By Benson Wambugu
Posted Wednesday, January 27 2010 at 20:18
The Kenya Revenue Authority has been ordered to refund money it drew from a bank for failing to remit taxes from a customer — handing a major victory to taxpayers, who have been suffering the wrath of overzealous tax collectors after revenue targets.
The Constitutional Court declared illegal the tax man’s decision to raid I&M Bank’s account at the Central Bank for money it had not received from a taxpayer after it realised it could not recover the levies from the customer.
I&M went to court after the tax man raided its account before the lapse of the period that agents have to remit the money to KRA.
Commercial banks act as KRA’s tax agents and are required to send to it money received from taxpayers within 30 days of receipt. KRA had gone to the Central Bank after Kenya Syntans and Chemicals obtained a court order stopping the direct debiting of its account, leaving I&M Bank between a rock and a hard place.
Lady Justice Jeanne Gacheche ruled that money held by financial institutions on behalf of their customers is shielded from compulsory acquisition by KRA under the income tax Act — which means that the tax man must immediately return the Sh2.7 million it withdrew from I&M’s account.
The tax man debited the bank’s account while pursuing more than Sh11 million, which it says Kenya Syntans and Chemicals Ltd owed it in unpaid taxes.
The judge’s decision blocks a major avenue that KRA has been using to recover tax monies from defaulters and may further slow down the authority’s race to meet its revenue targets.
“The court’s interpretation of the law has put the tax man and the taxpayer on an equal footing,” said lawyer Macharia Kahonge.
The income tax law demands that once KRA has served a bank with an agency notice relating to any of its customers, the bank has 30 days to comply unless reasons for incapacity to act are communicated to the Commissioner of Income Tax.
Failure to honour an agency notice constitutes an offence in addition to shifting the tax liability to the account of the agent, a provision under which the tax man directed CBK to attach I&M’s account pending remission of the money from Kenya Syntans.
I&M Bank, represented by Allen Gichuhi of Walker and Kontos Advocates, told the Constitutional Court that KRA had acted in disregard of the law by raiding its account at the CBK before the 30-day window had lapsed.
The bank told KRA it could only remit Sh2.8 million when it received a demand for Sh11 million in lieu of taxes due from Kenya Syntans, which had meanwhile obtained a court order to stay the enforcement of the notice, blocking I&M from raiding its account to pay the tax man.
I&M had asked the court to declare KRA’s agency notices requiring immediate payment of any taxes due illegal because they were in contravention of the law that grants the agent a 30-day grace period from the date of service of the notice.
The Kenya Bankers Association termed the ruling timely, saying the tax man had been abusing its legal right to make any person or institution pay without their consent.
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