Betting tax, withholding tax: the issue of ambiguity in the law

In overruling the Tax Appeals Tribunal’s judgment, the High Court observed that betting tax is an income subject to the Income Tax Act (ITA). Its collection is by way of Withholding Tax (WHT), and KRA could issue agency notices under the Tax Procedures Act, 2015 (TPA) to collect betting tax.

The taxman’s issuance of agency notices to Sportspesa to collect betting tax was held to be within the law.

Brief Background

In a letter dated 28 June 2019, Sportspesa, made a voluntary self-disclosure of betting tax for the year 2018, of KES. 1,2 billion and made a settlement proposal with the Commissioner of Domestic Taxes (the commissioner). The taxman issued Sportspesa with withholding tax demands and agency notices for withholding tax arrears for April and May 2019 amounting to KES. 3,29 billion and 2,57 billion, respectively.

Aggrieved, Sportspesa filed Tax Appeal Nos. 304 and 305 of 2019 before the Tax Appeals Tribunal (the Tribunal) on 28 June 2019. It sought interpretation of the term winnings and for the agency notices to be set aside. In the meantime, the taxman wrote to the Betting Control and Licensing Board citing Sportpesa’s tax non-compliance and requesting non-renewal of its license. Consequently, Sportspesa paid KES. 1,9 billion pending determinations by the Tribunal of the said appeals hoping for an amicable settlement of the dispute.

On 6 November 2019, the Tribunal held that winnings did not include the stake of punters and hence set aside the taxman’s demands for withholding tax of KES. 3,29 billion and KES. 2,57 billion. Subsequently, KRA enquired on the payment status of the voluntary self-declaration for betting tax for 2018, and Sportspesa responded to KRA by requesting that it offset the KES. 1,2 billion betting tax from the KES. 1,9 billion that Sportspesa had paid earlier.

KRA declined to offset the betting tax as requested on the ground that the KES. 1,9 billion that was paid by Sportpesa was withholding tax which related to punters and not Sportspesa. Moreover, it demanded immediate payment of the betting tax of KES. 1,66 billion (i.e. the KES. 1,2 billion plus penalties and interest) by issuing agency notices. This action prompted Sportspesa to file Tax Appeal No. 402 of 2020 before the Tribunal.

The Tribunal, in its judgment dated 16 April 2021, partly allowed the appeal, and set aside KRA’s agency notices. Nonetheless, it upheld KRA’s decision to disallow set-off of betting tax against the 1,9 billion paid by Sportpesa. Both parties were aggrieved by the Tribunal’s decision causing Sportspesa to file ITA No. E079 of 2021 and Commissioner for Domestic Taxes ITA E048 of 2021 in the High Court. The appeals were consolidated by the High Court and heard concurrently.

Issue for Determination by High Court

The High Court collapsed the issues for determination as follows:

• whether KRA’s issuance of agency notices over betting tax, interests, and penalties was ultra vires; and
• whether betting tax of KES. 1,661,350,351/= could be offset from the KES. 1,900,000,000/= paid by Sportspesa to KRA.

Whether KRA’s issuance of agency notices over betting tax, interests, and penalties was ultra vires

In reference to Article 209 of the Constitution of Kenya and section 5 of KRA Act, the High Court (the court)noted that KRA has the mandate to administer and enforce assessment, collection, and account for all government revenue. The court noted the provisions of the TPA apply to all taxes unless a specified procedure unique to administration of a tax is established under a tax law.

Accordingly, the court found that no specific procedure for enforcement of betting tax had been established under the Betting Act. Judge Mabeya asserted that section 68 of the Betting Act did not provide an enforcement mechanism for collection of betting tax.

The court found that betting tax qualifies as a withholding tax and the absence of an enforcement procedure under the Betting Act means that its collection is subject to TPA. Overall, the taxman’s decision to issue agency notices to collect betting tax by issuing agency notices was, thus not ultra vires (i.e. it was within its powers).

Whether betting tax of KES. 1,661,350,351/= could be offset from the KES. 1,900,000,000/= paid by Sportspesa to KRA

On the second issue, the High Court found that the KES. 1,900,000,000/= paid by Sportspesa to KRA was not paid as withholding tax but as security for any taxes. It was paid to avoid non-renewal of Sportspesa’s betting license and to secure lifting of the agency notices pending determination of the tax dispute. Furthermore, it was undeniable that betting tax of KES. 1,661,350,351 was due from the Sportspesa’s tax declaration.

The High Court ordered KRA to set-off the KES. 1,661,350,351/= from KES. 1,900,000,000/= paid by Sportspesa as security for taxes. The court also found that Sportspesa should follow the process of applying for refund of overpaid tax under Section 47 of the TPA.

Commentary and conclusion

On the first issue, courts have stated clearly over time that the rules of interpretation of tax statutes requires that a tax statute is read and interpreted strictly. This position was captured in Republic v Kenya Revenue Authority Exparte Bata Shoe Company (Kenya) Limited [2014] eKLR where the court asserted the literal rule of interpretation to decipher the actual intention of legislature when enacting the statute. The Supreme Court in Gatirau Peter Munya v Dickson Mwenda Kithinji and 2 others [2014] eKLR pronounced that a purposive interpretation should be given to statutes to reveal the statute’s intention.

The discourse herein reveals an ambiguity in the enforcement procedure of betting tax under the Betting Act. Furthermore, it is unclear whether the Betting Act falls within the meaning of a “tax law” in the Tax Procedures Act. In Mount Kenya Bottlers v AG and 3 others [2019], the Court of Appeal stated that if there is ambiguity in a tax statute, such ambiguity must be resolved in favour of the taxpayer or as is sometimes stated; the contra fiscum rule. 

On the second issue, in the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR, the court stated that “burden of proof” is a legal term used to assign evidentiary responsibilities to parties in litigation. Tax laws provide that in any tax proceedings the burden of proof to show that the tax decision should not have been made or should have been made differently, falls on the taxpayer as there exists a presumption of correctness which attaches to KRA’s assessments or determinations of deficiency.

This presumption remains until the taxpayer produces competent and relevant evidence to support his position, afterwards the case must be decided upon the evidence presented, with the burden of proof still on the taxpayer. Once the taxpayer has made out a solid case to prove the facts, the burden then shifts to KRA to rebut the case. If it cannot provide any evidence to prove its position, the taxpayer will succeed. Therefore, the decision by the High Court to allow the set-off, was well within the law.

Indeed, collection of WHT from Sportspesa has been a bone of contention in recent years. For instance, the High Court in Commissioner of Domestic Taxes v Pevans East Africa Limited & 6 others (Tax Appeal E003 of 2019) [2022] KEHC 10392 (KLR), upheld that the Commissioner could not collect WHT from Sportspesa, and all it could was to seek the same from punters directly. The decision in that case was based on some ambiguity in the law applicable to the dispute. The same benefit of ambiguity of the law was not accorded to Sportpesa in the current case.

Albeit binding, the decision of the High Court can be challenged for failing to uphold the contra fiscum rule. Nonetheless, the 13^th Parliament should legislate to make it clear whether betting tax under the Betting Lotteries and Gaming Act falls within the ambit of the TPA and the ITA.