Members of Parliament have dodged a Sh1 billion tax demand for the Sh7.5 million car grant the lawmakers get every five-year term after a recent law change that has extinguished a court battle with the Kenya Revenue Authority (KRA)
A tribunal ruled on November 22 that the KRA has the right to demand Sh2.5 million from each of the 416 MPs - 349 in the National Assembly and 67 in the Senate-as 30 percent income tax on the car grant.
But rather than fight the ruling in the High Court, the MPs’ employer, the Parliamentary Service Commission (PSC), sneaked in changes to the Tax Amendment Bill exempting public servants from paying income tax on reimbursements such as car grants.
The law change was made in the Omnibus Bill during public participation and was little noticed by a majority of Kenyans who were reviewing the proposed law as submitted by the Treasury.
President William Ruto on Wednesday approved the Tax Amendment Bill, which also has some taxes that were in the withdrawn Finance Bill after deadly protests.
This has made the tribunal ruling in vain and offers public servants a benefit that their counterparts in the private sector are not enjoying.
“This provision creates a disparity in the treatment of reimbursements between public and private sector workers. It is also open to abuse, especially where it appears to suggest that costs for the purchase of assets can be reimbursed regardless of who owns the assets,” says tax consultants at KPMG.
The MPs and senators had claimed that the car grant was tax-free because it was not an income, arguing that the benefit was reimbursement for the use of the car during their official Parliamentary functions.
The lawmakers argued that the money is meant to enable them to travel and constantly meet with their constituents and represent their interests in Nairobi by attending Parliamentary and committee sittings, in line with the role of Parliament under Articles 1(2) and Article 94 of the Constitution.
The tax appeals tribunal, however, dismissed the argument and ruled that the Motor Vehicle Reimbursement are gains from employment subject to tax in line with section 3(2) of the Income Tax Act (ITA).
“From the above provision of the law read together with Section 3(2)(a)(ii) ITA it is clear that the Motor Vehicle Reimbursements is subject to tax under ITA,” the tribunal ruled.
The tribunal reckons that MPs like all employers must pay tax on benefits issued to employers, including payment of free gym membership.
For instance, if an employer pays a gym membership worth Sh100,000 on behalf of their employees, the staff are liable to pay a tax of Sh30,000 or 30 percent of the benefit.
The PSC, fighting KRA at the tribunal, opted to take the short route, which is under their control, of changing the law instead of seeking to overturn the ruling at the High Court.
The commission inserted the exemption in the days to December 5 while reviewing the Tax (Laws) Amendment Bill, which is aimed at easing a cash crunch in government after the abandonment of the finance bill-- contained new taxes and hikes to raise an extra Sh346 billion.
The new taxes in the Bill that became law yesterday include higher duties on betting, wines and spirits and techies like Uber.
It also provides unfettered benefits for public officers including non-taxation of any amount paid or granted to them as reimbursement of expenditure incurred while performing official duties regardless of the ownership or control of the assets purchased.
“Any amount paid or granted to a public officer pursuant to any written law or statutory instrument, with effect from July 27, 2022, to reimburse an expenditure incurred for the purpose of performing official duties, notwithstanding the ownership or control of any assets purchased,” said the amendment in the Bill.
The choice of the July 27, 2022 date means that KRA cannot seek a penny on the Sh7.5 million car grant from the current crop of MPs elected after the August 8, 2022, General Elections.
The dispute was triggered by letters from the KRA to the Clerks of the Senate and National Assembly on December 7, 2022, demanding for settlement of income tax on the motor vehicle reimbursements equivalent to Sh1.45 billion.
The KRA demanded Sh168.4 million from 67 senators and Sh877.4 million from 349 members of the National Assembly. The amount included penalties and interest of Sh47.1 million and Sh56.55 respectively.
The PSC objected to the demands arguing that the money was meant to facilitate the legislators to discharge their parliamentary duties.
The MPs reckoned that the Salaries and Remuneration Commission had stated in a circular that the sole purpose of the motor vehicle reimbursement is “to undertake official duties as a Member of Parliament” and any personal or private consequences are purely incidental therefore the reimbursement is not a gain or profit.
In response, the KRA explained that the motor vehicle reimbursement was not like mileage claims, which are intended to indemnify MPs for travel to their constituency offices and therefore, not taxable.
The KRA insisted that the motor vehicle reimbursement was a gain that benefits Speakers, Deputy Speakers and MPs by virtue of the position and keeps the cars for personal use after expiry of their terms.
MPs are provided with a car grant of up to Sh7.5 million for the purchase of a car of engine capacity not exceeding 3000cc to undertake their official duties.
