Earlier this week, the High Court of Kenya vide a ruling in the Constitutional Petition No. E005 of 2021, a case of Stanley Waweru & 3 others (the Petitioners) V National Assembly, the Commissioner General, Kenya Revenue Authority and the Attorney General (the Respondents), paused the implementation of the minimum tax until all the petitions before the court on the subject matter are heard and determined. A similar petition had been filed by the Kenya Association of Manufacturers, Retail Trade Association of Kenya and Kenya Flower Council protesting the imposition of the minimum tax.

Minimum tax was introduced by the Finance Act, 2020 with effect from 1st January 2021. It is charged at the rate of 1% gross turnover and is applicable where the installment tax payable is lower than the minimum tax payable. The tax is Payable in installments due on the 20th day of the 4th, 6th, 9th and 12th month of the year of income.  Minimum tax does not apply to all types of income and is exempt from the following incomes:  

• Income that is exempt from the Income Tax Act
• Income subjected to employment taxes, residential rental income tax, turnover tax or capital gains tax
• Income of the extractives industry.

Petitioner’s Case

The Petitioners, all registered officials of the Isinya East Sub County Bar Owners Association opposed the Minimum Tax as introduced under Section 12D of the Income Tax Act on the ground that it was unconstitutional. The petitioners submitted that the enforcement of the minimum tax would lead to the obliteration of their businesses together with a majority of other small and medium enterprises struggling to remain afloat. They sought the following reliefs from the Court:  

• Minimum tax is riddled with ambiguity and contradictions and therefore in contravention of Article 10 of the constitution that enshrines the right to certainty;
• Imposition of minimum tax is premised on the assumption that all businesses make net profits of at least 3.33% at any given time and is therefore discriminatory to small and medium enterprises thereby contravening Article 27 of the Constitution that enshrines equality in the application, protection and benefit of the law.
• Minimum tax illegally and unfairly threatens some enterprises with tax beyond 30% of and even 100% or more amounting to deprivation of property contrary to Article 40 of the Constitution.  
• Minimum taxes infringe on consumer rights as it will expose consumers to high prices for basic commodities as enterprises will be forced to increase their profit margin to make at least 3.33% profit, thereby contravening Consumer Rights as enshrined under Article 46 of the Constitution.
• Minimum tax affects the finances of the County government as the gross turnover of an enterprise includes the County taxes, therefore passing the amendments without the concurrence of the Senate contravene Article 110 of the Constitution.
• Minimum tax contravenes the principle of taxation enshrined under Article 201 of the Constitution which requires taxes to be progressive and not regressive by the mere fact that it is impugned on gross-turnover and not gains or profits.
• Minimum tax favours those in the energy and petroleum sector and in the insurance sector thereby creating an unfair tax environment. 

Respondent’s Case

The Respondents opposed the petitioners case and provided that the National Assembly has a constitutional mandate to take legislative and policy measures in tax administration as well as it has the wide authority to define the scope of taxation through a statute. Below are some of the grounds that were submitted by the Respondents:

• The payment of taxes is an obligation imposed on all businesses and individuals.
• Minimum tax will promote fairness in the sharing of the taxation burden as provided in Article 201 of the Constitution as it is imposed on all persons.
• The petition is a threat to the doctrine of separation of powers as it encroaches on the legislative mandate of parliament.
• An order of the Court granting the Petitioner’s prayer amount to an interference of Parliament’s constitutional powers by the Judiciary.
• The orders sought are against public policy and public interest
• The payment of taxes is an obligation imposed on all businesses and individuals.
• Recovering of the taxes due from Kenyans will be difficult if Minimum tax is suspended. 

Court’s Decision

The petitioners requested the Court for conservatory orders on implementation of Minimum Tax pending hearing and determination of the main case on the constitutionality of Minimum Tax. In making a decision, the Court noted that the issues raised by the petitioners are not frivolous and are weighty constitutional issues which require to be investigated further by the Court.

The presiding Judge was satisfied that the issues raised in the Petition disclose substantial questions of constitutional law.  Balancing the need to secure the government’s revenue sources on one hand and the protection of the Bill of Rights on the other both of which the State is enjoined to attain is paramount.

On the orders sought by the petitioners, the court granted interim reliefs to preserve the businesses and livelihoods of the Petitioners and Kenyans pending the hearing and determination of this Petition. Per the petitioners, if the conservatory orders are not granted, they and a majority of business enterprises in Kenya will suffer from the imposition of the minimum tax.

The Court suspended the minimum tax but noted that the grant of interim relief will not occasion any harm to the respondents as they will be at liberty to collect tax arrears due from the petitioners and other taxpayers inclusive of the interest and/or penalties.

Where Things Stand

The Court’s ruling is applicable to both the Petitioners and other taxpayers in Kenya who have the obligation of minimum taxes. The Court orders prevent KRA from collecting minimum taxes from all taxpayers in Kenya. So far, KRA has issued a press release confirming that it will respect the Ruling. The taxman will also be appealing the court order.

While the temporary suspension of the minimum tax provides reprieve to taxpayers, it should be noted that a favorable decision is obtained by KRA, taxpayers will pay all the tax dues including penalties and interests.