Now taxman wants his dues from that illegal business

Some of the 200 bags of sugar worth Sh1 million seized at the Suam boarder in Trans Nzoia County on May 27, 2016. PHOTO | DENNIS LUBANGA | NATION MEDIA GROUP

What you need to know:

  • High Court Judge Justice Joseph Nyamu in November 2008 ruled in favour of Yaya Towers citing the unlawful employment of a Mr David Peter Saunder effectively prohibiting KRA from demanding the tax from the firm.
  • KRA legal representative in the suit lawyer Paul Matuku said the verdict by appeal court judges Martha Koome, Fatuma Sichale and Otieno Odek now removes any doubt on whether illegal businesses can be taxed in Kenya.

A recent ruling by the Court of Appeal allowing taxation of illegal trade now sets precedence for the taxman to begin pursuing thousands of businesses whose incomes have largely remained outside the tax bracket for being illegitimate.

The verdict opens the door for the Kenya Revenue Authority (KRA) to go after multi-billion shillings businesses classified as illegal but raking in tidy sums of money every year.

The ruling means the illicit economy including drug trafficking, prostitution, and smuggling ought to be taxed as they fall under illegitimate ventures that don’t give to Caesar what belongs to him. Even profits made from corrupt processes including fraud, corruption, extortion and embezzlement would qualify to be taxed.

After a decade of court battle with Yaya Towers Limited associated with businessman and politician Nicholas Biwott, the court ruled that even income earned from unlawful activities is subject to taxation just like any other.

The matter that began in August 2006 at one point went in favour of the firm which had argued that the Sh17 million income tax KRA had demanded from payments made to a foreigner illegally employed at the firm, was not justified in law.

High Court Judge Justice Joseph Nyamu in November 2008 ruled in favour of Yaya Towers citing the unlawful employment of a Mr David Peter Saunder effectively prohibiting KRA from demanding the tax from the firm.

Verdict

“Doing so would go against public policy and would amount to benefiting from an illegality,” Justice Nyamu ruled.

KRA appealed immediately sparking another prolonged legal duel that ended last month with a ruling going the taxman’s way. KRA legal representative in the suit lawyer Paul Matuku said the verdict by appeal court judges Martha Koome, Fatuma Sichale and Otieno Odek now removes any doubt on whether illegal businesses can be taxed in Kenya.

“It has always been provided for in the law but what this ruling does is to clear any grey areas regarding what many perceived as untaxable. As long as we can ascertain that you made income from an activity and it is clear how much it is then the law allows us to compute what you owe KRA and demand tax, it is that simple,” Mr Matuku told Smart Company.

Mr Matuku had centered his argument in court on whether KRA was allowed to assess tax on an unlawful engagement. He faulted the 2008 High court ruling citing Section 3(1) of the Income Tax act, which provides for the taxation of “all the income of a person”.

Since no such case had been heard in Kenya, the taxman’s legal counsel relied on several English authorities to strengthen his argument. In one of the cases cited, (H.M Inspector of Taxes Versus AB (supra), the court held that the unlawful income was taxable.

In yet another case, a firm accused by the Commissioner of Inland revenue had complained that taxing its illegal profits would be akin to targeting income from burglary. In his judgement, Judge Lord Morison who was handling the case said it was irrelevant to consider the legality of profits as long as income had been earned through a trade.

“Burglary is not a trade of business but if a trader committed a housebreaking and stole his rival’s order book and from its information, was able to increase the profits of his own business, I have no doubt that these profits are subject to tax. It is in my opinion absurd to suppose that honest gains are charged to tax and dishonest gains escape,” Judge Morison said.