute annihilation of the association’s businesses along with a majority of Small and medium enterprises struggling to earn an income in the already abysmal economy.”

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The petitioners argued that by its very definition, the said tax did not amount to Value-added tax, custom duties nor excise tax, yet the National Assembly purported to include it in the category of income tax.

The petitioners also cited the uncertainly and confusion which arose from guidelines issued by KRA which provided that “minimum tax shall not apply to income which is subject to withholding tax, including digital service tax, provided that at the end of the accounting period, the tax payable on taxable income exceeds minimum tax payable.”

The petitioners argued that the Income Tax Act itself lacked a provision exempting the incomes referred to in the guidelines from minimum tax.

In his judgment, Justice Odunga held that the contested section of the Tax Income Act would only prevail in situations where there is a conflict between it and any other provision of the Act.

“Where, the provisions can exist side by side with the other clauses without causing injury to either then that co-existence will be upheld. However, where there is a conflict between section 12D and any other provision in the Income Tax Act, section 12D of the Income Tax Act being a non obstante provision would prevail,” he stated.

The judge said KRA had failed to comply with the provisions of the Statutory Instruments Act hence rendering minimum tax guidelines null and void and as a result, in the absence of the requisite guidelines, Section 12D of the Income Tax Act cannot be operationalized.

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