Reprieve for tea farmers as court rejects bonus tax bid

Tea farmers have won a major reprieve after the High Court quashed a decision by Kenya Revenue Authority (KRA) to tax their annual payments popularly known as bonus.

The amount, running to about Sh2 billion had been backdated by KRA to 2009, following tax assessment for the period between 2008-2014.

Some 11 tea factories, which hold shares in Kenya Tea Development Agency (KTDA) challenged the demand by the taxman of Sh603,968,757 but lost the case before the Tax Tribunal.

More tea factories joined the case, challenging the tax demand arguing that a government circular in 1979 had granted them a waiver. There are 52 tea factories in the country that are shareholders of the KTDA.

And last week, Justice Robert Limo faulted the KRA, saying the taxman could not wake up after 26 years and demand additional taxes, backdated to 2009, without a notice.

“Going by the above principle, this court finds that the respondent (KRA) acted unfairly by letting the appellants believe in the existence of a waiver (which belief was buttressed by the respondent’s conduct for 26 years) only to abruptly, arbitrary and without any notice not only demanded additional taxes but backdated the demands to 2009,” said the judge.

The ruling comes amid increased fallout between farmers and counties on one side and the KTDA on the other over low bonus paid to farmers.

The court added that the collection of taxes must not appear to be punitive, arbitrary, abrupt, discriminatory or unfair because “if the taxpayer closes shop because of perceived irregularity, arbitrariness or frustrations, there will be no tax to collect”.

Through lawyer Benson Millimo, the KTDA and the tea factories said the taxman had written a letter to waive the requirement by companies to treat income accounts, dividend account and interest accounts separately for purposes of computation of tax payable.

The tribunal was later asked to determine whether the separation of accounts in law for specified sources of income applies to the interest, dividend and rental incomes of the farmers.

In the ruling, the tribunal said interest account is a separate source of income because income is earned separately from the gains and profits of the KTDA’s ‘Business Income”, which arose from the manufacture and sale of green tea.

The tribunal decided that interest income should be treated separately and the waiver of February 1979 did not amount to a waiver, which ousted provisions of Income Tax Act.

In the appeal, Mr Millimo told the court that such an income could only be taxed through withholding tax because it is a qualifying dividend.

On its part, KRA argued that the tribunal was right in holding that business income and interest income are separate sources of income, hence subject to separate accounts.

The taxman contended that the issue of rental and dividends income as a separate income was raised during the appeal as an afterthought.

However, the judge said: “There was nothing and indeed there is nothing that prevented the respondent from writing a letter expressly cancelling the waiver issued on February 7, 1979, and giving the appellants adequate notice that going forward they were required to henceforth comply with the requirements of the law and file separate accounts for purposes of assessment of taxes.”