Wednesday 4 March 2020

Tax Updates, March 2020 - Case Digest

Kenya Revenue Authority vs Kenya Bankers Association (Court of Appeal, Nairobi Civil Appeal No. 213 of 2018)

Summary: A lender (chargee) upon exercise of its statutory power of sale (sale of charged property in case the borrower defaults) is not obligated to pay Capital Gains Tax (CGT).


On 4th October 2016, the Appellant, Kenya Revenue Authority (“KRA”) published a Notice discontinuing manual payment of both Stamp Duty and Capital Gains Tax (“CGT”). KRA required both taxes to be paid simultaneously online through the I-Tax System. I-Tax system was programmed not to allow payment of Stamp Duty unless CGT was also paid. 

The Respondent, Kenya Bankers Association, (“KBA”) being an Association of forty-two (42) licensed commercial banks, one mortgage finance bank and two microfinance banks was aggrieved KRA’s action to twin the payment of CGT and Stamp Duty. Consequently, KBA filed a Judicial Review application at the High Court challenging KRA’s action.

The High Court declared that:
  1. KRA’s administrative action was unreasonable, unfair and influenced by an error of law. 
  2. CGT is payable by the chargor upon registration of the Transfer and not by the chargee or the purchaser, unless there is a surplus from the proceeds of the sale as to constitute the chargee a trustee for the chargor.
  3. The High Court issued an order compelling KRA to allow payment of Stamp Duty on transfers, without requiring payment of Capital Gains Tax or an acknowledgment number for payment of CGT.
KRA appealed the decision.


  1. A charge facilitates the transfer upon a chargor's failure to repay the sum secured by the charge. A chargee becomes the proprietor of the charge. The chargor remains the proprietor of the land. In executing the Transfer (after exercising its statutory power of sale), a chargee does so in its capacity as a nominee of the chargor.
  2. Money received after the exercise of the statutory power of sale is applied to pay rates, rents, taxes and charges. It is improper for the appellant to demand money that has not been received by a chargee.
  3. CGT is a charge on the income of a person. In order for one to be liable to payment of CGT, it has to be established that there has been a gain. Section 19 of the Land Act is not applicable as it refers to “taxes to be paid on the charged land”.
  4. KBA was not given an opportunity to present its points of view concerning the administrative action. KRA’s unilateral decision to demand collection of CGT from KBA members by twinning the payment of CGT and Stamp Duty was unfair and irregular.
Appeal Dismissed.

Statutes Referred to

  1. Section 2 of the Land Registration Act, 2012;
  2. Section 98(3) and (4) of the Land Act, 2012;Paragraph 5 (2) of the 8th Sch. to the Income Tax Act (Cap 470);
  3. Section 101 (a) of the Land Act, 2012;
  4. Section 3(1) and (2)(f) of the Income Tax Act;
  5. Paragraph 2 of the 8th Sch. to the Income Tax Act;Section 15(3)(f) of the Income Tax Act;
  6. Article 47 of the Constitution of Kenya, 2010;
  7. Section (4)(1) and (2) of the Fair Administrative Action Act, 2015.

Cases referred to

  1. Selle & Another vs. Associated Motor Boat Company Limited & Others [1968] E.A. 123


  1. The decision is a draw back on KRA’s aggressive tax collection approach. A change in the law may be necessary to appoint chargees as statutory agents for collection of CGT on charged property.
  2. It is the responsibility of the borrower to compute and pay CGT on their charged property. The borrower should liaise with the lender to ensure that surpluses from the statutory sale (if any) are applied to settle CGT.
  3. This decision is binding on the High Court, Sub-ordinate Courts and the Tax Appeals Tribunal unless KRA appeals to the Supreme Court, with leave of the Court.

Contact us for assistance:-
East African Tax Consulting
Starlings Muchiri (Director); or Samuel Karanja (Director)
Tel. +254 722 332729

East African Tax Consulting is an Associate of Muthomi & Karanja Advocates

Tax Updates March 2020 - In the News

Earlier enactment of the Finance Act

The government seeks to have the Finance Bill passed by Parliament and assented by the President by 30th June every year. This is in response to declaratory orders by the High Court in Okiya Omtatah Okoiti v Cabinet Secretary, National Treasury & 3 others [2018] eKLR whereby the Court declared the Provisional Collection of Taxes and Duties Act No.44 of 1959 unconstitutional.

Legacy data migrated to iTAX

KRA has begun migrating all historical tax balances to the iTax system. The move is welcome especially for taxpayers with tax credits brought forward from previous years. On the other hand the legacy system was error laden. Correcting the errors will be a difficult task more so because tax payers are not obligated to keep records beyond a period of 5 years.

LSK and KRA disagree on representation at the Tax Tribunal

The Law Society of Kenya has disagreed with KRA’s move to vet lawyers who represent taxpayers at the Tax Appeals Tribunal. LSK argues that the move is procedurally unfair. It is our opinion that the move is unconstitutional since every person has a constitutional right to be represented by a lawyer of his or her choice.

High Court rules that Demurrage is subject to income tax

The High Court ruled that demurrage is not part of freight cost for goods. The Kenya Income Tax Act doesn’t explicitly classify demurrage as income for the owner of the intermodal container. Modern income tax legislation e.g. the Tanzanian Income Tax Act of 2004 explicitly classify demurrage as income subject to income tax. We expect the Shipping lines/ agents to appeal to the Court of Appeal for final determination of the matter.

KRA to collect revenue for Nairobi County Government

Kenya Revenue Authority is set to start collecting parking fees, business licenses, land lease fees and buildings’ approval charges for Nairobi County with effect from mid-March 2020. This follows the transfer of some of the functions of the Nairobi County Government to the National Government. We expect KRA to integrate with iTax system with the Nairobi County revenue management systems. This will make it easier for KRA to widen the tax base especially among the small traders.

Sugar Task force recommends re-introduction of Sugar levy

The president received the report by the sugar task force. The task force recommended the introduction of the sugar development levy. Reintroduction of the levy is likely to lead to higher prices of sugar for consumers.

Contact us for assistance:-

East African Tax Consulting
Starlings Muchiri (Director); or Samuel Karanja (Director)
Tel. +254 722 332729

East African Tax Consulting is an Associate of Muthomi & Karanja Advocates