Taxation of Gains From Illegal Activities in Kenya: a Case for Legislative Intervention

Abstract

Revenue collection is vital for any state in order to fund government programmes. Taxation is the main revenue earner for the Kenyan government. The mandate of any government across the world include promoting peace, securing the general welfare of its citizen and ensuring that human rights and rule of law are fully realized. The government has to meet its mandate. Realization of such mandate requires funding. The government has constantly been broadening the tax base in order to collect funds to enable it to fulfill its roles. Section 3 of the Income Tax Act has provided for the imposition of tax on income that has been derived from Kenya. Taxation in Kenya not only extends to legal income but also illegal income. This was established in the case of Republic vs. Kenya Revenue Authority ex-parte Yaya Towers. The court held that income from illegal activity was subject to taxation. The Income Tax Act however does not have specific provisions on imposition of tax on illegal activities. This is on the deductibility of expenses and protection against self-incrimination during disclosure of illegal incomes. Lack of adequate provisions on the two areas has led to uncertainty. The research study has analyzed the deduction of expenses on income derived from illegal income and the protection of one’s right against self-incrimination. The study will also have a comparative analysis with other jurisdictions being the United States of America and South Africa. This is in order to relate the principles applied in these jurisdictions on the taxation of illegal income specifically on the two issues stated above. The data utilized in this study is both qualitative and quantitative. It is derived from primary and secondary sources. Secondary sources includes the internet, books, and journals while the primary sources include interviews conducted on small business owners and specialists in the tax sector in Kenya. The study concludes that tax reforms on taxation of illegal income would bring fairness and equity, which are key cannons of taxation. The law on taxation of income vi requires one to disclose all his income. If one discloses illegal income, there is no law protecting the taxpayer from self-incrimination, which arises because of that disclosure. The study recommends for the need to balance the obligation to file returns and the protection against self-incrimination. The study also concludes that the law does not provide adequate provisions on tax assessment of illegal income. This touches on aspects of which deductions can be termed as allowable deductions for purposes of taxation. The study recommends that there be classifications of deductions based on the illegal income. The very offensive illegal income may have fewer deductions or no deductions at all. Clarity on the aspect of deductions can help a lot in ensuring that the taxation is unequivocal