Demystifying Minimum Tax
The Finance Act, 2020 and the Tax Laws (Amendment) Act, 2020 amended the Income Tax Act (Chapter 470 of the Laws of Kenya), by introducing minimum tax to the Kenyan tax regime. This was yet another fiscal policy mechanism through which the government sought to boost its revenue coffers by widening its tax base. It was projected that the new tax would be raising around Twenty-One Billion Kenya shillings annually to the Treasury.

Minimum tax is a base income tax, payable at a rate of 1% of the gross turnover of an entity. This tax is payable by all persons whether they make a profit or not. The tax is to be paid in structured instalments and shall be due on the 20th day of each period ending on the 4th, 6th, 9th and 12th month of the year of income.
The Income Tax Act provides that a person is required to pay minimum tax where the instalment tax is lower than the minimum tax. Incomes exempted from minimum tax include:

a) income exempted under the Income Tax Act;
b) Employment Income;
c) Income subject to Residential Rental Income Tax;
d) income subject to turnover tax;
e) income subject to capital gains tax;
f) income of extractive sector;
g) income of a person engaged in a business whose retail price is controlled by the Government; and
h) incomes of persons engaged in insurance business.

This new tax was essentially meant to ensure that businesses who routinely and perennially reported losses over the years also contributed their fair share of taxes to the government whether they make profits or not. This was premised on the fact that those entities continued to enjoy government services and utilities notwithstanding their profit-making position and as such ought to contribute to the same.
The Kenya Revenue Authority (KRA) thereafter published Minimum Tax Guidelines to foster understanding of this novel tax by taxpayers. The new tax took effect from 1st January 2021 but was temporarily halted by the Court on 19th April 2021 following a petition filed challenging its constitutionality.
It is noteworthy that this tax came into effect during the ongoing Covid-19 pandemic when most businesses where slowly recovering from adverse effects of the pandemic.

The Petition and issues arising
As soon as the minimum tax took effect on 1st January 2021, stakeholders challenged the new tax in the High Court in Machakos through Petition No. E005 of 2021, Kitengela Bar Owners Association versus The National Assembly, KRA and the Attorney General. This petition was subsequently consolidated with Nairobi Petition E001/2021 in which a similar petition had been filed by The Kenya Association of Manufacturers, The Retail Trade Association of Kenya and The Kenya Flower Council (KFC), all petitions premised on challenging the constitutionality of minimum tax.

On 19th April 2021, the court granted a conservatory order restraining the KRA from implementing, administering or enforcing the impugned tax pending the hearing and final determination of the Petition. Pursuant to the conservatory order of 19th April 2021, the KRA immediately complied with the order, halted its implementation of the tax and reassured taxpayers who had already paid the first instalment that they will retain the same as a credit on their iTax ledger pending the outcome of the Petition.

The Determination
On 20th September 2021, the High Court rendered its judgement on the consolidated Petitions and held that, among other findings:
Contrary to the assertion by the petitioners, the amendment to the Income tax Act introducing minimum tax did not require consideration by the senate as it does not directly affect the revenues of counties.
The court made a finding that minimum tax amounts to double taxation as businesses who are in a tax loss and subsequently shift to a profit position are not allowed to offset the minimum tax paid. This was held to be
unconstitutional and unlawful to subject one to double taxation as the same is also economically punitive in
nature.
Introduction of minimum tax falls short of the test of fairness as it has the potential effect of diminishing the capital for those making losses while for others making profits, their capital base is unaffected.
The Income Tax Act introduced by the Finance Act 2020 is unconstitutional as it was not enacted in accordance with Article 201(b)(i) of the Constitution since its application violates the principle that the burden of taxation is to be shared fairly. It was further held that the introduction of minimum tax violated Article 28 of the constitution on the right to dignity as the tax assumes that all those in tax loss position are evading taxes.
Consequently, the court granted an order prohibiting and restraining the KRA from implementing, further implementing, administering, applying and/or enforcing Section 12D of the Income Tax Act, Chapter 470 of the Laws of Kenya as amended by the Tax Laws (Amendment) (No.2) Act, 2020 by collecting and/or demanding  payment of the minimum tax.

Conclusion
The annulment of minimum tax is a welcome move by all SMEs especially those reporting losses, as the burden of having to dig into their capital investment to pay the now annulled minimum tax has been abolished.
The court in effect held that the KRA must devise a way in which tax evaders can be identified and lawfully dealt with rather than adopting a system under which even the innocent are ensnared on the pretence of dealing with tax evasion. The KRA has already issued a notice stating that it is dissatisfied by the court’s decision and is preferring an appeal to the court of appeal against the High court’s judgement. Taxpayers shall now await to see how the appeal unfolds in the court of appeal regarding the fate of minimum

Please do not hesitate to contact King’ori Macharia and George Sakimpa in case of any questions or clarifications
1) Kingori Macharia
Managing Partner and Head of Dispute Resolution
Email: kingori@ashitivaadvocates.com
Tel: +254-722-764732 / +254-20-2710880 / +254-20-2711180

2) George Sakimpa
Associate, Dispute Resolution Department
Email: gsakimpa@ashitivaadvocates.com
Tel: +254-722-764732 / +254-20-2710880 / +254-20-271118