The Court of Appeal through the determination of the CIVIL APPEAL NO. E591 OF 2021 upheld the judgment of the High Court of Kenya at Machakos on 20 September 2021 that declared minimum tax unconstitutional.

Background

The Finance Act, 2020 introduced a minimum tax of 1% on gross turnover through the introduction of Section 12D to the Income Tax Act.  The introduction of minimum tax was aimed at levelling the operating playfield for business enterprises by ensuring that all persons contribute towards the government’s efforts to mobilize resources for growth and development.

It was however not to be applicable to exempt income, employment income, residential rental income, capital gains, persons undertaking mining or upstream oil and gas activities, persons subject to turnover tax, insurance business, and any business whose retail price is regulated by the government.

The minimum tax was to be a final tax payable in instalments that would be due on the same date as the current instalment tax obligations (i.e. on the 20th day of the fourth, sixth, ninth, and twelfth month of a company’s financial year).

Aggrieved by the imposition of the minimum tax regime introduced by Section 12D, several parties filed two constitutional petitions before the High Court challenging its constitutionality and legality. The  petitions were consolidated into Constitutional Petition E005 of 2021, through wich the Petitioners sought that Section 12D of the Income Tax Act be declared unconstitutional and therefore null and void, and further, that the KRA be restrained from implementing, collecting and/or demanding the payment of minimum tax.

As pled by the petitioners, in April 2021, the High Court issued conservatory orders restraining the KRA from further implementing or enforcing Section 12D of the Income Tax Act, pending the hearing and determination of the petitions challenging its validity.

On 20 September 2021, the High Court through the determination of the Constitutional Petition E005 of 2021 declared the minimum tax to be unconstitutional.

Determination by the Court of Appeal

Dissatisfied with the judgement of the High Court, the Kenya Revenue Authority (KRA) appealed against the ruling to the Court of Appeal. Among its grounds of appeal, the KRA alleged that the High Court  in its determination failed to appreciate the concept of double taxation and misconstrued the provisions of the Income Tax Act in respect of gains and profits thus contradicting the express provisions of Section 3(2) of the Income Tax Act.

In its decision, the Court of Appeal found that learned Judge  of the High Court erred in his findings relating to double taxation and in failing to resolve the applicability of Section 12D as a non-obstante clause not subject to any provision to the contrary vis a vis the provisions of Sections 15 and 16 of the Income Tax Act.

Tax Laws Amendment (No 2)Act, 2020 was null and void to the extent that :

  • the levying of Minimum Tax on gross turnover as opposed to gains or profit would lead to a situation where a loss making tax payers, would bear a heavier burden than on other taxpayers contrary to the spirit of Article 201 of the Constitution; and
  • lumping innocent entities that are in a loss making position with tax evaders in a bid to expand the tax base violates the innocent taxpayers' constitutional right to fair treatment and dignity.