The High Court has suspended the 30 percent tax introduced on lumpsum withdrawal of retirement benefits following the amendment of the Finance Act in 2020.
This follows a petition by two pension associations, who argue that the amendment was irregularly introduced by Parliament to subject income tax on provident plans that offer lumpsum retirement benefits to persons aged sixty-five and above.
The Finance Act, 2020 amended Paragraph 53 to the First Schedule of the Income Tax Act, introducing taxes on lumpsum payments of pension to persons aged 65 years of age or more.
The High Court suspended the implementation of the law on Monday, pending the determination of the petition filed by two pension associations. The case will be mentioned on March 2.
Lumpsum payments were exempt from tax alongside monthly pensions, before but MPs made the amendment such that any withdrawal of funds by members of a retirement benefits scheme, is subject to tax at pension withholding tax rates.
The withdrawal of any amount that is above Sh1.6 million is subject to 30 percent tax, while the first Sh600,000 is tax-exempt.
Subsequent withdrawal of Sh400,000 is subject to a tax of 10 percent, 15 percent and 20 percent, respectively.
Members from unregistered schemes who withdraw their funds are tax-exempt since the funds have already been taxed at the point of contribution and the point of investment.
The law was reintroduced by former Treasury Cabinet Secretary Ukur Yatani after it was voted out by lawmakers in the Tax Amendment Act in April 2020, to cushion businesses and workers from Covid-19 shocks.
The Association of Retirement Benefits Scheme through its chairman Simon Nyakundi and the Association of Pension Trustees and Administrators argue that the contested law was sneaked in without public participation.
The two associations argue that it is unfair to tax people who should be enjoying their retirement.
The court heard that most of them save because it was exempt but now will be discouraged because the incentive has been removed.
“Tax incentives are meant to encourage members to save more for their retirement as well as discourage early access of benefits before reaching retirement age,” Mr Nyakundi said.
They want the court to quash paragraph 53 of the first schedule to the Income Tax, which was amended by sections 8(b) and (c) of the Finance Act, 2020, arguing it is unconstitutional.
They argue the law will disrupt business models and business of pension schemes and result in the loss of employment, as members will avoid saving through pension schemes since the tax incentives are no longer there.
“The amendment was sneaked into law without prior notification, consultation, and approval. There is no record anywhere, including in the Hansard of the National Assembly, having proposed, considered and approved, under the Bill it passed on,” the associations state in court documents.
Initially, the law applied to employees whose taxable employment income before bonus and overtime allowances does not exceed the lowest tax band provided under Head B of the Third Schedule.
Section 8(c) of the Finance Act, 2020 was amended to introduce income tax on lumpsum payments on retirement benefits.