The implementation of the Minimum Tax has been suspended, pending the hearing and determination of various petitions filed before the High Court.



22 April 21

ALN Kenya | Anjarwalla & Khanna representing the Kenya Association of Manufacturers (KAM), The Retail Trade Association of Kenya (RETRAK) and The Kenya Flower Council (KFC) filed an application seeking conservatory orders and a constitutional petition at the High Court, Nairobi(the Nairobi Petition) on 15 March 2021.

A petition and application seeking conservatory orders were also filed by the Officials of the Kitengela Bar Owners Association at the High Court, Machakos challenging the new tax (the Machakos Petition). The High Court, Machakos delivered a Ruling on 19 April 2021 and issued conservatory orders as follows:

“That conservatory orders are granted restraining the KRA whether acting jointly or severally by itself, its servants, agents, representatives or howsoever otherwise from the implementation, further implementation, administration, application and/or enforcement of 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 pending the hearing and determination of the Petition.” (the Orders).

The effect of the Orders is that collection of minimum tax by the KRA, including the instalment that was due on 20 April 2021, has been temporarily stopped pending the hearing and determination of the petition. Additionally, the Orders are applicable to the Nairobi Petition. The Machakos Petition has been fixed for hearing on 19 May 2021.

Honourable Mr. Justice Mrima sitting in Nairobi directed that the Nairobi Petition be transferred to Machakos. The Nairobi petition will be mentioned before the Honourable Mr Justice Odunga in Machakos on 27 April 2021.

Minimum Tax was introduced through the Finance Act, 2020 which was enacted on 30 June 2020 and amended by the Tax Laws (Amendment) (No.2) Act, 2020 (the Act) which was enacted on 23 December 2020 (TLA) to correct a drafting error which stated that minimum tax would apply where instalment tax is higher than minimum tax. To resolve this, the TLA amended section 12D of the Income Tax Act, Chapter 470 of the Laws of Kenya (ITA) to provide that minimum tax is payable where the instalment tax is lower than minimum tax, at the rate of 1 percent on the gross turnover.

The effect of this amendment was to introduce a new tax that would be payable unless specifically exempt. The following are exemptions from minimum tax:

  • Income that is exempt under the ITA;
  • Employment income
  • Income subject to residential rental income tax
  • Income subject to turnover tax;
  • Income subject to capital gains tax;
  • Income of the extractive industries;
  • Income of a person engaged in a business whose retail price is controlled by the Government; and
  • Income of a person engaged in the insurance business.

Additionally, the Cabinet Secretary for National Treasury and Planning is empowered by section 13 (2) of the ITA to exempt income or a certain class of income from tax, through a notice in the Kenya Gazette. In that regard, Kenya Airways was recently granted an exemption from the provisions of section 12D of the ITA relating to Minimum Tax, through Legal Notice No. 24 of 2021.

The minimum tax shall be paid in instalments on the 20th day of each period ending on the 4th, 6th, 9th and 12th month of the year of income.

In January 2021, the Kenya Revenue Authority (the KRA) published Guidelines on Minimum Tax (the Guidelines), which were revised in March 2021. The Guidelines define ‘gross turnover’ to mean gross receipts, gross earning, revenue, takings, yield, proceeds, sale or other income chargeable to tax under Section 3(2) of the ITA. The Guidelines also provide that minimum tax shall apply where it is higher than the instalment tax due for the period, and minimum tax shall be reduced by any Advance Tax, Withholding Tax or Digital Service Tax paid for the period.

The introduction of minimum tax, coupled with the effects of the COVID-19 pandemic, has an adverse effect on businesses, considering that the tax is payable on gross turnover and not profits as is the norm.

The grant of the Orders, albeit temporary, is a relief to many businesses that were expected to make their first minimum tax instalment payment on 20 April 2021.

The suspension of payment of minimum tax will continue to be effective until the petitions are heard and determined or until the ruling of the High Court is set aside or stayed by the Court of Appeal. This, therefore, means that taxation of income in Kenya will continue as was prior to the enactment of the TLA, without minimum tax being charged on the gross turnover until a final determination on the petitions is made by the High Court.

Should you have any questions regarding the information in this legal alert, please do not hesitate to contact Daniel Ngumy or Faith Macharia.

The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter.