Matindi V CS, National Treasury & Planning & 4 Others (Constitutional Petition E280 Of 2021)  KEHC  (KLR) (Constitutional And Human Rights) (17 February 2023) (Judgment)
|Constitutional Petition E280 of 2021||17 Feb 2023|
Dennis Kizito Ng'wono Magare
High Court at Nairobi (Milimani Law Courts)
Matindi v CS, National Treasury & Planning & 4 others
Matindi v CS, National Treasury & Planning & 4 others (Constitutional Petition E280 of 2021)  KEHC 1144 (KLR) (Constitutional and Human Rights) (17 February 2023) (Judgment)
Necessity of the tax waiver legislation based on country to country agreements to be compliant with the Constitution
The petitioner was aggrieved by the financing agreements between the Government of Kenya and Japan entered on various dates between August 16, 2010 and September 18, 2010 that exempted Japanese companies, Japanese consultants and Japanese employees involved in the projects under those financing agreements from the provisions of the Income Tax Act, 1975. The exemptions in the financial agreements were brought to life in Legal Notice No 15 of 2021 and Legal Notice No 27 of 2021.
The petitioner contended that the Legal Notices were discriminatory on grounds of nationality and race and were unconstitutional for not having been subjected to public participation. The petitioner also contended that section 13(2) of the Income Tax Act was unconstitutional to the extent that it authorized Income Tax waivers through a notice in the Kenya Gazette issued by the Cabinet Secretary for National Treasury and Planning against the dictates of article 210 of the Constitution that required all money bills to be passed by the National Assembly.
The arguments from the respondents were that that grants and loans were from foreign sources hence Kenya had to defer to the foreign authority.
- Whether the doctrine of separation of powers estopped the High Court from invalidating a gazette notice on account of the gazette notice having errors.
- Whether the judiciary had no powers to superintend on the legislature on how to draft their reports.
- What elements should a tax waiver fulfil to be acceptable in law?
- Whether tax waiver legislation that was based on agreements between two states that had the effect of indemnifying nationals from one country from paying taxes violated the principle of neutrality of tax and was discriminatory.
- Whether the income generated from companies, employees and consultants that were nationals of a country that had granted Kenya a loan, and that were working on the project funded by the loan, qualified to be exempt from income tax under paragraph 21 part 1 of the first schedule to the Income Tax Act.
- Whether the income generated from companies, employees and consultants that were nationals of a country that had granted Kenya a grant, and that were working on the project funded by the grant, qualified to be exempt from income tax under paragraph 21 part 1 of the first schedule to the Income Tax Act.
- Whether tax waiver legislation based on country by country agreements had to comply with the Constitution and must be on the basis of reciprocity, nondiscrimination, equality and tax neutrality.
- Whether the Cabinet Secretary for National Treasury and Planning had the power to grant tax waivers.
- Whether the National Assembly abdicated its role by surrendering the powers to legislate on a money bill to the Cabinet Secretary for National Treasury and Planning.
- Whether Legal Notice No. 15 of 2021 was unconstitutional for want of public participation.
- The errors related to the two gazette notices both named as 27/2021 could be classified de minimis non curat lex (law was not concerned with small things). They were small and inconsequential errors, for which the law provided no remedy. The regulations covered by the two notices were not impugned in terms of content or procedure. They had identifiers embedded within the notices, the legislative supplement number and the subject matter. One notice was in legislation supplement no 21 and another in no 13. They caused no confusion to a fairly average intelligent reader.
- The reports of the National Assembly met minimum requirements of article 20 of the the Constitution which provided that official documents ought to be in English or Kiswahili. Whether the reports were confusing was not justiciable. Confusion was a subjective matter. The National Assembly regulated its own procedures. Reports needed to be intelligible to the immediate consumers of the business of Parliament.
- If parliamentary reports were jumbled up, it was not the business of the court to intervene and as such the same was not justiciable. The reports may be consumed by members of the public, among other persons. However, that did not create a justiciable right as against parliament.
- The doctrine of separation of powers required each of the three arms of government to stick to its lane. The court refrained from passing judgment on the quality and state of the reporting in Parliament.
- Unless Parliament concealed or did not disclose some documents, there could be no justiciable cause over the contents and the intelligibility of a house report or the manner in which the house ran its affairs. That was not to say that they had a carte blanche to have unintelligible reports. It meant that question of accountability for those reports did not lie here.
- The judiciary or the executive had no powers to superintend on the legislature on how to draft their reports. It was only the people who could recall their representatives for making such mistakes. People had 5 years cycle to improve the reports. If they could not do so, the court could not intervene.
- The court would not engage in a debate on the competence of reports of the August house or such reports as may be having missing pages. Even if pages were missing, it was not the problem of the National Assembly but whoever brought the incomplete report. The court could not trace any report of the clerk of the National Assembly declining to supply a complete record to the petitioner.
- Claims over the twin notices Nos 27 were dismissed. There was no correlation between the alleged errors related to Gazette Notice number 27 of 2021 and the content thereunder. The duty to number the Kenya Gazettes was not and could not be placed on the shoulder of the Cabinet Secretary. The issue of gazette notices with similar names should first be taken up with the Government Printer before being litigated upon.
- Article 260 of the Constitution defined legislation as an Act of Parliament and laws made by county assemblies. Under section 9 of the Statutory Instruments Act, the regulatory impact assessment was not to be carried out except in very specific circumstances.
- Section 13(1) of the Income Tax Act was introduced by section 9 of Act No 8 of 1978 that stated that the income specified in party 1 of the First schedule, which accrued in or was derived from Kenya shall be exempt from tax so specified. Therefore, any instrument purporting to exercise powers made under another act was a statutory instrument
- Section 13(2) of the Income Tax Act provided on tax exemptions, article 210 of the Constitution provided that there could be no blanket exemption. The extent of waivers meant the amount waived. Every waiver must:
- be authorized by legislation.
- Each waiver must be reported to the Auditor General.
- Each waiver must be accompanied by a reason for such a waiver, and
- there should be a public record of the waiver and amount waived
- The Constitution required that each waiver be placed in a public record and for the same to be reported. No tax or licensing fees may be imposed, waived or varied except as provided by legislation. On the other hand section 13(2) of the Income Tax Act required that waivers shall be exempt from tax to the extent specified in the notice.
- The supreme law of the land on waivers was enshrined in article 210 of the Constitution. The Income Tax Act, was amended to accord to the new Constitutional dispensation vide section 7(1) of the Fifth Schedule to the Constitution which stated that all law in force immediately before the effective date continued in force and was to be construed with alterations, adaptations, qualifications and exceptions necessary to bring it in conformity with the Constitution. Ipso facto, the impugned notice fell far short of even the Act that it purported it relied on since the extent of waiver was not given.
- The waiver purported to be according to some financing agreements. The exemption was to be individualized and the amount waived must be specified and it had to identify who it applied to and the Auditor General ought to be informed about the waiver. Section 13(2) of the Income Tax Act gave power to exempt income or a class of income. It did not give power to exempt people or a class of people. For taxation to be fair reasonable and proportionate, it had to have an element of neutrality and should be able to apply without discrimination unless it was for clearance of historical injustices and marginalization.
- The financing agreements were not part of the public records that covered the waiver. A person reading the Legal Notice was sent to look for the financing agreements to find the contents and terms of the waiver. However, the Constitution required that the extent be in the notice itself.
- The notice did not cover all workers involved in the projects financed by Japan, but Japanese companies, Japanese consultants and Japanese employees. There was no reason accompanying the same. There was no indication of the amount of tax waived as required under article 210 of the Constitution that the extent of waiver had to be specified.
- The criteria of race or ethnicity did not bring with it the sense of neutrality of tax. There should always be a way one could meet the criteria for waiver. A good example of compliance with the percepts in article 210 of the Constitution was the waiver under the the Persons with Disabilities Act in which there were qualifying persons and an objective criteria and not birth that was used to determine waiver provided under the relevant statute. Such expenditures were personalized and the amounts were known. The trouble with the contents of the impugned notice was that it was omnibus and covered all Japanese consultants, employees and companies involved in the specified projects. The extent of involvement was not set out and the upper and lower limits were also not provided and as a result the cost benefit analysis was not, and could not be done.
- Such blanket exemptions of nationals of one state, reeked of economic apartheid and were not reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom. Kenyans were highly taxed, subjecting Kenyans working for those Japanese companies and projects to tax and having the Japanese workers from janitors to CEOs, walk home tax free defeated equal pay for equal work mantra.
- The nature of taxation was that it could cause economic disparities and as such it widened the economic gap. The blanket waiver especially on the loans which was a burden to the very tax payers for generations served no purpose. In order to quell embers of colonialism, where only Africans were paying certain taxes, it was important that the country consulted its people about whether they were willing to accept such transgressions.
- Kenyas struggle against racism was enshrined in article 27 of the Constitution that provided that every person was equal before the law and had the right to equal protection and equal benefit of the law. Article 27 prohibited discrimination by the State based on race. Article 27(6) sought to realize the right to equality by undertaking the State to take legislative and other measures, including affirmative action programmes and policies designed to redress any disadvantage suffered by individuals or groups because of past discrimination. Any measure under article 27(6) shall adequately provide for any benefits to be on the basis of genuine need. That was need for existence for the disclosure of the reason for waiver to ascertain genuine need.
- The effect of the waiver was economic apartheid, where, equal pay for equal work was thrashed. Japanese employees working in the same organization, ended up with all their money, while the local Kenyans and Kenyan residents in those organizations paid tax. Taxing only Kenyans and giving waivers to Japanese companies compromised the constitutional protection under article 27 of the Constitution. Even expatriates working for the same companies most of whom were non-resident but were not Japanese ended up paying more than their Japanese counterparts.
- The right to equal treatment could not be derogated from. If for any reason the state was interested in waivers, there should be legislation which legislation, which in itself did not discriminate. If the legislation was discriminatory, then there should be strict compliance with article 24 of the Constitution.
- A limitation was not valid unless the legislation specifically expressed the intention to limit that right or fundamental freedom, and the nature and extent of the limitation. The delated legislation on tax waivers in the impugned notice breached article 27 without expressly referring to it and justifying the same.
- Without reasons being given for the discriminatory blanket waiver, Legal Notice No 15 of 2021 dated 15/2/2021 was not justifiable in an open and democratic society. It was anathema to equality and financial prudence. The constitutional imperative was that all waivers must be by legislation. There was no legislation on the authority to issue a tax waiver for Japanese companies, Japanese consultants and Japanese employees in the specified agreements set out in the schedule.
- Practice from the 1960s was to have agreements singularly or specifically legislated upon. Under the External Loans and Credits Act, parliament always had a say on the type of interest and conditions for grant of loans. Full disclosure on conditions and amounts was paramount. Even in the External Loans and Credits Act which predated the Constitution, amounts were crucial and the minster was not authorized to waive tax.
- The existing first schedule to the Income Tax Act named specifically the bodies to be exempted. However, to extend the same to certain office holders or nationals of certain states, in particular without reciprocity hence subjugating the Constitution to that of the Japanese empire. That was unconstitutional since it was only parliament that had the obligation and responsibility to impose tax, by extension un-impose by legislation
- The duty to impose tax, carried with it the duty, by legislation to un-impose tax. The National Assembly abdicated its role by surrendering the powers to legislate on a money bill to the Cabinet Secretary. He simply drew some gazette notice to be placed before an overwhelmed committee on delegated legislation, who despite not receiving satisfactory answers rubber stamped the Cabinet Secretarys request. That was contrary to article 210 of the Constitution.
- Although the definition legislation included county legislation, it was only the National Assembly that could originate a money bill. The Cabinet Secretary had no power in the to grant blanket tax waiver. That was in contravention of article 27 and 210 of the Constitution. The waiver had to follow the normal route on legislation. Waiving tax through delegated legislation did not meet the Constitutional imperative on money bills under article 114(3) of the Constitution. Article 114 sufficiently covered matters dealing with foreign loans and taxes or waivers incidental thereto as provided for under article 210 of the Constitution.
- Public participation had foundational basis in article 10 and 256 of the Constitution. It was a tool the people reserved for themselves in light of history of Kenya. The importance of public participation could not be waived. Parliament waived the right to public participation in publishing the legal notices on grounds that the legal notices were not statutory instruments.
- Public participation was not limited to statutory instruments. It was related to all legislation and even decisions on hiring of constitutional office holders. Parliament had no power to exclude public participation in legislation and other business. Parliament should be geared more towards public participation and not less of it. Legal Notice No 15 of 2021 was a statutory instrument and the law required it to go through public participation. The National Assembly breached the Constitution by failing to carry out public participation.
- Parliament waived the need of public participation. They had power to determine the nature of public participation having regard to the nature of the issue. The more technical and wide the effects, the more the need to engage in public participation. The decision by parliament to waive public participation were made without requisite authority and was therefore null and void ab initio.
- Loans were not equivalent to foreign sources. Whereas a grant was a foreign source, it was doubtful whether a loan, concessionary or otherwise qualified of a foreign source as the country was bound to repay the same from internal sources.
- To the extent that a grant was not an entitlement, the court would not deal with it as it was subject to the wishes of the grantor. The petition did not show how grants were affected by the notices. That was because they were not loans covered under article 114 of the Constitution and were not a burden on the national debt and were not entitlements. Those were gratuitous payments or receipts which were governed by the donors postulations. The same did not apply to loans which the country was bound re-pay.
- An order compelling carrying out a duty had to be given only when the duty had been breached. It could not be given in anticipation. The court declined to compel the Kenya Revenue Authority to do its duty since there was no evidence that they had failed to carry out their duties. That was because, they were not under obligation to collect the income tax before a declaration was made.
- Once the court re-ignited the duty today, it could not be placed on their shoulders at the pain of contempt when they had not declined to carry out their duty. The order was not ripe for determination. It could only be addressed once the same was ripe and justiciable.