The Court of Appeal has suspended a judgment issued early this year that quashed tax waivers granted to Japanese workers and companies, following an appeal by Parliament.
The High Court had in February declared section 13 of the Income Tax Act unconstitutional and stated that the then-Treasury Cabinet secretary Ukur Yatani had no powers to grant the waivers. The former CS had exempted income tax for businesses, consultants, and workers earned from 15 projects funded by Japanese companies valued at Sh328 billion.
Parliament and the Treasury argued that following the declaration, there is no legal framework for tax exemption, yet Article 210 of the Constitution envisages a scenario where one may be exempted from paying taxes.
The court heard that without the exemption, there is bound to be a level of apathy, especially among investors such as those under the Japan International Cooperation Agency (JICA) programme, who ventured into investment in the country following the waiver.
“In the circumstances, it seems to us that given the far-reaching nature and enormity of the declarations and orders issued by the trial court, an order staying the coming into effect of the declarations of invalidity of the impugned Legal Notice and unconstitutionality of section 13 of the Income Tax Act is merited,” said Justices Daniel Musinga, Asike Makhandia, and Mumbi Ngugi.
The court suspended the decision for six months from December 19, when the ruling was made.
In February, High Court judge Dennis Magare ruled that exemption or waiver of tax can only be granted by Parliament through legislation and after the same is passed as a money Bill as provided in the Constitution, and after public participation.
The judge also quashed section 13(2) of the Income Tax Act, saying it is unconstitutional to the extent that it authorises income tax waivers through a notice in the gazette and for specified persons without regard to Article 210 of the Constitution.
Such blanket exemptions of nationals of one state, reeks of economic apartheid and are not reasonable and justifiable in an open and democratic society based on human dignity, equality, and freedom,” the judge said.
The judges heard that for waivers to be processed like a money bill through the National Assembly, there would be no tax exemption for the period the process was underway as a money bill has to be processed through public participation.
Such a process, according to Parliament, would mean that Kenyans have no tax exemptions for the period the judgment would be in force.
The court was also informed that there is apprehension by investors on whether the Kenya Revenue Authority would be collecting taxes from the date of the judgment.
Further, there was confusion on the part of the Treasury as to how to manage grants and loans as it was not clarified in the judgment on which of the two the taxes would be levied from.
According to the Treasury, the exemptions were granted under a contract between the Kenyan and Japanese governments, and revising the terms and imposing taxes after they had already started the projects in Kenya would be changing the substantial terms of the contract between the two countries without negotiations, and which might lead to stalling of ongoing projects.
The petitioner, Eliud Karanja Matindi opposed the application arguing that has not recorded any difficulties in complying with the judgment and in the event the court finds that the exemption is lawful, the taxes collected from that date will be refundable to the affected Japanese companies, consultants, and individuals.
Some of the Japanese-backed projects that were subjected to tax exemptions include the Olkaria V Geothermal Power Development Project which cost Sh66.9 billion.
Other Japanese projects that have benefited from the tax relief include the first phase of the Sh38.2 billion Mombasa Special Economic Zone Development Project, the first and second phases of the Mombasa Port Area Road Development Project which cost Sh29 billion, the first phase of the Mombasa Port Development Project (Sh22 billion).
The Sh18.2 billion power transmission line from Lessos to Kisumu will also see Japanese workers and firms benefit from the tax relief. Mwea Irrigation Development Project is the other candidate for tax exemption, with the country having spent Sh13.2 billion on the farming project.
