- Last week, the High Court declared the minimum tax passed in the Finance Bill 2020 unconstitutional.
- There are cases where the KRA has clearly usurped the powers of the National Assembly on tax policy making.
- But to say it has no discretion to issue tax guidelines and has to go through the Statutory Instruments Act means that implementation of tax laws after the Finance Bill has been passed into law will have to wait for months.
Last week, the High Court declared the minimum tax passed in the Finance Bill 2020 unconstitutional, handing a setback to the Kenya Revenue Authority (KRA) which had planned to collect Sh21 billion annually.
Within hours after the judgment, the KRA announced that it would be move to the Court of Appeal to have the decision overturned.
At first when the KRA made this pronouncement, I thought it was jumping the gun because being a tax administrator and not a policy maker, it should have let Treasury handle the appeal.
But going through the judgment, the KRA has the locus standi to appeal the ruling.
In the judgment, the High Court found that the tax guidelines issued by the KRA were non-binding and not enforceable by law because they were not enshrined in the Statutory Instruments Act.
The Act would then require that the guidelines go through public participation and also be tabled before Parliament for approval.
This part of the judgment is what invited the KRA to lead an appeal because tax guidelines is an issue within its purview.
There is need for this part of judgment to be clearly elaborated in the Court of Appeal because it stands to open the floodgates of litigation for many regulators.
There are cases where the KRA has clearly usurped the powers of the National Assembly on tax policy making.
But to say it has no discretion to issue tax guidelines and has to go through the Statutory Instruments Act means that implementation of tax laws after the Finance Bill has been passed into law will have to wait for months.
The compliance procedure demanded by the Statutory Instruments Act will mean the KRA will not be collecting taxes within the required timeframe of the financial year and so even the government’s financial obligations will not be met.
Why this part of the judgment opens floodgates is that it provides grounds for any guideline issued by a regulator to be challenged.
For example, it means that even the Central Bank of Kenya when issuing the Monetary Policy Committee updates which are also regulatory guidelines should go through the Statutory Instruments Act. So, all regulators will find their hands tied in meeting their mandate.
Second is that the court found the minimum tax as discriminatory. Now, here we are walking on thin ice because if we are to strictly follow this principle that a tax law should not be discriminatory, we are opening a Pandora’s box.
A taxpayer who pays Pay As You Earn can argue that the tax law is discriminatory because those in the informal sector do not pay Pay As You Earn.
Another scenario is that a taxpayer can argue that it is discriminatory for the law to exempt people with disabilities from paying Pay As You Earn or import duty on vehicles they bring into the country.
So, segmentation in tax policy design to effect equity is important, and segmentation is in tandem with the fact that a tax policy will be discriminatory.
Where I agree with the ruling is on the grounds of fairness. The design of this tax law was to target businesses perpetually declaring losses through creative accounting.
But in the course of trying to address this tax avoidance issue, the law punishes everyone making losses when it initially targets those who avoid paying corporation tax by declaring losses.
From the implementation of this law, it was businesses that have genuinely made losses who bore the full brunt of this law.
No doubt there is a tax avoidance case for the minimum tax. There are companies that have perpetually been reporting losses for like 10 years, which begs the question how their capital has been resilient for all that while.
A number of jurisdictions like Tanzania, Cameroon, Taiwan, and the United States already have the minimum tax in place to address this tax avoidance problem. The problem has been the design of the minimum tax to fulfil its intention.