The High Court has quashed income tax waivers granted to Japanese workers and companies saying the decision in 2021 was unconstitutional as Treasury Secretary has no such powers.
Former Treasury CS Ukur Yatani had exempted income tax for businesses and workers earned from 15 projects valued at Sh328 billion.
Justice Dennis Magare, however, said exemption or waiver of tax income can only be granted by Parliament through legislation and after the same is passed as a money bill provided in the constitution and after public participation.
The judge also quashed section 13(2) of the Income Tax Act, saying it is unconstitutional to the extent that it authorises income tax waivers through a notice in the gazette and for specified persons without regard to Article 210 of the constitution.
“Such blanket exemptions of nationals of one state reek of economic apartheid and are not reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom,” the judge said.
The court said the fact that Kenyans are highly taxed, subjecting working Kenyans to those Japanese companies and projects to tax and have Japanese workers from janitors to CEOs, walk home tax-free defeats equal pay for equal work.
The case was filed by Eliud Karanja Matindi who complained that the CS has no powers and that the waiver must follow the legal route of legislation.
In the notice on May 2021, the CS directed that Japanese employees, companies and consultants involved in several projects were exempt from paying income tax.
The CS said he instituted exemptions through bilateral agreements with Japan and exempted them from Income tax.
The notice contained 16 agreements from 2007 to September 2020. The matter was discussed by Parliament and adopted in May 2021.
Mr Karanja said the tax waiver was contrary to the constitution because the same was without legislation.
He further said the action violated the constitution by elevating the Japanese companies and employees in an opaque manner and failing to disclose the cost-benefit analysis from the waiver.
The Treasury had defended the decision saying the CS has powers under section 13(2) of the Income-tax Act to issue exemptions from income tax, or exempt income, which accrued in or derived from Kenya to the extent specified through a notice in the gazette.
The CS said the decision was informed by negotiations and agreements preexisting in all Japanese government financing.
The judge said the constitution requires that there shall be a public record of each waiver and the reason for the same and shall be reported.
No tax or licensing fees may be imposed, waived or varied except as legislation provides.
He added that whereas the said section gives the power to exempt income or a class of income, it does not give the power to exempt people or a class of people.
“For taxation to be fair, reasonable and proportionate, it has to have an element of neutrality and should be able to apply without discrimination unless it is for clearance of historical injustices and marginalisation,” he said.
The judge pointed out that the financing agreements are not part of the public records that cover the waiver.
“There is no reason accompanying the same. There is no indication of the amount of tax waived as required under Article 210 of the constitution that extent of waiver to be specified,”
Some of the projects that were subjected to the tax exemptions include Olkaria V Geothermal Power Development Project which cost Sh66.9 billion.
Other Japanese projects that have benefited from the tax relief include the first phase of the Sh38.2 billion Mombasa Special Economic Zone Development Project, the first and second phases of the Mombasa Port Area Road Development Project which cost Sh29 billion, the first phase of the Mombasa Port Development Project (Sh22 billion).
The Sh18.2 billion power transmission line from Lessos to Kisumu will also see Japanese workers and firms benefit from the tax relief. Mwea Irrigation Development Project is the other candidate for tax exemption, with the country having spent Sh13.2 billion on the farming project.