The Kenya Revenue Authority (KRA) has lost its bid to tax billions of shillings collected monthly from motorists through the fuel levy meant for road maintenance.
A tribunal has barred the taxman from seeking Sh1.7 billion from the government-owned Kenya Roads Board (KRB), terming the levy and interest earned from billions sitting in accounts non-income and not liable for taxation.
The KRA sought tax on the understanding that KRB has been registered as a taxpayer and issued with personal identification numbers (PINs) twice in 2009 and 2020.
The tax appeals tribunal ruled that the KRB’s income is not subject to tax and that the interest earned from banks was exempt from taxation.
The board collects Sh25 from a litre of fuel as the Road Maintenance levy Fund (RMLF) or an estimated Sh135 billion for building and upgrading highways.
“KRB receives income from the Exchequer, grants, gifts, donations or endowments thus, does not fit the definition of income as couched under the ITA [Income Tax Act]. Accordingly, the tribunal having established that the appellant’s income is not subject to tax finds that the KRB’s interest income was exempt from tax,” said the five-member tribunal chaired by Christine Muga.
It also ruled that it was wrong for the KRB to be issued with a PIN, arguing that the agency is not a corporate body.
“KRA erred in its issuance of a PIN to Kenya Roads Board Fund. The issuance of two PINs was illegal, first on the basis that a taxpayer can only have one PIN at one particular time and second the fund is not a body corporate capable of being issued with a PIN,” said the tribunal while ordering the KRA to cancel the PINs within 90 days.
KRB petitioned the tribunal in April 2024 after the KRA demanded income tax of Sh1.7 billion for the seven years to 2022.
Initially, the amount had been assessed at Sh4.1 billion but was reviewed downwards to Sh1.7 billion in March 2024 following an objection by KRB.
KRB reckoned that its main income is from the fuel levy and transit tolls, which do not qualify as income for taxation.
The board invests surplus funds in banks or government securities, earning interest income that is subject to 15 percent withholding tax.
The interest income earned is distributed towards maintenance, rehabilitation and development of the road network.
KRB stated that all the surplus earned from bank interest for the period had been remitted to the Treasury and that it had no funds to settle the tax demand.
However, the KRA argued that a review of financial statements and i-Tax returns had established discrepancies regarding interest income declaration from 2015 to 2022.
The KRA said KRB erroneously declared the interest income as exempt, arguing it was a taxable income under the Income Tax Act (ITA). It stated that KRB had filed income tax but had grossly under-declared interest income.
The tribunal heard that KRB’s status as a registered taxpayer with PIN gave it the obligation to comply with the Tax Procedure Act rules.
One of the rules, says the KRA, demands that “a registered person shall use a PIN for the purpose of all tax laws and a registered person shall be issued with only one PIN at any time.”
But KRB says the taxman was seeking a piece of the Sh2.8 billion it had transferred to the government’s main account in November 2019. The board said the KRA failed to acknowledge that the law demands KRB to invest funds that are not readily required for road maintenance in local banks to earn interest, which is ploughed back for highway upgrades.
It argued that the interest does not qualify as income generated from trading activity that is subject to tax.
The fuel levy was introduced in 1993 to raise funds for road maintenance, replacing road tolls which had been in place since the late 1980s but were hit by widespread graft at toll stations.
Initially, the levy on petrol and diesel stood at Sh1.50 and Sh1 respectively per litre, going up progressively to Sh5.80 each by 1999.
Further increments took the levy to Sh9 per litre in 2006 and Sh12 in 2015, and again to Sh18 per litre in July 2016.
