Relief for businesses as High Court declares minimum tax provisions unconstitutional

Relief for businesses as High Court declares minimum tax provisions unconstitutional

The High Court has thrown out the minimum tax terming it as unconstitutional, and a null and void provision.

In a ruling on Monday, High Court Judge Justice George Odunga deemed the tax discriminatory to loss-making business entities as he faulted the use of the levy as a means to net tax cheats misrepresenting their trading performance.

“The minimum tax has the potential of not only subjecting the people to double taxation but also unfairly targeting people whose businesses for whatever reason are in loss making positions to pay taxes from their capital rather than profits,” he said.

“Those who are able to pay taxes from their profits will not have their capital affected while those generally in loss making position will be sacrificed at the altar.”

Treasury Cabinet Secretary Ukur Yatani proposed the minimum tax in 2020, charged at the rate of one per cent of total annual sales, to be paid by businesses whose tax obligation is below one per cent of their gross sales.

This as a means to net entities persistently declaring losses deceitfully to avoid taxation by government.

“Mr. Speaker, some companies continue to declare losses year in year out hence not contributing to the exchequer in terms of tax revenue. However, these companies enjoy facilities, such as infrastructure, whose cost of construction and maintenance is serviced by the government through tax revenues contributed by other patriotic taxpayers,” CS Yatani said on June 11 last year.

The proposal was carried under the 2020 Finance Act and the Tax Laws Amendment (No.2) Act, 2020.

The enactment of the tax was however blocked in April this year after Kitengela Bar Owners Association protested the levy’s implementation in a petition which set the stage for Monday’s ruling.

In their argument, the petitioners stated that the implementation of the tax would result in the annihilation of their business alongside the majority of small and medium enterprises (SMEs) which are already struggling to generate any income under adverse economic conditions.

Moreover, the petitioners said the minimum tax is a contravention of Section 15 (1) of the Income Tax Act (ITA) which argues that taxes should only be subjected to gains/profit and not turnover as visioned by the minimum tax.

In his ruling, Justice Odunga agreed with the petitioners as he reprimanded the government for what he termed as casting the net deep without a care for what it will catch.

Instead of putting in place systems to detect tax cheats, the High Court said the State opted for blanket taxation.

“The assumption is that all these companies in loss making positions have avoided taxes. Will all due respect, that is not how to enact a fiscal legislation,” Justice Odunga added.

The minimum tax proposal has also come under pressure from experts who view the levy as punishment for firms with high turnovers but low profit margins such as businesses in the fast moving consumer goods category (FMCG).

Monday’s ruling is a win for such businesses and all others under the mountain of losses for varied reasons.

On the flip-side, the ruling is a bitter pill for the taxman who had hoped to expand its tax base through the tax and raise its mobilization of local revenues.

KRA has been barred from implementing, administering or applying the minimum tax as the High Court struck out the levy carried through amendments to the Income Tax Act (ITA).