The National Treasury building in Nairobi. County government workers are grappling with delayed salaries triggered by the National Treasury's late disbursement of monthly dues to counties.
A parliamentary committee wants the National Treasury officials investigated and charged for enabling a local company to evade Sh2.31 billion in taxes.
The Delegated Legislation Committee of the National Assembly says the officials unlawfully granted a Special Operating Framework Agreement (Sofa) to Blue Nile Rolling Mills Limited.
The deal saw the government lose over two billion shillings in tax exemptions between January 21, 2020, and July 2024.
The committee chaired by Ainabkoi MP Samuel Chepkong’a relied on the data from the Kenya Revenue Authority (KRA) as it put the Cabinet Secretaries for the National Treasury and Trade on the sword for their responsibility in approving the exemptions and signing the agreement.
The committee made its findings after undertaking investigations on the circumstances under which Blue Nile was granted Sofa agreement but did not make its position clear on how the lost amounts should be recovered.
This as it emerged that from August 2024 to the end of the agreement in 2030, the State will lose at least Sh4.82 billion depending on the company’s continued operation in Kenya.
While extending the tax remission to Blue Nile Rolling Mill Limited, the government committed to absorbing any adverse taxation changes, effectively pushing punitive tax burden to the already overtaxed Kenyans for the duration of the agreement.
This even as it warned that should the Sofa agreement, granted under the East African Community (EAC), operate its unexpired term, the government risks losing Sh7.13 billion, enough to construct the required infrastructure for the Junior Secondary School (JSS) students.
General principles
In a report before the National Assembly, the committee reveals that the agreement did not comply with the general principles of a standard contract or agreement “in respect to the signatures appended and the dates reflected therein.”
“The committee established that the exemption under the EAC duty remission scheme were granted despite lack of demonstration of any application for the same which is a clear indication that the exemption was unprocedurally and unlawfully granted,” the committee’s report established.
The committee noted that the granting of Sofa to Blue Nile was to the disadvantage of other industry players contrary to the Competition Act on unfair trade practices.
Blue Nile Rolling Mills deals in the manufacture of galvanising wire or steel production.
The committee made its observations on issues that related to unconstitutionality, non-conformity with relevant laws, and noncompliance with the principles of a standard contract or agreement.
“The committee having observed that the SOFA agreement was nullity ab initio, Blue Nile Rolling Mill limited ought not to benefit from the tax exemptions,” the report reads.
“There is no proof that the company applied or requested to be exempted from duty remission under the EAC duty remission scheme.”
A circular of October 18, 2021 by the National Treasury issued the guidelines for the granting of tax exemptions that were relied upon in the unlawful deal, which the committee established to be a statutory instrument.
However, the committee observed that although the guidelines is a statutory instrument, it was not laid before the National Assembly in line with the Statutory Instruments Act for scrutiny and approval.
This even as it noted that the circular ceased to have effect upon expiry of seven days from the date of issuance as provided for in the law.
“The Sofa agreement was a statutory instrument which ought to have been submitted to the National Assembly for tabling and consideration as required under the Statutory Instruments Act,” the report says.
The report further shows that from January 21, 2020 to July 2024, the government lost Sh1.2 billion in Value Added Tax (VAT), Sh120.7 million in Import Declaration Fee (IDF) and Sh49.93 million in Railway Development Levy (RDL).
The import duty lost during the period is Sh925.9 million broken down as Sh98 million in 2022, Sh505.21 million in 2023 and Sh322.7 million in 2024.
The tax exemptions granted to the Blue Nile Rolling Mills limited include reduced corporate tax rate of 10 percent for the first five years, which is expected to expire in December 2024, VAT exemptions on inputs used for the project and exemptions from IDF and RDL.
The committee notes that Article 7 of the “purported” Sofa arrangement on confidentiality “is unconstitutional to the extent that it” infringes on Article 35 of the constitution on access to information “as the same excludes non-parties to gain access to the information contained therein.”
“Article 201 (a) of the Constitution which requires openness, accountability including public participation in matters relating to public finance, which principles the parties did not adhere to in the execution of the agreement,” the committee says.
The committee also revealed that Sofa violates Article 95 (4) (C) of the constitution that provides for the oversight role of the National Assembly over national revenue and its expenditure.
“The committee observed that the failure by the relevant ministries to involve the National Assembly at any stages of the process followed in exempting the Blue Nile Rolling Mills limited from tax remission, denied the House of the performance of its oversight role.”
The MPs also observed that Article 210 (2) of the Constitution which requires maintaining of public records of tax waiver and report of the waiver to the auditor-general with reasons, was not demonstrated in the documentation from the National Treasury.
“The whole architecture of the purported agreement contravenes the provisions of Articles 10 (2) (c) and 118 of the constitution which require good governance, integrity, transparency and accountability,” the report says.
It was also established that the SOFA agreement does not conform with the Income Tax Act.
The law allows the Cabinet Secretary for National Treasury to exempt any income or class of income which accrued or derived from Kenya from taxation by publishing a gazette notice and submitting it to the National Assembly “without unreasonable delay.”
“The committee observed that these requirements were not followed, since the CS neither published the notice in the gazette nor submitted it for laying in and approval by the National Assembly.”
Another gap in the Sofa agreement is that it violates the Law of Contract in relation to the signature and affixing of common seal.
The committee detected the fact that Sofa contained three signatures by parties but on different dates at different places, implying that not all the parties were present at the signing contrary to the Law of Contract.
