On Monday, the High Court of Kenya under Justice George Odunga ruled the 1% minimum tax on businesses unconstitutional.
In 2020, Treasury Cabinet Secretary Ukur Yatani proposed a 1% minimum tax that was introduced in January 2021. Under this tax, businesses with a tax obligation of less than 1% were required to pay 1% tax on their total sales.
This was as part of its revenue raising strategy to help the government pay Sh3.03 trillion budget while also reducing the government’s expanding budget deficit, which has reached Sh953 billion this year.
KRA exceeded its revenue collection target in the fiscal year 2020/21 as a result of its tax expansion programs. Despite the economic impacts of the Covid-19 outbreak, the taxman collected Sh1.669 trillion, compared to Sh1.607 trillion in fiscal year 2019/20.
The enactment of the 1% minimum tax blocked
The enactment of the 1% minimum tax was however blocked in April 2021 after three executives from the Kitengela Bar Owners Association challenged the tax.
The petitioners said that enacting the tax would destroy their business, as well as the majority of small and medium businesses (SMEs), which are already struggling to make ends meet in these difficult economic times. The High Court then temporarily stopped KRA from collecting it.
This petition was filed against the National Assembly, the Kenya Revenue Authority, and Attorney-General Paul Kihara Kariuki.
High Court Eliminates the 1% minimum tax
In a Court Ruling on Monday, Justice George Odunga issued an order deeming the tax unconstitutional and invalid. Prohibiting the Kenya Revenue Authority from enforcing the tax’s term.
The ruling is a relief to businesses who were concerned about paying the tax on total sales and losing money while dealing with the terrible economic times brought on by the Covid-19 pandemic.
Justice Odunga deemed the 1% tax discriminatory claiming it has the ability to double tax people, as well as unfairly target people whose enterprises are losing money for whatever reason, forcing them to pay taxes on their capital rather than their profits.
In response to the verdict, KRA stated that it respectfully disagrees with the Court’s findings and that it will appeal.