MINIMUM TAX DECLARED UNCONSTITUTIONAL IN KENYA
SUMMARY OF PETITION NO. E005 OF 2021
The High Court of Kenya at Machakos on 20th September 2021 ruled that Section 12D of the Income Tax Act, Chapter 470 the Laws of Kenya as amended by the Tax Laws (Amendment) (No.2) Act, 2020 which introduced the minimum tax in January 2021 as unconstitutional null and void.
In a detailed judgment delivered by Justice G.V. Odunga, the High Court had this to say:
“… in so far as the introduction of minimum tax in the manner contemplated opens the window for violation of Article 201(b)(i) of the Constitution, this Court in the exercise of the powers conferred upon it by Article 165(3)(b) of the Constitution is enjoined to intervene. The said Article provides that this Court has the jurisdiction to determine the question whether a right or fundamental freedom in the Bill of Rights has been denied, violated, infringed or threatened. Once it is proved that there is a threat to right or fundamental freedom this Court does not have to wait until such a threat becomes a reality…
I have considered the issues raised in these petitions. I find that the Finance Act, 2020 which amended the Income Tax Act Cap 470 of the Laws of Kenya by introducing a new Section 12D providing for introduction of Minimum Tax at the rate of 1% of the gross turnover effective 1 January 2021 was not enacted in accordance with Article 201(b)(i) of the Constitution since its application violates the principle that the burden of taxation is to be shared fairly. 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, for whatever reason, are in loss making positions, to pay taxes from their capital rather than from their profits, an advantage enjoyable by others merely because their businesses are thriving.
The impugned amendment will clearly lead to favorites and sacrificial victims. Those who are able to pay taxes from their profits will not have their capital affected while those who are genuinely in a loss-making position will be sacrificed at the altar of those who dishonestly conceal their profits. The Respondents have instead of putting in place systems that can enable them detect the dishonest entities, opted for an easier way out by casting the revenue net into the deep sea without bothering what the net will catch as long as the culprits are also caught. With due respect that is how not to enact a fiscal legislation. A fiscal legislation must be precise and must be specifically targeted to meet its objective.
I have also found 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. In the absence of the said Guidelines particularly as regards the definition of “Gross Turnover”, section 12D of the Income Tax Act cannot be operationalized. Accordingly, I find merit in these petitions and I hereby issue the following orders: one, A declaration that Section 12D of the Income Tax Act as introduced by the Finance Act,2020 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. Two, 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. Three, an order prohibiting the 2nd Respondent whether acting jointly or severally by themselves, their servants, agents, representatives or howsoever otherwise from the implementation, further implementation, administration, application and/or enforcement of Section 12D of the Income Tax Act, Chapter 470 of the Laws of Kenya as amended by the Tax Laws (Amendment) (No.2) Act, 2020 by collecting and/or demanding payment of the said Minimum Tax.”
By Andrew Wanga