Small and medium businesses can now breathe a sigh of relief after Machakos High Court declared the minimum tax from companies as unconstitutional and a null and void provision.
The minimum tax was introduced under the Finance Act 2020, to be charged at the rate of one per cent of total annual sales and paid by businesses whose tax obligation is below one per cent of their gross sales.
Justice George Odunga issued an order restraining Kenya Revenue Authority from implementing the law stating that it is a tax discriminatory to loss-making business entities.
“Minimum tax provisions are unconstitutional and the guidelines should be considered void. The minimum tax has the potential of not only subjecting the people to double taxation but also unfairly targeting people whose businesses for whatever reason are in loss making positions to pay taxes from their capital rather than profits,” he said.
“This punitive amendment can only be enjoyed by thriving business. The solution is not to cast the net wide to get culprits but to come up with a tailor-made solution aimed at catching the culprits only.”
According to Odunga, those who are able to pay taxes from their profits will not have their capital affected while those generally in loss making position will be sacrificed at the altar.
Kitengela Bar Owners Association moved to court in April this year to challenge the tax implementation.
In a petition, they argued that the authority’s introduction of an additional tax was unconstitutional, unlawful and devastating.
They also argued that the minimum tax is a contravention of Section 15 (1) of the Income Tax Act (ITA) which states that taxes should only be subjected to gains/profit and not turnover as visioned by the minimum tax.
The law came into force on January 1, 2021.
When opposing the interim order, the KRA commissioner- general had told the court that it should be allowed to continue with the implementation and if the petition succeeds, it will refund the taxes paid.