Legal Alert: The High Court Sets Good Precedent For The Separation Of Powers Among The Executive From Usurping The Powers Of The Commissioner Of Domestic Taxes.

The High court Vide a ruling dated 16^th September 2022 in the matter of REPUBLIC VS COMMISSIONER OF DOMESTIC TAXES EX PARTE LONDON DISTILLERS (K) LIMITED, 2022, determined that Treasury or in this case the Ministry of Finance has no legal right to approve abandonment of taxes without prior recommendation from the Commissioner. In this Alert we discuss the salient arguments by the parties to the dispute and our view on the ruling.

Brief facts

London Distillers Ltd.’s Case (Ex parte Applicant) In a letter dated 15^th September 2021, London Distillers applied to the Cabinet Secretary for National Treasury and Planning for the abandonment of KES 517,118,680 which it had collected as excise duty in the course of its business. In a letter dated 20^th January 2022, National Treasury allowed the application and approved the abandonment of 80% of the outstanding principal excise duty and waived 100% of the penalties and interest. In a letter dated 2^nd February, 2022, the Commissioner wrote to London Distillers acknowledging the abandonment by Treasury and demanded Kshs. 80 million being 20% outstanding tax arrears. On the same day, the parties agreed to commence weekly installments of Kshs. 7,500,000. On 2/03/2022, the Commissioner rescinded the approval by Treasury dated 20/01/2022 and demanded the entire sum of Kshs. 517,118,680 to be paid within 7 days, failing which the KRA would institute enforcement measures. On 3/03/2022, London distillers protested the rescission by the Commissioner. On, 17/03/2022, the Commissioner lifted agency notices after negotiations but continued to demand Kshs. 517,118,680. London Distillers moved to court on 23/03/2022 to apply for the judicial review orders of certiorari, mandamus and prohibition against the Commissioner’s’ decision dated 2/03/2022 Commissioner of Domestic Taxes’ Case (Respondent) Following receipt of the ex-parte’s letter dated 15^th September 2021, the National Treasury wrote to the Commissioner on 1/10/2021 seeking its advice on the application for waiver. On 22/12/2021, the Commissioner, in reply to the national Treasury, advised that the application was not tenable as it failed to meet the threshold under section 37 of the Tax Procedures Act, 2015. On 1/01/2022, the Commissioner wrote to both the National Treasury and the Attorney General explaining what agency taxes entails. On 22/02/2020, the AG advised Treasury on the legal position on the procedure for abandonment of taxes clarifying that such process was to be initiated by the Commissioner and if satisfied that the application met the threshold, would be approved by the Cabinet Secretary of the Treasury, not vice versa. On 2/03/2022, the Commissioner rescinded the approval given by Treasury on 20/01/2022 and ordered payment of Kshs. 517,118,680 The Commissioner opposed this application via the replying affidavit of Victor Mino dated 8/04/2022 that London Distillers had done a self-assessment for returns from January 2020 to August 2021 and still failed to remit the total sum of Kshs. 529,278,690.

Issues for Determination

Whether the Commissioner’s decision to demand full taxes, despite National Treasury’s decision to abandon part of the taxes, was irrational, illegal, unreasonable.

Applicable rules

The High Court observed that under section 37 of the Tax Procedures Act the Commissioner (KRA) may determine if:

• It may be impossible to recover an unpaid tax;
• There is undue difficulty or expense in the recovery of an unpaid tax;
• There is hardship or inequity in relation to the recovery of an unpaid tax; or
• There is any other reason occasioning inability to recover the unpaid tax.

Section 89 (6) provides that a person liable to a penalty or interest may apply in writing to the Commissioner for the remission of the penalty or interest payable and such application shall include the reasons for the application. Section 89 (7) goes ahead to state that the Commissioner may, upon an application made under the previous provision or on the Commissioner's own motion and with the approval of the Cabinet Secretary, remit, in whole or in part, any penalty or interest payable by a person except a penalty imposed in relation to tax avoidance, provided that the remission of interest is by reason of— (a) Uncertainty as to any question of law or fact; (b) Consideration of hardship or equity; or (c) Impossibility or undue difficulty or expense, of recovery of tax.

Court Analysis

Justice Alfred Mabeya, upon making a determination on these facts and placing reliance on the above mentioned rules, stated that the respondent, being the master of taxes and tax laws, had a duty to evaluate the application for abandonment of taxes vis a vis the statutory requirements to be met before such approvals are issued. The KRA can invoke the provisions of section 37 of the Tax Procedures Act on abandonment of taxes. The judge reaffirmed the correctness with which the Attorney General Kihara Kariuki, in response to the Commissioner on the legal position on the procedure for abandoned taxes, stated that the process is supposed to be initiated by the Commissioner and if he determines that the application meets the threshold, approval is sought from the CS Treasury. The KRA advised National Treasury that the application was not tenable and did not meet the threshold under section 37 (1) of the Tax Procedures Act. Nevertheless, National Treasury partially allowed the abandonment. The judge said the Treasury purported to exercise a power it did not have. It therefore, had no business to purport to allow the abandonment of 80 percent of the admitted taxes. It was thus illegal for Treasury to grant the company's request for lower taxes since only the Commissioner can invoke the provision for tax to be abandoned. That was extreme abuse of power on the part of Treasury The Commissioner’s decision to demand the payment of KES 517,118,680 was therefore neither illegal nor irrational and unprocedural as contended by London Distillers. Taxpayers should request tax waiver through the Commissioner, which is the proper procedure. If the Commissioner abuses its discretion to review and propose approval for the abandonment of taxes, taxpayers may still seek judicial review in court.

Commentary on the Case 

Whereas the London Distillers case sets good precedent for the separation of powers among the executive vis a  vis the Treasury from usurping the powers of the Commissioner of Domestic Taxes, it sets good precedent for the application of waiver on penalties and interests. It reaffirms the provision in Section 89(7) of the Tax Procedure Act, which provides that a taxpayer may apply for waiver of penalty or interest where they meet the conditions specified therein. This means that the application must be properly justified and supporting evidence provided. Applicants are in essence, required to submit their applications directly to the Commissioner alongside supporting evidence for prior vetting if it qualifies for tax waiver before it is then sent to the Cabinet Secretary for approval. Should the application fail to meet the threshold lain at the Commissioner’s discretion, it shall be rejected and the penalty and interest thereof demanded for payment. The court therefore rightly asserted itself in interfering with the decision of the Treasury where it did not act in good faith, or rather, it acted on extraneous considerations which ought not to influence him. It plainly misdirects itself in fact and in law by undermining due process that belies the Commissioner to initiate all procedures on tax remission.

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