In the past, businesses were not expected to pay any income Tax in the event that they did not make any profit. This however changed in January 2021 when the Parliament amended the Income Tax Act and introduced the impugned minimum tax.
Persons whose estimated instalment tax liability was lower that 1% of their gross turnover were required to pay minimum tax as from 1st January 2021 with the exception of companies paying employment tax and PAYE, rental income, turnover Tax for small firms as well as Capital Gains and proceeds from mining or oil exploration taxes. This imposed tax came at a period when most businesses were only getting back on their feet after the harsh effects of the pandemic therefore leading to a national outcry.
The High Court at Machakos rightfully ordered restraining the implementation of Section 12D of the Income Tax Act Chapter 470 as amended by the Tax Laws (Amendment) No. 2, 2020 on collecting or demanding payment of the minimum Tax therefore suspending the implementation of the same by the Kenya Revenue Authority.
The High Court of Machakos presided by Justice Odunga in his detailed ruling ordered the suspension of the implementation of this tax stating that due to the pandemic, businesses were adversely affected and therefore imposing the minimum tax would only aggravate the situation making it impossible for the businesses to stay afloat. In the Court’s view, the lesser evil would be to suspend the implementation of the said tax as businesses recover and the economy comes back up without completely reducing the chances of some businesses ever recovering. The Court was also of the opinion that the said tax is meant to favour large companies who can easily avoid paying other taxes but comfortably pay the minimum tax while the small companies suffer.
Section 12D of the Income Tax Act was therefore declared unconstitutional since it violated Article 201 (b) (i) on the principles of public finance. The Constitution provides that the burden of taxation ought to be shared equally and it was the Court’s opinion that the same was contravened by the Section since the burden was being felt more by the small companies as compared to the big ones.
The tax had been imposed in an attempt to stop companies that were deliberately declaring losses as a tax avoidance strategy, but the Court was of the opinion that it would have detrimental effects to companies that genuinely made losses.
This however came as a blow to the Government since it had estimated to make at least 21 Billion Shillings annually from the said tax therefore help in in the recovery of the country following the economic contraction in 2020.
The decision is said to be historic since it provides much needed relief to businesses that continue to strain as a result of over taxation in Kenya. This will in turn mean that many businesses that were at the brink of collapsing can now stand a chance to recover and bounce back generating the same income the government was aiming for in order to sustain the economy.
The Kenya Revenue Authority sought a stay application pending its Appeal at the Court of Appeal. The Court however directed that the Stay of Execution Application be deemed as withdrawn in lieu of an expedited hearing of the appeal. This therefore means that the declaration rendering the minimum tax unconstitutional remains in place until the determination of the appeal.
Please note that this article must not be construed as legal advice and for further information regarding Minimum tax and professional advice thereto, kindly do not hesitate to contact us at [email protected] or visiting our offices on 8th Floor, CMS Africa House, Nairobi or on 3rd Floor, Ritah Plaza, in Kakamega.