“Having considered the issues placed before me, it is my view and I find that this is an appropriate case for the 2^nd Respondent (Kenya Revenue Authority) to “hold its horses” for the time being as this Court navigates through the labyrinth of the respective contentions made by the parties herein.”

Justice George V. Odunga in Constitutional Petition No. E005 of 2021. 

Through the Finance Act, 2020, Minimum Tax was introduced through a new Section 12D to the Income Tax Act (Cap. 470) of the Laws of Kenya (“ITA”) with effect from 1^st January 2021. The new section has provided that a minimum tax of 1% is applicable on the gross turnover for taxpayers who are carrying out business and thus earning revenue, but their tax payable is lower than 1% of their gross turnover.  The minimum tax is a final tax and is payable in instalments that are due on the same date as the current instalment tax obligations, that is on the twelfth day of each period ending on the fourth, sixth, ninth and twelfth month.  Recently, the Kenya Revenue Authority published Guidelines on Minimum Tax in order to further clarify key questions on the incidence, computation and exemptions of the tax. Key clarifications included that: 

• Income from insurance businesses and income from businesses whose retail price is controlled by the government is exempt from tax.  
• An individual who is not required to pay Instalment Tax under Section 12(5) of the ITA because the total tax payable for that year of income is an amount not exceeding forty thousand shillings shall be subject to Minimum Tax. 
• The minimum tax paid is the final amount paid by an entity in a loss position. In addition, a person whose tax payable from income earned is less than the Minimum Tax shall not be eligible for a refund of the excess tax.  

On 19^th April 2021, a day before the deadline for the first payment of the Minimum Tax, High Court judge Justice George Odunga ruled on a Constitutional Petition filed by aggrieved taxpayers challenging the legality and constitutionality of the Minimum Tax and issued temporary conservatory orders suspending the implementation of Section 12D of the Income Tax Act with respect to the implementation and collection of the Minimum Tax.  

The Petition, filed in the Machakos High Court by the officials of the Kitengela Bar Owners’ Association was based on the following core grounds: 

1. The Minimum Tax is unconstitutional as it is riddled with ambiguity, uncertainty, contradictions and lack of clarity.   

2. As the Minimum Tax is levied on gross turnover and not gains or profits, all persons, even those in loss-making positions are required to pay minimum tax, meaning that a taxpayer who has made no profits or is in a lossmaking position will have to pay the minimum tax out of pocket or their capital. This contravenes Article 201(a)(i) of the Constitution of Kenya which sets out the principles of public finance, which specifically provide for the promotion of an equitable society through the fair and just sharing of the burden of taxation.   

3. The levying of Minimum Tax on gross profit as opposed to gains or profit will give rise to an occurrence where a taxpayer, could possibly pay ‘income tax’ exceeding the statutory 30% corporate tax rate, which will consequently mean that the taxation burden on him/her will be heavier than on other taxpayers. 

4. The Minimum Tax is discriminatory against small and medium-sized enterprises and favours large companies, in contravention of Article 27 of the Constitution which enshrines equality in the application, protection and benefit of the law.  

5. The Minimum Tax discriminates against traders in consumer products by favouring those in the energy, petroleum and insurance sectors who were exempted through the Tax Laws (Amendment) (No.2) Act 2020. 

6. The Minimum Tax being chargeable on gross turnover affects the finances of the County Government as the gross turnover of an enterprise includes the county taxes levied and chargeable to a business in its respective county. As such, the enactment of Section 12D of the ITA should have been referred to the Senate. 

7. The Petitioners would suffer untold prejudice as their gross turnover would be subjected to an excessive, discriminative and illegal tax and the enforcement of the tax stands to kill their business and the livelihoods of millions of Kenyans operating small to medium enterprises. 

After analyzing the above-mentioned grounds and other areas of contention with regard to the application of the Minimum Tax on taxpayers presented to the Court, Justice Odunga pronounced his ruling based on the following rationale:  

1. For a court of law to shirk its constitutional duty of granting relief to a deserving suitor because of fear that the effect would be to engender serious ill will and probable violence between the parties or indeed any other consequences would be to sacrifice the principle of legality and the dictates of the rule of law at the altar of convenience. 

2. If the Court finds that the law is constitutional, the Kenya Revenue Authority will be at liberty to demand tax due and will not be prejudiced as it will be able to collect any taxes owing together with interest from the Petitioners. On the other hand, if the orders are refused the Petitioners continue to make payments and the law is found to be unconstitutional, the Petitioners will not be able to recover their monies.  

3. He took judicial notice that numerous businesses had been adversely affected by the restrictions imposed on the economy by virtue of the coronavirus pandemic and that the Minimum Tax is likely to aggravate the situation and send the Petitioners and similar businesses into the abyss. 

4. He highlighted that the right to life is meaningless unless people have an opportunity to engage in income-generating activities in order to earn a living. Thus, in determining whether the operation of a legislation provision poses a danger to life and limb, the court must adopt a purposive approach in order to develop the law where it does not give effect to a right of fundamental freedom and adopt an interpretation that most favours the enforcement of a right or fundamental freedom and promotes the Bill of Rights as enshrined under the Constitution.  

5. He stated that the suspension of the Minimum Taxes will not occasion a lacuna in the operations or governance structure which if left unfilled will cause grave consequences to the general populace.  

6. He stated that in its application of conservatory orders, the Court must always be careful not to issue orders whose effect would be to finally determine the pending petition. He rejected the argument that by granting the orders sought by the Petitioners, the court would have issued final orders and made it clear that the mere fact that the Court suspends certain provisions of the challenged enactment does not amount to a determination that those provisions are unconstitutional. 

In light of the above, taxpayers are not obligated to pay the Minimum Tax until the constitutional petition before the High Court is heard and determined. The Kenya Revenue Authority has subsequently issued a clarification on the treatment of Minimum Tax paid prior to the issuance of the conservatory order stating that the affected taxpayer’s iTax ledger will reflect the amount as a tax credit pending the outcome of the Petition.  

For more information on this, please reach out to our Corporate & Commercial/ Regulatory Compliance team comprised of Jinaro Kibet jkkibet@tripleoklaw.com,  Stephen Mallowah smallowah@tripleoklaw.com or Bryan Mylo bmylo@tripleoklaw.com  and Oscar Mbabu