The National Treasury has for the 2016/2017 fiscal year set an ambitious revenue collection target for the Kenya Revenue Authority (KRA). This calls for enhanced tax base and improved revenue administration processes. It’s in line with this expectation that the taxman will have to employ the following strategies: the enforcement of the Tax Procedures Act, 2015 (TPA Act) and the widening of the tax dragnet to rope in income from illegal and immoral sources.
The Tax Procedures Act, 2015
The Act aims at actualizing the taxation principle of Simplicity. The overarching objective being to harmonize the tax administration process as one way of making tax compliance easier. It brings all the tax procedures in Kenya under one regime, with the exception of minimal specific procedures provided for under the specific tax legislations.
It provides a punitive penalty amounting to double the tax avoided for those taxpayers who are guilty of involvement in tax avoidance schemes. It introduces novel ideas that are crucial in simplifying the tax legislation and also significantly reduces room for doubt on both the part of the taxpayer and that of the KRA, thus setting ground for a more robust and efficient tax regime. This will hopefully translate to more tax revenue. Under this law, and reminding us of the case of Al Capone the Chicago crime boss, it is now easier to secure a conviction for tax evasion than for corruption under the Anti-Corruption and Economic Crimes Act.
Taxation of Illegal Income
Taxation of illegal income has been a topic of debate in different jurisdictions. The tax authorities, in their zest to maximise revenue collection, have argued that proceeds of trade is income, even if the trade was illegal.
To mention but a few are the celebrated cases of Mann – Vs – Nash and Commissioner of Inland Revenue – Vs – Aken. Just recently in the Civil Appeal No. 55 of 2009 pitting Kenya Revenue Authority against Yaya Towers Limited, the Court applied itself to Section 3(1) of the Income Tax Act, Cap. 472 and guided by the above cases ruled that the said Section talks of all income legal or otherwise hence KRA has jurisdiction to tax profits from illegal services rendered and that doing so would not be breach public policy.
The “Income” in Section 3(1) is clarified under 3(2) to include:
My interpretation is that income and gains from criminal activities for instance: money laundering, drug trafficking, prostitution, and smuggling would qualify for taxation as they fall under the rubric of the above classifications. The reason is that their principal purpose is to make commercial gains, although from illegal sources and evince characteristics of commercial venture.
Amend the Income Tax Act to seal loopholes
Income from corruption, fraud, theft, embezzlement, extortion and by extension money laundering do not fall within the scope of classes of income stated in sub-section 3(2) of the Income Tax Act and thus are strictly interpreted not amenable to taxation.
The National Assembly should through the window created under Article 209(1)(a) and (2) of the Constitution have the Income Tax Act amended to have a “catch-all” provision for taxation of “all gains, profits and income from whatever source derived.
Key reasons for the call for the taxation of incomes from illegal activities are that:
First, Article 210(1) of the Constitution provides that no tax or licensing fee may be imposed, waived or varied except as provided for by legislation.
Second, and close to this is Section 196(2) of the Public Finance Management Act states that a public officer shall not raise revenues other than in accordance with the Constitution or an Act of Parliament.
Third, Article 201(b) (i) of the Constitution provides that the public finance system shall promote an equitable society and in particular the burden of taxation shall be fairly shared. Article 10(1)(a)(b) and (c) read with (2)(b)binds state organs,
“state officers, public officers and all persons to ensure that in applying or interpreting the Constitution, enacting, applying or interpreting any law, or making or implementing policy decisions they shall give regard to equity, social justice and equality.”
Taxation of this income would therefore bring fairness and equity which are key cannons of taxation.
Fourth, the non-payment of the tax leads to absurdity that profits/earnings out of honest business are taxed whilst the ones from dishonest ones escape taxation.
Fifth, failure to tax illegal income would encourage tax payers to have their business of tax tainted with illegality for the purposes of avoiding payment.
I remain conscious that taxes arouse strong passions, fuelled not only by conflicts of economic self-interest, but by conflicting ideas of fairness. Matters of illegality raise complex questions of law that are not easy to resolve. This nevertheless should not dampen the call for the proposed amendments.