Read judgment


Kenya’s high court judge, David Odunga, had already suspended the newly introduced law, saying in April that it should be kept on ice until the dispute over its unconstitutionality had been argued and decided.

Now, the judge has delivered judgment holding that the tax, which would have extracted one percent of gross turnover from businesses that would otherwise fall outside the tax net because they made a loss, is unconstitutional.

Among those involved in bringing the case (consolidated from two separate petitions) was the Kenya association of manufacturers, the retail trade association of Kenya and the Kenya flower council, with the country’s organised legal and accountant’s professions among those admitted as interested parties. On the other side was the national assembly, the attorney general and the Kenya revenue authority.


The President assented to the new law in June 2020, amending the Income Tax Act with the introduction of a controversial new minimum tax due to come into operation from the beginning of 2021.

According to the petitioners, the tax would ‘annihilate’ small to medium businesses, forcing them to pay tax even when they were struggling to get off the ground and had not yet made any profit.

They argued that people whose businesses are in a ‘loss-making position’ shouldn’t be required to pay a minimum tax as it would have to come out of ‘their pocket or their capital’. For new businesses, startup costs like licences and permits, meant they could not make a profit at the beginning, and yet they would now have to pay tax, based on their gross turnover, even though they might have made no profit at all.

Zero earnings

The revenue authority and other respondents said the national assembly had a right to enact taxes. In this case it had done so after consultation, as required, and that the law was not unconstitutional.

The state needed additional revenue to fund recurrent and development expenditure and the minimum tax was aimed at levelling the playing field by ensuring that everyone contributed to government efforts. The minimum tax was necessary so that more businesses would contribute to the fiscus.

Some companies had been taking advantage of the previous tax situation by declaring ‘huge book profits and paying dividends to shareholders’ while reflecting ‘zero earnings for tax purposes’. This meant that fewer entities were shouldering the country’s tax burden and not enough funds were being raised.

‘Tax net’

The government had decided that it needed to bring loss reporting businesses into the ‘tax net’ via a minimum tax designed to ensure that taxpayers could no longer ‘escape their fair share of tax liability through “tax planning”.’ The introduction of a minimum tax would ensure that even if they were perpetually declaring a tax loss, these businesses still contributed to the exchequer.

Among the countries that operated under a similar system, levying a minimum tax, were Tanzania, Nigeria, Ivory Coast, Austria, South Korea, India and the USA, though their rates were not necessarily the same as the one laid down for Kenya.

Judge Odunga said that despite complaints that the new law would ruin small businesses, the new law could only be declared unconstitutional if there had been a specific violation of the constitution. If implementing a statute was ‘difficult or inconvenient’, rather than ‘unconstitutional or unlawful’, nothing could be done.

Double taxation

One of the allegations by the petitions was that the new tax would ‘lead to double taxation’. This was because if a company ‘in a tax loss position becomes profitable in the course of its financial year, having already paid the minimum tax … it will now be required to pay corporation income tax.’ The minimum tax it had already paid would be neither a tax-deductible expense nor a tax credit, and in that sense, the company would have been subjected to double taxation.

While the government said this complaint should be disregarded, the court said it could not be wished away. It was a substantial issue and had to be dealt with. Judge Odunga then concluded that double taxation was not just unconstitutional and unlawful, but was also ‘economically punitive’.

Sharing the burden of taxation ‘fairly’ was a fundamental principle, and a system that lends itself to the possibility of double taxation ‘cannot be said to be fair’, even if such a system existed in other jurisdictions. The new tax law means that ‘those people who genuinely make losses will be forced to fall back on their capital in order to pay the tax, while those who make profits will be paying income tax from their profits.’

‘Guided missiles’

Taxation ‘cannot be fair when a system … is introduced that has the potential effect of diminishing the capital for those making losses, while for others making profits, their capital base is unaffected.’

Then follows a section in which Judge Odunga used a series of comparisons to make his point. The national assembly had to find a way to identify and lawfully deal with tax evaders, ‘rather than adopting a system under which even the innocent are ensnared.’

‘Like fire, which converts everything to itself, [a statute] must remove and convert the dark spots. Like guided missiles, it must hit only the target. It must only trap those against whom it is targeted. It must only burn the chaff and not the wheat. It cannot, by legislation, say: “Since I cannot tell who is telling me the truth when it comes to tax loss, I am going to assume that you fall in the same category and impose a figure upon you, based on your turnover.”’


As for the argument that even those not paying tax when they should be, were enjoying the country’s infrastructure, the court commented, ‘the government can devise a system and it has done this before, whereby those enjoying those facilities meet their expenses. That can be done without violating the law. Such taxes ought not to be introduced through the backdoor as was attempted in this case.’

A little later, the judge again used metaphorical language to make his point. The government may well have found ‘the virus that had infected the revenue collection system as being the dishonest returns of losses by some entities, [but] it was the vaccine developed for this virus that is inappropriate.’

The solution wasn’t a net that caught culprits as well as non-culprits, but rather to develop a system tailored to target ‘only the culprits.’

‘Sacrificial victims’

He also spoke about the new law clearly leading ‘to favourites and sacrificial victims’. The capital of those able to pay taxes from their profits would not be affected, while those genuinely in a loss-making position would be ‘sacrificed at the altar of those who dishonestly conceal their profits.’

The government should have found a system that allowed the detention of ‘dishonest entities’, but instead had opted for the easier way not ‘but casting the revenue net into the deep sea, without bothering what the net will catch as long as the culprits are also caught.’

He declared that the new amendment to the Income Tax Act was unconstitutional, and thus null and void. The associated guidelines were also of no effect, and the government was prohibited from implementing the new law.