The High Court has barred the Kenya Revenue Authority (KRA) from collecting minimum tax from businesses.
Justice George Odunga made the decision on Monday after finding section 12D of the Income Tax Act unconstitutional.
Last year, the National Assembly amended the Income Tax Act to give KRA powers to collect minimum tax at the rate of one percent of the gross from companies making revenues of at least Sh50 million, starting January 2021.
But business stakeholders faulted the government for introducing a new tax regime at a time when firms and the economy, in general, are struggling due to disruptions caused by Covid-19 pandemic.
In April, the High Court temporarily barred KRA from collecting the tax after three officials of the Kitengela Bar Owners Association challenged it arguing that enforcement of the tax is unconstitutional and would harm their businesses.
The petition was filed against the National Assembly, KRA and Attorney-General Paul Kihara Kariuki.
The minimum tax was applicable to businesses, regardless of whether they make a profit or not.
Those exempted were individuals and companies paying employment tax and PAYE, rental income tax, turnover tax for small-sized firms, as well as capital gains and proceeds from mining or oil exploration taxes.
“The tax payable under this section shall be paid in instalments which shall be due on the twentieth day of each period ending on the fourth, sixth, ninth and twelfth month of the year of income,” section 12D(2) of the Income Tax Act states.
Lobbies including Kenya Association of Manufacturers (KAM), the Retail Trade Association of Kenya (Retrak) and the Kenya Flower Council had also challenged the tax, arguing that most companies were reeling from effects of Covid-19 and that the introduction of the new tax might lead to the closure of more loss-making companies.
“This historic decision by the courts today (Monday) provides much needed relief to businesses that continue to strain under the weight of over-taxation and unpredictability in the country today. It not only ensures that many businesses remain open and productive but provides space for businesses to bounce back and generate the much-needed revenue to support our country,” the lobbies said in a statement after the ruling.