Reprieve for businesses as court stops implementation of minimum tax


Reprieve for businesses as court stops implementation of minimum tax

In Summary

  • In its ruling on Monday, the High Court issued conservatory orders blocking the Kenya Revenue Authority (KRA) from effecting the tax pending the hearing and determination of the petition.
  • In their argument, the petitioners stated the implementation of the tax would result in the annihilation of their business alongside the majority of SMEs which are already struggling to generate any income under adverse economic conditions.
  • Charged at the rate of one per cent of gross turnover, the minimum tax came into being through the 2020 Finance Act and was promoted by National Treasury CS Ukur Yatani as a cure for tax evasion perpetrated through the declaration of ‘artificial losses’.
 

Hundreds of thousand of business around the country can breathe a sign of relief with the High Court of Kenya stopping the implementation of the minimum tax.

The halting of the tax whose first installment was to fall due on Tuesday follows a petition challenging the implementation of the new tax by the Kitengela Bar Owners Association.

In its ruling on Monday, the High Court issued conservatory orders blocking the Kenya Revenue Authority (KRA) from effecting the tax pending the hearing and determination of the petition.

The officials of the association sued the National Assembly alongside KRA’s Commissioner General and the Attorney General arguing the minimum tax contravenes the constitution.

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

Further, the aggrieved party states the minimum tax does not allow for the deduction of expenses and cost before the deduction of due tax arrears.

At the same time, the petitioners have warned tax obligations under the minimum tax could rise beyond the statutory 30 per cent corporate tax leaving a heavier taxation burden.

In addition, the petition argues the minimum tax cares less about the ability of taxpayers to pay up while the majority of SMEs lie in loss making territory in their early years.

Charged at the rate of one per cent of gross turnover, the minimum tax came into being through the 2020 Finance Act and was promoted by National Treasury Cabinet Secretary Ukur Yatani as a cure for tax evasion perpetrated through the declaration of ‘artificial losses’.

The tax was to be paid in four installments and on the 20th day of each period ending on the fourth, sixth, ninth and twelfth month of the year of income.

Technically, this means business would account for the tax on April 20, July 20, October 20 and January 20.

The implementation of the tax has recently come under fire from other quarters with the Federation of Kenyan Employers (FKE) for instance saying the tax will only serve to add to the burden faced by businesses during the pandemic.

“Enterprises are struggling to stay afloat due to the COVID-19 pandemic. If pushed further, the small and medium enterprises could be tipped into premature closure, hurting jobs and the economy,” the FKE said on February 27.

Tax experts and analysts have meanwhile warned of the ill-fated consequences from the implementation of such a tax which would weigh heavily on firms with high turnovers but with low profit margins.

“It’s actually a punishment so to speak. We did present this argument to the National Assembly, but we do know how the government is hungry for money. Think of a business in the fast moving consumer goods (FMCG) category such as a supermarket. The margins are so low that at no point will the income tax exceed one per cent of turnover,” PKF Partner Michael Mburugu told Citizen Digital in an interview in January this year.

The petition against the provisions of the minimum tax is expected to feature again on May 19 when parties to the case highlight their submissions to the court.

For Citizen TV updates
Join @citizentvke Telegram channel



Video Of The Day: Guns galore

Avatar
Story By Kepha Muiruri
More by this author