Minimum tax to go as Sh8bn levies kick in

Treasury building in Nairobi on June 11, 2020. PHOTO | SILA KIPLAGAT | NMG

The National Treasury will introduce new tax measures to replace the Sh21 billion it earns in annual minimum taxes if the government loses an appeal against a court ruling that stalled its implementation last year.

Kenyan authorities have promised the International Monetary Fund (IMF) to resolve the court case by end of this month and supplement the tax with new measures if they lose the appeal.

The IMF revealed Kenya will find a way to raise at least Sh8 billion of the lost tax revenue from alternative measures. The National Assembly had in 2020 amended the Income Tax Act (ITA) to give the Kenya Revenue Authority (KRA) powers to collect minimum tax starting January 2021.

Parliament introduced the minimum tax at the rate of one percent of the gross turnover, with businesses expected to pay the tax to the KRA once every quarter.

However, Justice George Odunga found that the government’s plan to impose a minimum tax on corporate sales, even when a company reports losses, is illegal.

“Consideration by the High Court of pending legal challenges to the minimum alternative corporate tax (MACT) is proceeding. We expect the court review to take place in July 2022 and remain confident of a positive result," the National Treasury told the IMF.

“If the outcome of the court process is not as we anticipate, we will implement other tax measures to achieve the Sh8 billion in FY2022/23 that we expect from the reintroduction of the MACT.”

The minimum tax is based on gross turnover and not gains or profits, and all businesses, even those in a loss-making position, are required to pay.

The government hoped to use the minimum tax strategy to ensure companies that had over the years reported losses as a tax-avoidance ploy to also contribute to the exchequer.

Industry lobbies, including Kitengela Bar Owners Association (KBOA), the Kenya Association of Manufacturers (KAM), the Retail Trade Association of Kenya (Retrak) and the Kenya Flower Council, petitioned the court to block it.

The petitioners partly anchored their argument on a move by the Treasury to exempt some companies from paying the tax, including the national carrier Kenya Airways Plc, whose business was hit by pandemic-related lockdowns. Businesses whose pricing is controlled by the government, such as fuel marketers and Kenya Power, were also exempted.

Justice Odunga in his judgment yesterday concurred with the petitioners, saying if implemented the scheme risked hurting businesses through double taxation.

The KRA, however, faulted the judge’s decision and vowed to seek a review in the appellate court.

“The Kenya Revenue Authority respectfully disagrees with the findings of the court and will prefer an appeal to the Court of Appeal to challenge this finding. This is to ensure that KRA continues to review and improve on tax policies in order to reduce the tax burden while ensuring that every citizen contributes their fair share of tax” KRA’s Commissioner for Legal Services and Board Coordination, Paul Matuku, said in a statement.

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