Tax Appeals: Examining the Impact of ‘Pay to Play’ on Access to Justice and Cash Flow Constraints for MSMEs

  • 15 May 2023
  • 4 Mins Read
  • 〜 by Waceera Kabando

‘Pay to play or pay to be played?’ Sections of the Finance Bill 2023 have caused a buzz amongst them the amendment of Section 32 of the Tax Appeals Tribunals Act to cause taxpayers who seek an appeal on the Tribunal’s decision at the High Court to pay a deposit or give security worth 20% of the disputed amount to the Commissioner. This deposit would be refunded in 30 days only if the ruling is in favour of the taxpayer. Currently, deposits are only provided for in Section 12 of the same Act where on appealing an assessment to the tribunal, one must put in a deposit of KES 20,000.

The motive of this proposal is indigestible seeing to it as in The Finance Bill 2022, the same was proposed with the only difference being a 50% deposit and this would be applied through an escrow account by the Central Bank of Kenya on behalf of the taxman. This proposal was rejected by Parliament and other key stakeholders on the grounds that it would reduce the working capital of the taxpayer while denying them justice and therefore forces the reintroduction of the same proposal, despite minor but still unfavourable changes, seem boondoggle.

Our Constitution gives us the right to access justice, in Article 48, and any conditions set should be reasonable, attainable and usually at the discretion of the court while Article 50 expounds on the right to fair hearing of all parties. This alone on the face of it raises the issues of discrimination and limiting the power of the Judiciary.

The 20% deposit or security given by the taxpayer seeking an appeal would go to the Commissioner who in such matters is the adversarial party thus defeating the purpose of taxation principles on continuity and cost-effectiveness. Paying the deposit would cripple the taxpayers’ operational budgets making it an unfair rule in the game meant to only benefit the Kenya Revenue Authority who would not be subjected to the same if they were the appellant.

The Kenyan economy has witnessed a downward spiral with our annual GDP depreciating from 7.60% in 2021 to 4.80% in 2022 according to the Central Bank of Kenya records. This has seen many businesses retrench their employees and others even shut down duty to negative cash flow trends. The Treasury, however, projects a 5.5% bump within the year reinforced by the Bottom-Up Economic Transformative Agenda by the Kenya Kwanza Government. This so far, has been but a dream yet to be realised as businesses continue to suffer under the strained economic environment that trickles down to the common Mwananchi with the cost of living shooting up faster than we could launch the Taifa-1 satellite.

The High Court holds high the discretion to impose security on a party on a case-to-case basis. This proposal would outrightly undermine the court’s discretion and render one of the parties to the dispute, the Commissioner, a higher power where a deposit is placed. As President Theodore Roosevelt stipulated in 1903, no man is above the law and the law is set to equalize all parties and nobody’s rights should be infringed upon while doing so. This is contrary to what this proposal will do as it is punitive to the taxpayer and an expansionist yet belligerent manner of barring the taxpayer from appealing decisions of the Tribunal.

In a bid to adapt from other regimes; the mechanisms that may work and learn from where they have failed, we can look at;

  •         Tanzania

A deposit, which is either the undisputed amount or a third of the assessed amount (whichever is higher) is made to the Tanzania Revenue Authority. The difference this has with the Kenyan proposal is that the deposit is made to the Commissioner at the point of the objection of an assessment rather than an appeal.

  •       Uganda

Save for an appeal to the Supreme Court of Uganda by the Uganda Revenue Authority, the High Court ruled, in Fuelex Limited v URA (2019), the provision of the Tax Appeals Tribunals Act that provides for the payment of 30% of assessed tax by the appellant as an infringement to the constitutional right to a fair hearing and also absolutely prejudiced to the taxpayer seeking an appeal. In the event that the Supreme Court upholds this ruling, those challenging the assessments on grounds of legal and technical grounds will not be bound to putting in a deposit, however, against the quantum of the assessment the deposit will apply.

  •       South Africa

The rules here, simply put, are ‘pay now, argue later’. Objection or appeals to assessments and decisions does not exempt the taxpayer from paying the amount they are obligated to pay. However, on request and with reasonable grounds this can be allowed. This ‘pay to argue’ approach has been proven constitutional by the South African Constitutional Court. It is also of great importance to note that the South African government is prompt in refunding the amounts and interest accrued where the appeal or objection is ruled in the taxpayers’ favour. This is a different approach in comparison to the Kenyan proposal which may be a better fit if all parties play the fair game.

This proposal would eventually be abused as seen in other regimes as the taxman may rule unfairly in the hope of an appeal by the taxpayer in order to get a deposit that may not be interest-accruing. The litigation process may be too long and expensive leading the appellant to consider dropping the matter to the benefit of the taxman. This trend could drive many businesses down and see the Kenyan economy become a hazard for international investment.