WHAT QUALIFIES AN ORGANIZATION TO BE GRANTED A TAX EXEMPTION STATUS? 

This case concerns an appeal by a Nairobi and Mombasa based community-based organization (CBO), against a decision made by the Kenya Revenue Authority. The CBO challenged the Commissioner’s decision to deny them income tax exemption, arguing that they qualified as an institution of public character under Kenyan tax law. 

The case also involved a detailed examination of the appellant’s financial activities. The KRA had scrutinized the CBO’s financial records and identified over 640 transactions that required explanation. The KRA argued that these transactions were not adequately explained and raised concerns about whether the CBO was using its assets and income exclusively for the public benefit, as required by law. The CBO provided brief responses to these concerns, which the KRA found insufficient.

The CBO argued that their organization was established solely for the relief of poverty, distress, or for the advancement of religion or education, all of which are considered purposes of public character. They presented evidence of their various programs, including educational initiatives, religious activities, and medical services, all of which were purportedly open to the public.

Despite the KRA’s concerns about the financial transactions, the Tax Appeals Tribunal seemed to recognize that the CBO’s use of assets and income was aligned with its objectives as an institution of public character. The Tribunal acknowledged that while there were questions about the financial transparency, the overall activities of the CBO were in service of the public good. 

Another central issue in this case was whether the Tribunal had jurisdiction to hear the appeal. The Commissioner of Domestic Taxes argued that the Tribunal lacked jurisdiction because the decision in question, dated December 15, 2023, was not an appealable decision under the Tax Procedures Act. The KRA relied on prior rulings where similar decisions were not considered appealable. 

However, the Tribunal examined the relevant legal provisions and concluded that it did have jurisdiction to hear the appeal. According to Section 12 of the Tax Appeals Tribunal Act and Section 52(1) of the Tax Procedures Act, the Tribunal is empowered to hear appeals on decisions such as the one being contested.

The Tribunal noted that the organization provided services that were accessible to the public, such as education and medical services, and engaged in religious activities that were not limited to a specific group. 

The decision to rule in favor of the CBO reflects the Tribunal’s view that it had sufficiently demonstrated its public character and that the Commissioner’s decision to deny tax exemption was not justified. 

This ruling is likely to influence how similar cases are handled in the future, particularly concerning the criteria used to assess whether an organization qualifies for tax exemption.

CPA Beatrice Njeri – Partner

Head of Tax & Accounting

beatrice@tarraagility.com
partners@tarragility.com