HISTORY OF INCOME TAX LAW IN KENYA

AUGUSTUS MUTEMI, 2015*

“In one sense every rule of law, either common law or equity, which has been laid down by the

courts, in that course of judicial legislation which has evolved the law of this country, has been

based on considerations of public policy.”_ Lord Wright in FENDER V. ST JOHN

MILDMAY [1938] AC 38, quoted by Justice Geoffrey Kiryabwire in CRANE BANK V

UGANDA REVENUE AUTHORITY[2010] at Page 5

“The spirit of the people, its cultural level, its social measure, and the deeds its policy may

prepare….is written in its fiscal history. He who knows how to listen to its message here discerns

the thunder of world history more clearly than anyone else”_ Joseph Alois Schumpeter [1991]

“The Economics and Sociology of Capitalism”, Princeton University Press

Prolegomenon: Kenya’s taxation system before the reception date

Before 1897, Kenya was made up of multifarious tribal-based societies each with its own

geographical and sociological background.1 These societies were communist/socialist in the

sense that property was communally owned by all the members of a particular social setup. Upon

amassing wealth in form of harvests, part of it was required to be submitted to the community

leaders in form of tithe. This “tithe” was to be used in future to assist those who didn’t have

enough property to sustain them or even to assist those who were hit by calamities. In a sense,

this was a form of taxation because the percentage that was submitted to the community leaders

was used to help others in future.

The principles and systems of taxation that existed in most African Kingdoms during this period

were therefore informal. It was only upon the influx of foreigners that some form of formal

taxation started. The Arabs who entered Kenya in the seventh century for example taxed the

coastal region on the basis of Islamic Law. Islamic law upholds the right of leaders to tax their

*The author is currently finalizing training as a lawyer at The University of Nairobi. He is a

research fanatic and a sycophant of Tax Law. More of his writings can be found here

https://uonbi.academia.edu/MutemiMutemi

subjects within bearable limits and therefore taxation is not forbidden. Capitation of such tax was

done by charging a fixed amount for each and every slave that was to be exported from the

Sultanate of Oman. Custom duties were also charged on other exports like ivory, cloves and

beads.2

When the Portuguese entered the country in the fifteenth century, part of the agreement they

signed with the Sultan of Oman included a clause to the effect that the sultan was to receive a

third of the customs revenue as his personal property. These clauses extended to other sultanates

including those of Mombasa, Kilwa and Zanzibar. Back in Portugal, Christian clergy from East

Africa were exempt from taxation including custom duties, a provision which is still in force

hitherto. On December 1895, the Sultan of Zanzibar gave away that entire region that was

formerly under The Imperial British East African Company (IBEACO) to the British

Government upon agreement with the British Government that he would receive an annual

stipend of £11,000.

Kenya’s taxation system and policy after the reception date

On the reception date i.e. August 12th

, 1897 the British decided to annex Kenya as their colonial

territory. They annexed this territory from the Imperial British East African Company

(IBEACO).3 The British however took almost 3 years to prepare the laws with which to govern

the country. They had to make use of the laws governing the countries they had colonized

particularly India before they could enact laws to govern Kenya. During this time, the British

Government introduced direct taxation. Such introduction of direct taxation was a three-pronged

rationale. The first reason for introducing direct taxation was because custom duties that were

extant at the time they came into the country could not raise enough funds that were required for

the administration of the country.4 The second reason was that there was need to protect the

settlers and custom duties were not enough for that and lastly, there was need to promote the

welfare of the settlers. This was only possible when direct taxation was put in place. The key

driver here was the British fiscal policy which advocated for self-sufficiency in the sense that

2 (Attiya, 2007)

3 (Bruce, 1990)

4 This is seemingly the first direct use of Adam Smith’s principles of Taxation in creating a tax in Kenya

income was supposed to be generated locally. The policy was buttressed by their dependence on

settler farming and local labor to assist in production and trade.

In 1900, the first tax laws were adopted in Kenya and they related to two taxes. Some were in

form of customs duty while others took the form of a rudimentary form of income taxation. For

income taxation, the 1st law adopted was called the hut tax and it was in form of regulations. The

reasoning of the British was that they had taken a primitive territory and these meant costing

them money to settle uncivilized disputes. It was called hut tax because the only form of

settlement was a hut which was to be the base of the tax. Chiefs and headmen were employed to

assist in the registration of men and their huts. The tax was enforced in terms of a currency

known as the Indian Rupee and it was 1 rupee per hut. Some tax law commentators have argued

that the introduction of hut tax was rudimentary. This is because the British Government argued

that Africans did not have civilized ways upon which taxes could be imposed. Moreover, the

British government was of the opinion that they had come to Africa to bring civilization and

therefore it was the responsibility of Africans to pay for the civilization they were acquiring.

According to the British government, Africans had no government of their own, they were wild

and primitive and their wealth could only be calculated on the basis of the number of huts they

owned.

In the same year, the British Government also introduced some form of identification to identify

Africans and therefore there was the introduction of Kipande system. Upon registration an “X”

was marked on the “kipande” to show that one had paid taxes for the year. This tax was imposed

until 1910 when a number of changes were made on the country’s taxation regime. For the first

time widows were brought into the tax bracket. There was therefore the introduction of another

tax called the poll tax whose base was the person. It started with men and in that regard all men

were to pay the tax in addition to the hut tax. In 1915, the British felt that the world war was

going to be expensive and therefore the tax became progressive (the wealthier you were the more

you paid)5 but it was flat before 1910. Poll Tax Ordinance provided for the distress of property or

three-month imprisonment for nonpayment of tax due6.

This kind of taxation was devoid of well-known taxation principles and key drivers since the

motive was colonization and the ill-intended “civilization” drives. At a glance, one may argue

that the key drive was to change African social set-up and economic models from

communal/socialist to a more capitalist economy. Attiya Waris argues that hut and Poll taxes

were crude wealth taxes that also served as a proxy for property rating in rural areas.7

When the Crown land Bill was proposed in 19088, it became the first crude law of the colonial

regime to levy a graduated land tax on individual holdings as a sound basis for land policy in

East Africa. This was necessitated by the need of preserving the means of obtaining some share

of any future appreciation in the value of the land particularly because much of the land acquired

by settlers was not being developed. According to the bill, any crown land lease rated at more

than Kshs. 180 rent would be charged a land tax at the rate of six cents for every 75 cents in

addition to such rent payable by the lessee. The bill also provided that for every person who

owned more than 50, 000 acres of land, a land tax four times more than the ordinary chargeable

tax would be charged on them. This bill was however rejected later in the year because of its

exploitive effect. The rejection was engineered by the settlers and its rejection paved way for the

1915 Crown Lands Ordinance. This ordinance deleted the clauses that had been seen as

exploitive and also helped in shaping the current land policy in the country in matters duration of

leases and also land market and mortgaging.

The period between 1922 and 1924 was marked by increased activism and agitation for a more

humane manner in which Africans were being treated. This agitation included a cry for

imposition of equal taxation mechanisms devoid of discrimination on matters race and class. In

particular, an issue arose as to how the imposition of taxes would be extended to the Asians and

whites. The agitation was however not fruitful because in 1933 the Graduated Personal Tax was

5 H.W.O. Okoth-Ogendo, Tenants of the Crown: Evolution of Agrarian Law and Institutions in Kenya (Nairobi:

ACTS Press, 1991) 27 6 (Okoth-Ogendo, 1991)

7 (Ochieng’ & Maxon, 1992)

8 Based on early communication between settlers in the East African region and the British Foreign Office, that dealt

with the problem of unproductive accumulation of land

created. The Britons saw this as a “simplified synthesis” of the United Kingdom Income Tax Act

of 1920. According to the enactment, which came into effect in 1934, tax rates graduated

according to the taxpayer’s income but with certain amendments. In addition, while the act was

in force, the former nonnative poll tax, which was not graduated, was to remain in abeyance. It

was to be assessed on every nonnative male and female resident in Kenya.

In 1932, however, The Moyne Report9 looked into the calls that called for the replacement of

Hut and poll taxes by a universal poll tax to abolish the payment of extra tax because of extra

huts. However, in order to retain the same rate as when both taxes were levied, the new tax was

to be levied at a higher rate. This would be made possible by spreading the extra tax over poll tax

payers in order to reduce the general average increase. This was because a proportion of hut tax

payers were women who were to be exempt from the new taxation regime. The new poll tax

would see a uniform adult male poll tax of six shillings and a cultivation or cattle tax. This tax

did not however see the light of the day because it involved a double burden to the owner of a

hut in a reserve who was also involved in cultivation and/or cattle keeping. There were also

concerns as to whether the new taxation regime would force Africans from their reserves in order

to provide labour to settler farms as a way of enabling them to pay for the new tax.10

In 1936, another commission11

was formed to enquire into and report on Kenya’s financial

position and taxation regime. The report made a number of recommendations, among them being

that the system of native taxation required amendment by an extension of the system of grading,

the reduction of the payment because of extra huts and the raising of taxable age. Further, the

report recommended that the graduated non-native Poll Tax and education taxes should be

abolished. Thirdly, traders and professional licenses were to be modified and the levy on official

salaries to be reduced by half. In their place, an income tax was to be imposed including a basic

minimum tax. Finally, there was need to guard against uncertainty of the yield from the

proposed income tax in its early years, and from Native hut and Poll Tax to allow a gradual

introduction of the proposed economies

9 Report of The Financial Commissioner on Certain Questions in Kenya, Lord Moyne, 1932 cmd 4093

10 (Kitenga, 2010)

11 Report of the Commission appointed to Enquire into and Report upon allegations of abuse and Hardships in the

Collection of Graduated Poll Tax and of Native Hut and Poll Tax. Chairman A.H. Webb, 1936, p 15. The

commissioners were appointed to enquire into and report on the financial position and system of taxation in Kenya

(1936) CHAPTER XP 247-251 APP.408. Printed and published by His Majesty Stationary Office. London. (1936).

There was another scheme12

the same year which included a native taxation. The native taxation

would consist of two main taxes: A universal Poll Tax which was to be payable to the

government as a contribution towards the general costs of administration including

communications, major buildings and scientific research and a rate to be assessed and levied by

local native councils to cover the cost of all social services. The rate was to be varied to meet

local requirements.

The African and settler agitations of 1922 and1924 were kept at bay until 1937 when the

Devonshire White Paper was produced. That year, a scientific form of income tax was

introduced. This scientific form was meant to apply to the Asians and to the whites and the

decision to introduce income tax that year was arrived at because it had worked successfully so

far in India and South Africa and it was hoped that it would successfully work in Kenya. It was

introduced through the Income Tax Ordinance 1937. The tax base was to be business profits,

salaries and wages, rent and income from agricultural produce or livestock. The form was seen

as scientific because it was based on determined and proven experience which included a well-

established way or format of defining income. The income tax introduced under the income tax

regulations and later the ordinance of 1937 continued with a little modification in Kenya until

1948.

In 1948, the 3 governors of East Africa established the EACSO (East African Common Services

Organization). Under this arrangement the 3 governors decided that there was no need to run

these taxes on an individual basis. They pulled their resources and formed the East Africa

Income Tax Department.13

The department was later to be disbanded to allow each country to

form its own Income Tax Department. Along with that, the law that applied was disbanded and

in 1973 Kenya came up with the Income Tax Act of 197314

and an Income Tax Department. In

1958, this relationship was formalized through the enactment of the East Africa Income Tax

(Management) Act which was passed by the East African Legislative Assembly, the legislative

body for EACSO

12

Report of the commission appointed to inquire on the financial position and system of taxation of Kenya p42 app

82 (1936). 13

The East African Income Tax (Management ) Act No 8 of 1952, East African High Commission Legislation, 1952 14

See also Eze O C, The Tanzanian Income Tax Act 1973: An Instrument of Social Change (1975) EALR 37 at 38

To better administer the territories in 1949, the East African High Commission amalgamated the

Customs and excise Departments of the three East African Countries. In furtherance of this

objective, 1949 also saw the creation of the East African Revenue Advisory Board. The same

year saw the Customs and Excise Revenues Allocation Act enacted repealing the Ordinance

(Cap 264). The Excise Tariff Ordinance of 1954 consolidated past legislations, as amended by

the various Finance Ordinances.

The Customs Tariff Ordinance of 1958 brought about a complete revision of customs rates. It

introduced a consistent pattern of rates by removing various anomalies, brought greater

administrative simplicity and excluded most producers’ requirements15

. Most of the items liable

to import duty were placed into one of the following categories: a general rate of 22% ad

valorem, a general assisted rate of 11% ad valorem (which applied to those goods, which it was

felt should pay some duty, but not at the general rate) and a protection rate at 30% ad valorem. In

addition to the ad valorem rates were certain specific rates on goods such as spirits, tobacco

goods, toilet preparations and piece goods. .

In 1961, pools and betting on overseas horseracing was brought into the tax net in Kenya. A

system of licensing pool promoters and their agents was instituted and all the pool bets were

taxable at the rate of 10% of each bet.63 The Pools Ordinance (No. 11 of 1961) applied to all

pools including fixed and betting pools. The Finance Amendment of the 1963/64 financial year

placed a tax impost on the stake money for losing bets, and 5% of the winnings on the winnings

on the winning bets

Throughout this period, key drivers made it possible for the colonial administration to impose the

various taxes as arbitrarily as they did. To start with, there was need to convert African socialism

and communism to a capitalist mode of economy where each and every African would work for

himself for pay. It is from that pay that the colonial government would impose taxes for a

localized economy. The principle of equality forced African elites to fight for their rights in a

move that would see the Asians and Europeans paying the same amount of tax as Africans. The

British government was not ready to allow this that easily.

15

(Waweru, 2006)

Africans and Asians were initially not represented at the Legislative Council. This meant that the

taxes imposed on them were arrived at the behest of the colonial government and therefore the

principle of certainty was never followed. As outlined earlier, the key driver was colonization

and converting indigenous African economy to a British economy.

Kenya’s taxation system and policy after independence

The first post-independence strategy on matters taxation and policy was set out in Kenya’s

earliest planning document entitled Sessional Paper No. 10 of 1965 on African Socialism and its

Application to planning in Kenya. The main purpose of the paper was to guarantee all citizens

equal political and economic rights. The paper stated that the economic approach of the

government was to ensure Africanisation of the economy and also the public service16

. The

government would concentrate investment in places where it was likely to maximize returns

which would subsequently be distributed to the rest of the country.

The paper laid down the foundation for the country’s fiscal policy framework. By the year 1972,

the economy of the country expanded and this saw the introduction of Sales Tax in 1973 which,

coupled with the first oil crisis of 1973, led to an economic shock and an increasing debt

problem. The resultant fiscal reforms included 20% withholding tax on nonresident

entrepreneurs, capital allowance restricted to rural investment, a new tax on the sale of property,

taxes on shares, the sale of land and a custom tariff of 10% on a range of previously duty-free

goods.

Kenya later came up with its own income tax department as a department of treasury and also

came up with its own income tax legislation known as the Income tax Act which commenced on

1st January 1974 and it was codified as Chapter 470 of the laws of Kenya. The preamble to this

Act reads as follows, “An Act of Parliament to make provision for the charge, assessment and

collection of income tax: for the ascertainment of the income to be charged; for the

16

(Chapra, 1976)

administrative and general provisions relating thereto; and for matters incidental to and

connected with the foregoing”. The preamble gives us the scheme or the various components

with which this law has dealt with.

References

Attiya, W. (2007). Taxation Without Principles: A Historical Analysis of The Kenyan Taxation

System. Kenya Law Review, 1, 272.

Bruce, B. (1990). Control and Crisis in Colonial Kenya the Dialectic of Domination. East

African Educational Publishers, Nairobi, Kenya, 53.

Chapra, M. (1976). The Islamic Welfare State and its Role in the Economy in Studies in Islamic

Economies. Jeddah: the Islamic Community.

Kitenga, G. (2010). Introduction to Tax Law. LawAfrica Pub.

Ochieng’, W. R., & Maxon, R. M. (1992). An Economic History of Kenya. East African

Publishers.

Okoth-Ogendo, H. W. O. (1991). Tenants of the Crown: Evolution of Agrarian Law and

Institutions in Kenya 27. Nairobi: ACTS Press, 1991.

Waweru, M. (2006). Speech By Mr. M.G Waweru, Commissioner General of The Kenya

Revenue Authority During The Kenya Institute of Management Annual Dinner. Kenya

Revenue Authority, Available at http://www.kra.go.ke/speeches/CG%20SPEECH%20-

%20KIM%20DINNER.pdf.