The taxman has been barred from rolling out minimum tax plan, giving a relief to businesses across the country that had petitioned the move terming it a hindrance to growth in the face of the pandemic.
High Court Judge Justice George Odunga has declared the provisions of the minimum tax, calculated at one per cent of a business’ annual sales, as unconstitutional and the tax guidelines void.
The judge further issued an order restraining KRA from implementing or enforcing the provisions of Section 12D of the Income Tax Act.
On the flipside, the ruling is a blow to the taxman, who had sought to expand the tax base by netting loss making entities through the tax, which had been proposed and assented to under the Finance Act 2020.
Minimum tax is a levy that was introduced to be charged at the rate of one per cent of the gross turnover of a business starting January 1, this year, and was projected to bring in Kes20 billion on an annual basis (0.2 per cent of GDP)
Being a turnover based tax means that the minimum tax is not based on the profitability of a business, usually measured by the bottom-line and companies would pay the tax even when making losses.
The proposed law, however, set to allow businesses to offset any losses suffered against future profits and carry forward the losses for a period of up to 10 years.
The terming of the law as unconstitutional marks a significant relief for business across the country who would have been forced to pay the tax, calculated at one per cent of their annual sales, if one per cent of their turnover was greater than their tax obligation.
In April, Kitengela Bar Owners Association, which sued the National Assembly, the Attorney General and the Kenya Revenue Authority, obtained conservatory orders stopping the roll out of the minimum tax law until the case was determined.
The bar owners said if the tax was imposed it would lead to the annihilation of their business along with a majority of SMEs in Kenya that are struggling to earn an income in an already subdued economy.
The Kenya Association of Manufacturers (KAM) said the decision to throw out the tax ensures that many businesses remain open and productive but provides space for businesses to bounce back and generate the much-needed revenue to support our country.
“This historic decision by the courts today provides much needed relief to businesses that continue to strain under the weight of over-taxation and unpredictability in the country today,” KAM said.
The businesses said that the introduction of minimum tax requires a taxpayer to pay their income tax based on the higher of either 30 per cent of net profit or one per cent of gross revenue.
The latter provides that the tax shall be applicable on the gross turnover of businesses and other taxpayers before deduction of production and operational costs.
This, they argued contradicts sections three as read with section 15 of the income tax Act.