The income of churches is exempt from tax in Kenya. Paragraph 10 of the first schedule of the income tax Act CAP 470 laws of Kenya exempts institutions established for the advancement of religion.
Some churches run business ventures like hotels, transport, Radio stations and so on. The income derived from such trading activities is NOT EXEMPTED from taxation. However, the exempting paragraph stated above further provides that the gains or profits shall be exempted from tax if those gains or profits are applied solely to those purposes and either -:
- the business is carried on in the course of the actual execution of those purposes; or
- the work in connection with the business is mainly carried on by beneficiaries under those purposes; or
- the gains or profits consist of rents
This means that if a church ventures into business and the profits are ploughed back for its purpose which is advancement of religion, then those profits shall be exempted from tax.
To merit this exemption, the paragraph requires churches to have a tax exemption certificate valid for a period of 5 years. That requirement for a valid exemption certificate has been quashed by the High court. In a case pitting KRA Vs Thika Road Baptist church, the High court upheld the decision of the Tax Appeals tribunal which barred a tax demand from the church.
KRA made an assessment of Sh. 5.5 Million arguing that whereas Churches are exempted from income tax, this particular church did not hold a valid exemption certificate. Ruling on the case Justice Majanja held “I, therefore, find and hold that since tithes, offering and freewill donations are not income chargeable with income tax, it was not necessary for the church to seek an exemption,” The learned judge based his decision on Section 3(2) of the ITA. The taxing section does not define tithes and offerings as taxable incomes.
It should be noted that the tax exemption is on income of the church. This does not extend to other tax obligations. The church is required to register for PAYE obligation, deduct and remit tax on its employees. It is the church that is exempted from tax not its employees. The source of the income of a church shouldn’t worry the taxman, the focus should be on the destination.
For business activities run by the church, VAT and other tax obligations still apply. Equally for payment of services like legal, training and consultancy withholding tax provisions apply.
For other exempt entities e.g NGOs read Taxation Of Not For Profit Organizations In Kenya
https://taxdon.co.ke/taxation-of-not-for-profit-organizations-in-kenya/