Churches have been handed a big relief after the High Court stopped the Kenya Revenue Authority (KRA) from demanding tax on tithes, donations and offerings without exemptions.
Justice David Majanja upheld a ruling of the tax Appeals tribunal, which barred the taxman from demanding tax from Thika Road Baptist Church.
The taxman wanted the church to pay Sh5.5 million, arguing that it failed to produce a tax exemption certificate.
While churches are exempted from paying taxes on tithes, the KRA insisted they must get the exemption, which is subject to certain conditions.
“I, therefore, find and hold that since tithes, offering and freewill donations are not income chargeable with income tax, it was not necessary for the church to seek an exemption,” Justice Majanja said.
This comes as a major relief to churches that collect hundreds of millions of shillings in tithes every year and a win by the taxman would have been used as a precedent to go after the big and established churches.
According to the judge, the KRA failed to demonstrate that tithes, donations and offerings are gains and profits, employment or rights granted for use of property or any other form of recognised income by the Income Tax Act.
Churches are required to file annual returns but are exempt from most taxes as provided for by Section 13 and paragraph 10 of the first schedule of the ITA and the Non-Governmental Organisations and Co-ordination Act.
Paragraph 10 of the First Schedule of the ITA exempts from paying tax, institutions, a body of persons or irrevocable trust of a ‘public character’.
These include trusts, churches and charities or bodies established for the purposes of fighting poverty or distress of the public or for the advancement of religion or education.
The Church moved to court when the KRA wrote to them in October 2018 accusing the religious organisation of failing to file tax returns between 2015 and 2017.
The taxman went ahead and demanded Sh5.5 million on account of income tax, a move that was objected to by the church, arguing it was a religious organisation registered under Section 10 of the Societies Act for the furtherance of the Christian faith.
The church maintained that it is not a business activity and derives its income from tithes and offerings.
After objecting, the KRA wrote back to the Baptist Church, saying that since it did not have a valid tax exemption certificate, the same would be rejected.
The matter was referred to the tribunal as the church maintained that the tax demand was unfair since its sole income is tithes and offerings, which are exempt from tax. The tribunal ruled in favour of the church saying the commissioner of domestic taxes was wrong in taxing tithes.
The tribunal further held that a tax exemption certificate was not necessary as it covers income that qualifies to be taxed under section 3(2) of the ITA.
The KRA argued before the High Court that the church must have a certificate of exemption if the income, in the form of tithes and donations is to be exempted. The taxman said the certificate is not automatically issued but is subject to various conditions.
Justice Majanja said in the ruling that to determine the matter, the starting point was to establish whether tithes, offerings and donations are income that should be taxed.
He agreed with the tribunal that tithes, freewill donations and offering to the churches and other religious organisations do not fall within the scope of income tax, which is chargeable in the ITA.
“I also agree that this type of income does not fall within section 3(2) of the ITA,” the judge said.
Commercial activities
In 2012, the Treasury put churches on notice that they are the next in line to pay taxes for commercial activities that give them an unfair advantage over other investors.
This is because some churches and charitable organisations were running businesses, which bring more money freeing them from over-reliance on tithes and offerings from members.
Then, the government wanted the church to distinguish what is charitable from commercial activities such as matatus, buildings, schools and hotels.
The threats were, however, not actualized as the government maintains the churches’ tax-exempt status because they contribute to the fight against poverty through their charitable activities.
Some schools and hospitals run by churches, for instance, offer services at subsidised rates seeking to benefit the rural and urban poor.
