The Constitutionality of Minimum tax provision
In a Constitutional Petition filed early this year, The High Court in Machakos declared section 12D of the Income Tax Act unconstitutional and hence null and void. Section 12D had introduced Minimum Tax as a blanket target on all taxpaying business entities at a rate of 1% on net sales regardless of whether they made losses or profits. Justice George V. Odunga while delivering the judgement on 20th September 2021 noted that the Minimum tax provision was in contravention of Article 201 (b) (i) of the Constitution of Kenya 2010 for subjecting taxpayers to double taxation hence punitive in nature. The Kenya Revenue Authority (KRA) had banked on the introduced new tax to widen its tax base. The court however noted that when the tax collector chose to widen its net for a bigger catch did not care about the effect its decision will have on Small Scale Businesses which are currently in perennial losses due to the abysmal economy caused by the covid-19 pandemic. Justice Odunga stated that;
“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 a loss-making position to pay taxes from their capital rather than profits.”
The KRA wanted to utilize the Minimum tax to capture treacherous business entities that were avoiding taxes through the declaration of constant losses. The above tax system is however discriminatory especially on entities making losses since they will have to tax their capital as opposed to profits. The court further noted that a tax system that reduces the capital base falls short of the values of an optimal tax system.
Economists, financial experts and associations such as Retail Trade Association of Kenya (RETRAK), Kenya Association of Manufacturers (KAM), Kenya Private Sector Alliance (KEPSA), Deloitte, Price Waterhouse Coopers (PWC) and Kenya Bankers Association (KBA) had earlier on opposed the 2020 amendments to the Income Tax Act introducing Minimum tax due to its punitive nature on businesses with low-profit margins and high capital turnover. Firms in the category of fast-moving consumer goods (FMCG) have a reason to smile since they were the worst hit businesses by the new changes in the Income Tax regime due to their low-profit margins and high capital. Business entities can now operate without fear of reducing their capital to pay tax.