WHY THE PROPOSED MINIMUM TAX OFFENDS ALL THE PRINCIPLES OF MODERN TAXATION

The Finance Act, of 2020 introduced Section 12D under the Income Tax Act requiring businesses to pay a minimum tax at the rate of 1% of the gross turnover. This amendment was declared unconstitutional by both the High Court and the Court of Appeal.

In summary, here are our views on why the proposed minimum tax offends all the principles of modern taxation.

• Article 201 of the Constitution provides that the effective burden of taxation be shared fairly. However, the proposed minimum tax is drafted in a way that will apply across both loss-making and profitable entities. This means that even a loss-making entity will be required to pay the minimum tax at the rate of 1% on its turnover. Hence, the burden of taxation will be unfairly and disproportionately applied to loss-making entities, since they will be required to pay the minimum tax from either their capital reserves or “personal finances”.

• Taxes should be generally levied according to a taxpayer’s ability to pay. Therefore, entities with a greater ability to pay taxes measured by income and wealth should pay more. However, the imposition of a minimum tax on a loss-making entity contradicts this cardinal principle of taxation. This is because the proposed tax is not concerned with the taxpayer’s ability to pay the tax, yet taxes should be imposed based on the ability or economic capacity of a taxpayer.

• Taxes should be levied and collected in such a manner that it provides the greatest convenience, not only to the taxpayer but to the government. However, the proposed minimum tax offends this principle of taxation, by making it almost impossible process for the government to collect taxes from entities in a loss-making position.

• By seeking to tax an entity’s gross turnover, the proposed minimum tax offends section 3 and section 15 of the Income Tax Act, Cap 470 which defines “profits and gains” as taxable income upon deducting allowable expenses, and not gross profits.

• The proposed minimum tax has far-reaching consequences of double taxation. This is because, where a taxpayer pays the minimum tax on their gross turnover and is subsequently required to pay the corporation tax upon deducting all its allowable expenses wholly incurred in the generation of income from the gross turnover. The payment of the minimum tax on the gross turnover cannot be computed as a deductible expense according to section 16(2) (c) of the Income Tax Act. This is because a tax paid is not a deductible expense.

• Generally, taxes must be productive and cost-effective. This is to mean that, the revenue yield from any tax imposed on a taxpayer must encourage and promotes economic development, wealth creation and social welfare. However, the proposed minimum tax which aims at taxing a corporation’s gross turnover not only fails to protect domestic industries but equally hampers or discourages productive efforts of the society and hence may lead to a reduction in economic development. 

• Notably, taxes should be simple, intelligible and predictable. However, the proposed minimum tax appears to be complex with the possibility of yielding undesirable effects. This is because it taxes the “gross turnover” a definition that is foreign to the Income Tax Act. The Income Tax Act defines what constitutes or amounts to taxable income.

• Finally, any new tax system must be dynamic or have a diversified tax structure to allocate the burden of taxation fairly among the vast population, thus, resulting in a low degree of incidence of a tax in the aggregate. However, the imposition of the minimum tax has the potential of increasing the degree of tax incidence by shifting the intended tax burden from the corporate entities to the final consumers. This ultimately overburdens taxpayers.