Court of Appeal Declares Minimum Tax Unconstitutional

This alert brings to your attention the Court of Appeal’s decision in Kenya Revenue Authority v Stanley Waweru and Six Others (Civil Appeal No. E591 of 2021). This was an appeal by the KRA against a ruling issued on 20 September 2021 by Justice Odunga, J. of the High Court of Kenya at Machakos (Constitutional Petition No. E005 OF 2021), where he declared Section 12D of the Income Tax Act unconstitutional.

On 30 June 2020, the President assented to the Finance Act 2020, which through Sections 7 and 9, amended the Income Tax Act, CAP 470 Laws of Kenya by introducing a Section 12D that imposed minimum tax at the rate of 1% of a business’ gross turnover with effect from 1 January 2021.

The Petitioners (Stanley Njuguna & 3 others) instituted proceedings challenging the constitutionality of Section 12D of the Income Tax Act. The Petitioners’ main argument was that the Constitution provides an exhaustive list of taxes that the government can impose, and minimum tax is not part of the list. In addition, the Petitioners argued that income tax is to be imposed on income only, but minimum tax was to be charged on gross turnover, regardless of whether a business was making profits or losses.

The High Court, in its judgement, found in favour of the Petitioners by holding that minimum tax offended the principles of public finance itemised under Article 201 (a)(i) of the Constitution. Consequently, the Court prohibited KRA from further implementation or enforcement of Section 12D of the Income Tax Act by collecting or demanding payment of minimum tax.

Dissatisfied with the High Court’s decision, the KRA appealed against the ruling at the Court of Appeal.

The KRA’s grounds of appeal at the Court of Appeal, the Respondents arguments and the Court of Appeal’s findings have all been summarised here