Kenya’s High Court ruled that the government’s plan to impose a minimum tax on corporate sales, even when a company reports losses, is unconstitutional.
The ruling comes as a relief for companies that were wary of paying the 1% levy on total sales from the beginning of 2021, even as they had to cope with the economic fallout from the coronavirus pandemic.
It is a blow, however, for President Uhuru Kenyatta’s administration, which was looking to collect at least 21 billion shillings ($191 million) annually from the measure. It would be yet another income stream to go toward the plan to narrow the East African nation’s fiscal deficit to 7.5% of gross domestic product in the year through June.
The tax is now annulled, Judge George Odunga said in the ruling on Monday. “It results in diminishing capital for those making losses, while for those making profits the capital base is unaffected,” he said.
While the government wanted to ensure companies that report loses as a tax-avoidance strategy over years also contribute to the exchequer, petitioners said the policy is punitive for those that are genuinely losing money. Their argument was helped by the move by the National Treasury to exempt some companies from paying the tax, including Kenya Airways Plc , whose business was hit by pandemic-related lockdowns. Businesses whose pricing is controlled by the government, such as fuel marketers and Kenya Power , were also exempted.
Kenya is looking to raise money to fund its 3.03 trillion-shilling budget to help it recover from the pandemic following an economic contraction in 2020, the first in nearly three decades. Kenyatta, due to step down in 2022 after two terms, is also racing to complete his program that involves increased investment in farming, housing, heath care and manufacturing.