SMEs score big as court quashes new tax formula

Tuesday, September 21st, 2021 02:00 |
High Court judge George Odunga. Photo/PD/File

Noel Wandera and Mutuku Mwangangi

Corporates and small businesses heaved a sigh of relief after the High Court declared a new tax targeting them unconstitutional. 

The court, in declaring the minimum tax illegal, said it was unfair to bracket as those with a history of tax evasion.

“Minimum tax provisions are unconstitutional and the guidelines should be considered void.

I issue an order restraining the Kenya Revenue Authority (KRA) from implementing or enforcing the provisions of Section 12D of the Income Tax Act,” ruled Justice George Odunga.

The decision effectively bars KRA from collecting or demanding revenue from small businesses. 

Odunga stated that the minimum tax unfairly targets loss-making businesses to pay taxes from their capital.

Corporates too hailed the ruling noting the new tax was going to impact many businesses.

Historic decision

In support of Odunga’s ruling, Kenya Association of Manufacturers chairman Mucai Kunyiha said the historic decision, is a relief to industrialists that continue to strain under the weight of over-taxation and unpredictability in the country today.

“It not only ensures that many businesses remain open and productive but provides space for businesses to bounce back and generate the much-needed revenue to support our country,” said Kunyiha.

He noted that though there was a need to expand the tax base, there were better ways of doing it, with minimal negative impact.

“With the appreciation that there is an urgent need to expand the tax base in the country, the industry’s perspective is that this can be done differently and with minimal negative impact to already struggling businesses,” said Kunyiha.

He said pre-Covid, businesses were already facing recurrent regulatory and policy challenges that impeded their productivity, causing the sector to shrink significantly.

The Finance Act 2020 introduced minimum tax payable at the rate of 1 per cent of gross turnover, which came into effect on January 1, 2021. The minimum tax was applicable to businesses, regardless of whether they make a profit or not.

Those exempted were individuals and companies paying employment tax and Pay As You Earn, rental income tax, turnover tax for small-sized firms, as well as capital gains and proceeds from mining or oil exploration taxes.

Being a turnover based tax, means that the minimum tax is not based on the affluence of a business, usually measured by the bottom-line.

Therefore, the businesses that would have been affected by the minimum tax are low margin businesses such as those dealing with fast moving consumer goods, new businesses and loss-making companies.

The court cited that this would be an advantage that is enjoyed by others whose businesses are thriving. 

“With due respect, that is not how to enact a fiscal legislation, which must be precise and must specifically target its objective,” said Odunga.

The Institute of Certified Public Accountants of Kenya (Icpak) welcomed the decision, with chair George Mokua saying it addressed some of their concerns.

“Our position is that it was ill-intentioned and the thinking around it was not well thought of,” said Mokua.

But in a quick rejoinder, KRA intends to appeal against the ruling.

“The KRA respectfully disagrees with the findings of the court and will prefer an appeal to challenge this finding.

This is to ensure that KRA continues to review and improve on tax policies, in order to reduce the tax burden while ensuring that every citizen contributes their fair share of tax,” said KRA in a statement sent to the media.

Michael Murugu, partner at PKF Consulting said this was an emotive issue that frees the common man and corporates from unpredictable tax policies.

“The government must go back to the drawing board and ensure that taxes are not punitive to investors.

It is a wake-up call to the government and an indicator that it is not business as usual.

Even if there is an appeal, it will still embarrass the government in the fullness of time,” he said.

The tax expert said the tax was “short term, short sighted and selfish for a government that did not seek public participation and did not look into the needs of investors”.

“You cannot criminalise every Kenyan as if it is the business of Kenyans to evade taxes,” he said.

The case had pit petitioner Stanley Waweru and three others against the National Assembly, the Commissioner General, KRA and the Attorney General.

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