Minimum tax to take away as 8 billion shilling levies come into effect

The National Treasury will introduce new tax measures to replace the 21 billion shillings it earns in annual minimum taxes if the government loses an appeal against a court ruling that blocked its implementation last year.

Kenyan authorities have promised the International Monetary Fund (IMF) to resolve the court case by the end of this month and to top up the tax with new measures if they lose the appeal.

The IMF has revealed that Kenya will find a way to raise at least 8 billion shillings of lost tax revenue through alternative measures. The National Assembly had in 2020 amended the Income Tax Act (ITA) to give the Kenya Revenue Authority (KRA) the power to collect minimum tax from January 2021.

Parliament introduced the minimum tax at the rate of 1% of gross turnover, with companies having to pay the tax to the KRA once every quarter.

However, Judge George Odunga ruled that the government’s plan to impose a minimum tax on business sales, even when a business declares losses, is illegal.

“The High Court’s review of the ongoing legal challenges to the Alternative Minimum Corporate Tax (MACT) is ongoing. We expect the legal review to take place in July 2022 and remain confident of a successful outcome,” the National Treasury told the IMF.

“If the outcome of the legal proceedings is not what we anticipate, we will implement further tax measures to reach the 8 billion shillings in the financial year 2022/23 that we expect from the reintroduction of the MACT. .”

The minimum tax is based on gross turnover, not earnings or profits, and all businesses, even those in a loss position, are required to pay.

The government hoped to use the minimum tax strategy to ensure that companies that had reported losses over the years as a tax avoidance scheme would also contribute to the treasury.

Industry lobbies including the Kitengela Bar Owners Association (KBOA), Kenya Association of Manufacturers (KAM), Retail Trade Association of Kenya (Retrak) and Kenya Flower Council have asked the court to block it.

The petitioners based their argument in part on a decision by the Treasury to exempt certain companies from paying the tax, including national carrier Kenya Airways Plc, whose business has been hit by the pandemic-related lockdowns. Companies whose prices are controlled by the government, such as fuel traders and Kenya Power, have also been exempted.

Justice Odunga, in his judgment yesterday, agreed with the petitioners, saying that if implemented, the scheme risked harming businesses due to double taxation.

The KRA, however, criticized the judge’s decision and pledged to seek a review before the court of appeal.

“The Kenya Revenue Authority respectfully disagrees with the tribunal’s findings and will prefer an appeal to the Court of Appeal to challenge this finding. This is to ensure that the KRA continues to review and improve the policies to reduce the tax burden while ensuring that every citizen contributes their fair share of tax,” Paul Matuku, Commissioner for Legal Services and Coordination of the KRA Board, said in a statement.

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