Home Business KRA loses bid to claim Sh64m tax from SGR contractor

KRA loses bid to claim Sh64m tax from SGR contractor


KRA loses bid to claim Sh64m tax from SGR contractor


Police guard the standard gauge railway site at Duka Moja, Narok County on August 3, 2016, after Chinese workers were attacked by Maasai morans. PHOTO | GEORGE SAYAGIE | NATION MEDIA GROUP

The Kenya Revenue Authority (KRA) has lost a bid to claim Sh64 million from a Chinese firm that built the standard gauge railway (SGR) line.

KRA was demanding tax on allowances paid to police officers who had been deployed to man the multibillion-shilling project.

In a judgment in December 2019, the Tax Appeals Tribunal ruled in favour of KRA, a decision that has now been quashed by the High Court following an appeal lodged by the China Road and Bridge Corporation (CRBC).

The contractor argued that KRA was attempting to expand the scope of Pay As You Earn (PAYE) to where the employer-employee relationship does not exist.

In his ruling, Justice David Majanja agreed with the firm saying CRBC was not an employer of the police officers and was therefore not under statutory obligation to deduct and remit any tax to KRA.

In its appeal, the Chinese firm had argued that the demand for Sh64,716,060 by KRA was illegal since CRBC had been contracted to build the railway while the State offered security by deploying police officers.

It further argued that the officers remained members of the National Police Service and their employment or terms of services remained with the NPS.

The High Court ruled that the tax tribunal erred in reasoning that the allowances paid to police officers was income for “services rendered” and was therefore liable to tax and subject to PAYE.

“The clear language of section 37 (1) of the Income Tax Act refers to: “An employer paying emoluments to an employee”. It would therefore be improper to imply or read into this provision any other relationship other than an employer or employee. To do so violates the clear words of the statute. It also violates the principles of interpretation of tax statutes,” said Justice Majanja.

CRBC told the court that it was contracted by Kenya Railways Corporation to build the SGR from Mombasa to Nairobi, which commenced in 2014 and completed in May 2017.

The company asserted that one of the conditions of the contract was that Kenya Railways would upon request and at a cost to it to provide reasonable additional assistance in matters of security.

It contended that its sole responsibility was to construct the SGR and that security services were not part of its contractual obligation.

However, the contractor said that on June 30, 2017, KRA’s commissioner of domestic taxes issued it with a demand letter from tax assessment for 2014 to 2016 claiming that the allowances paid to the police officers amounted to salaries and that it ought to have remitted PAYE on the same.

CRBC objected in its letter dated July 27, 2017 but the Commissioner rejected the objection and on September 19, 2017 confirmed the tax demand.

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