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Kenya Revenue Authority (KRA) has lost more than Sh2 billion— enough to finance the Ministry of Livestock for a whole year — after its lawyer failed to attend a court hearing. The taxman had demanded that mobile telephone operator, Celtel Kenya, pays the money in income tax on equipment that the company had bought while it set up its business in Kenya.

Justice Onesmus Mutungi’s decision to terminate the case that was expected to define how KRA should tax new entrants into the telecommunications industry means that the taxman is headed back to the drawing board.

The case, was filed in 2003 after KRA and Celtel’s predecessor, KenCell, disagreed on taxation of the licence premium that the mobile phone operator paid to the market regulator, the Communications Commission of Kenya (CCK).

KRA had claimed that the payment made for acquisition of the licence was capital in nature — having been a one-off payment made to secure an advantage of an enduring nature in the Kenyan telecoms market.

But KenCell had maintained that the payment worth $55 million (Sh3.96 billion) was revenue in nature and that only the $4.5 million (Sh324 million) it paid in lease premium to Nandlal and Company Limited was taxable.

The company’s position was supported by a local committee of tax experts appointed to look into the case, but KRA insisted that the 15 years fee was an expense that qualified to be taxed to the tune of Sh2.6 billion.

It was on this basis that the Commissioner of Income Tax filed an appeal against the committee’s decision. KRA maintained that the committee was wrong in finding that a one off payment for a 15-year licence was revenue expenditure deductible — and therefore non-taxable.

The taxman also held that the committee was wrong in failing to understand that the fee was for the purchase of the right to access the Kenya telecommunication market through allocation of a GSM spectrum or a band equivalent to the purchase of a right.

When the case was taken before Justice Mutungi, the court was asked to determine whether KenCell should be allowed to deduct money against any losses it made in the course of business. This would be the case if the fee was considered as revenue expenditure. Classifying the fee as being capital in nature would on the other hand make it taxable.

Earlier, KRA had disagreed with KenCell’s claim that it had returned a loss of Sh2.17 billion for the year2001 revising the figure upwards to Sh2.6 billion. The taxman argued that the law does not recognise costs incurred in acquisition of an intangible asset used wholly and exclusively in the production of a taxpayer’s income as tax deductible.

By acquiring rights to operate in the Kenyan telecoms market, the taxman argued, KenCell had acquired a capital item that it would use to earn income over a long period of time.

In response, Celtel, then trading as KenCell, declared the suit defective on grounds that the memorandum of appeal and statement of facts were not served upon Celtel as stipulated in the Income Tax rules.

Celtel further argued that the licence obtained by payment of the fee was for a mere 15 years and neither the terms of the licence nor the provisions of the applicable legislation afforded Celtel an automatic right to renewal of the license upon expiry of the period.

By March 2005, Celtel’s investment in Kenya was estimated to have been worth Sh21 billion raising the expectation that the company would continue with its business beyond the initial 15-year period.

Celtel argued that in the absence of a legal prohibition against charging of a renewal fee or of a fee for the issue of a second licence, there was no justification for KRA to claim that the initial fee was a one-off payment.

“The licence once awarded could be assigned, delegated, transferred or encumbered with the prior consent of the CCK, erroneously impling that its value is typical of capital assets” argued Celtels lawyer Nazlim Malik.

The appeal was to be heard on September 29, 2005, but the hearing was later moved to December 5, 2005 and subsequently to March 14, 2005 before it terminated on March 15, 2006.

In terminating the case, Justice Mutungi observed that Times Towers (KRA’s head office) is a walking distance from the High Court and the lawyer could therefore not use the excuse of failing to get a car to transport him to court.