Is It Legal To Levy Tax On The Proceeds Of Illegal Activities In Kenya?



Section 3 of the Income Tax, Cap 470 of the laws of Kenya (the Act), states that a tax known as income tax shall be charged for each year of income upon all income of a person whether resident or non-resident, which accrued in or was derived from Kenya. The Act provides for the charging of tax on specific types of income which include the following:[1] gains and profits from business and employment; service rendered; rent; dividend; interests; pension charge or annuity and capital gains.


The Act has, however, has not come out clearly and explicitly to state that any income earned from unlawful activities can be taxed. The inability of Kenya Revenue Authorities (KRA) to tax income form illegal activities in Kenya is therefore attributable to the partial legal gaps in the Act. This gap is described as partial because section 3(2) of the Act has included gains or income from a business or services rendered as taxable. This could allow income form businesses like drug trafficking, child trafficking or prostitution to fall within taxable incomes under section 3(2) of the Act. The fact that the Act has not differentiated between income from lawful and unlawful businesses opens the doors for possible taxation of income form such unlawful activities. In any event the purpose of both lawful and unlawful business is that they are commercial ventures which are incorporated   to make profits.


The big question is whether this was the intention of the legislature when they enacted the Act.  Did parliament intend that income from illegal activities could be taxed under section 3(12) of the Act as read with 3(1) of the Act? The High Court Kenya in Nairobi attempted to answer this questions the case of Republic versus Kenya Revenue Authority (KRA) ex-parte Yaya Towers Limited.[2] This paper shall use the decision of the court in this matter as a springboard to explore whether the Kenya Revenue Authority (KRA) has the legal right to levy tax on income earned from illegal activities




In this case, Yaya towers Limited (Yaya) entered into a consultancy contract with a firm known as Modave Technologies to offer Yaya the services of one David Saunders, who was a partner in the firm. The consultancy fees for Mr Modave was to be paid to the firm. Upon receipt of this consultancy fees from the firm paid income tax that was due therefrom. On is part KRA argued that in addition to the income tax already paid, Yaya was under an obligation to deduct and remit the Pay As You Earn (PAYE) tax from the salary of Mr. Saunders before remitting the balance thereof to Modave Technologies. Considering that this was not done KRA proceeded to assess and demand a PAYE deductions and penalties at Kshs 17,775,190.10. Yaya filed a judicial review application to challenge this administrative decision. The sub strum of its case was that the said Mr. Saunders was an immigrant who could not engage in employment with YAYA without a valid entry permit. And that considering that Mr Saunders did not have a valid entry permit, he could not have been an employee of Yaya. Yaya further submitted that it is criminal for a third party to employ an immigrant unless he has a valid entry permit that allows him to be employed.  In the present case, Mr Saunders lacked a valid entry permit and therefore any purported employment with YAYA (which is denied) is based on an illegality. And that courts should never lend its hands to KRA whose cause of action is premised upon an illegal act.


Justice Nyamu held that Mr. David Saunders was indeed an employee of Yaya and the company was therefore obliged to remit PAYE deductions to the taxman. However,   considering the fact that David was employed when he did not have a permit allowing him to engage in employment in Kenya contrary to the Kenyan law,[4] the said employment was illegal and a criminal offence.[5]  The judge concluded by stating as follows:


In the view of the court, the Respondent apparently has not acted outside its jurisdiction. However, as I have earlier stated, an illegal contract cannot form any basis for assessment of income tax as that would be against public policy. Collection of taxes arising from unlawful transactions should be discouraged particularly by the courts by refusing to aid any party regardless of any apparent bona fides. In reality, the Respondent has no jurisdiction to assess and levy tax from transactions which have been done in breach of any written law or in furtherance of an illegality under common law.


By a stroke of the pen, Justice Nyamu declared and affirmed that the government can’t levy tax on illegal activities as this would be against public policy. In affirming the position of Yaya towers not to deduct PAYE tax from the salary that was paid to him by Yaya, the judge seemed to have been persuaded by the previous case of Omega Enterprises (K) Ltd. v KTDC & Others[6] where the court had held that:


            If an act is void, then it is in law a nullity. It is not only bad, but incurably bad. There is no need for an order of the court to set it aside. It is automatically null and void without more ado, though it is sometimes convenient to have the court declare it to be so. And every proceeding which is founded on it is also bad and incurably bad. You cannot put something on nothing and expect it to stay there. It will collapse.


The KRA appealed this judgment and decree to the Court of Appeal, the main ground of its appeal was that any income obtained from unlawful activity or business enterprise should not be taxed under the Act.[7]


In its judgment the court of appeal set aside the High court judgment and all consequential orders of Justice Nyamu by stating as follows:


In contending that such an illegal business is not subject to taxation, Mr. Oyatsi for the respondent urged us to find that the remedy lies in        prosecution for an offence under Section 109 (1) (f) of the Income Tax Act. Whereas, the Income Tax provides for that alternative remedy, we think the crux of the matter in this appeal is the determination of whether an illegal trade is subject to taxation. Having come to the conclusion,        like we have done that it is indeed taxable, then the issue of alternative remedy may not be called into play, as this remedy would apply to non-compliance of payment of tax, whether from an illegal or honest trade.


The following questions emerge from this decision:

  1. a) Is the decision of the court in tandem with literal interpretation of section 3 of the Act?
  2. b) How does one deduct expenditures related to illegal activities?
  3. c) Is the taxation of illegal income in tandem with the country’s constitutional dispensation?
  4. e) Is the Act of levying tax on income earned from unlawful activities in tandem with taxation principles of fairness and equity?
  5. f) What is the international perspective on taxability of illegal activities?


  • Interpreting Section 3 of the Act.

The decision on whether to levy tax on all forms of illegal activities or not has been with us for a very long time. In fact as early as 1931, Al Capone, the most publicized fraudster of the 1920s was prosecuted, convicted and sentenced to 11 years for federal income tax evasion in the United States of America (USA).[8] This conviction, became a subject of intense debate in the Congress. The congress was of the view that convicting Al Capone to criminal of a criminal offence while allowing him to keep the proceeds earned from his unlawful activities was wrong and immoral. Consequently, in 1916 Congress passed the Revenue Act which imposed tax on the entire net income from a variety of sources including any business carried on for gain or profit.[9] For avoidance of doubt, the Supreme Court proceeded to interpret and settle meaning of the words contained in section II of the said Revenue Act in United States v Sullivan [10] when it stated that income from unlawful activities is taxable. The court, however failed to clarify whether a taxpayer can be taxed on unlawful income if he returns or is compelled to pay back the stolen asset or income. This position was nevertheless later clarified in Rutkin v United States[11] as follows:


            An unlawful gain, as well as a lawful one, constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value form it.  


The judges in the English case of Mann v Nash,[12] had similar view to their American colleagues Rutkin case when they affirmed that government which levy tax on unlawful income are not condoning crime, instead they are merely recognizing income from what appears to be trade, and that revenue laws provide that such income ought to be taxed.


Section 3 of the Act is similar to the provisions of the American Revenue Act which did not specifically state that unlawful activities are taxable. The Act provides that income tax shall be charged upon all income of a person, whether resident or non-resident, which accrued in or was derived from Kenya. The Act has not qualified the type of income which would be taxable. It, therefore, behooves on the Kenyan courts to also give an interpretation on whether income earned from unlawful activities are taxable in Kenya. My view is that interpretation of the Act as explained in the  should not be any different from the views expressed by the American and English cases supreme court  as indicated by the judges of appeal in the Yaya case.


Furthermore, the Black Laws dictionary defines an income as the return in money from one’s labour, or capital invested; gains, profits, or private revenue. The Oxford advance Learners Dictionary define it as the money that a person, a region, a country, etc. earns from work, from investing money from businesses, etc. These two definitions are largely consistent with what constitutes an income under section 3 of the Act and the Rutkins case. On the face of it, it seem that the court of appeal was right in its interpretation of section 3 of the Act.


The only caution is that such taxation could only take place if said income was accrued or derived in Kenya. If the income is accrued outside the country then the same would not be taxable irrespective of its legality. Ordinarily an income would be deemed to have accrued or derived in Kenya if the payment from that business transaction is made by a Kenyan resident or a person having a permanent establishment in the country. This view was affirmed by the courts in the case of  Motaku shipping Agencies Limited Vs Commissioner for Income Tax[13] where it was elucidated that for an income to be deemed to have accrued or been derived in Kenya, that payment must be made by a resident person or a person having a permanent establishment in the country. And that the payment must be incurred in the production of income accrued in or derived from Kenya, or in connection with a business carried on or to be carried on, in whole or in part, in Kenya.


This qualification of accrual or derivation in Kenya can easily be met by several enterprises that could be carrying out illegal activities in the country. The question that remains is whether this was the intention of the legislature in enacting the Act. And if the response is in the affirmative, then, did they provide sufficient safeguards to protect the tax system from the possible pitfalls of taxing illegal activities. For example would KRA allow a taxpayer to deduct the expenditure incurred in obtaining the unlawful income for purposes of ascertaining the total taxable income of a thief, a fraudster or a corrupt civil servant?


In conclusion, the world has today moved away from this traditional mode of interpreting statutes which favoured literal interpretation of the laws as was captured by Lord Cairns in Partington v. Attorney-General in 1869:[14]


As I understand the principle of all fiscal legislation, it is this: if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute for a very long time the courts have relied on this literalist approach in interpreting tax laws.


The world has instead embraced anew and purposive way of interpreting a tax statutes in a manner that gives effect to the intention of parliament. This is intended to insulate the courts from reading absurd judgments which are likely to reduce courts of law into a laughing stock.  It encourages the interpretation of the laws by discerning the intention of the legislature and remedying the mischief that parliament intended to cure.[15] This current method of interpreting tax statutes was discussed by the courts in in Austin v The Commonwealth[16]. Where it was stated as follows:


In earlier times it used to be said that legislation imposing taxation was subject to a strict construction, in favour of the taxpayer. However, in more recent times, this Court has departed from the narrow and literal interpretation of words appearing in legislation including that imposing         taxation in favour of an Interpretation that seeks to achieve the apparent purposes or objects of the enactments as expressed in the enactment as expressed in its terms.


Greenberg confirms that the English courts have today adopted this method of interpreting tax statutes where the court is expected to find out the intention of the taxpayer and not the narrow literal meaning in the Act.[17] Steven,[18] welcomed the new approach adopted by the courts by stating as follows:


In many ways the most dramatic change of direction during the period was    in tax law….A third of the Houses’ work was in tax law…… Yet a dramatic     change had     taken place. In the mid-fifties the accepted approach to tax            legislation was that, being in the penal nature the legislation had to be read            narrowly and unless the       actual transaction or income was ‘charged’, i.e.,             covered by the exact words of this section, taxation was not payable. By mid-  nineteen sixties the situation had changed noticeably.  ….The House had      come to read tax legislations like other legislations and while still charry of           taxing by analogy, the law Lords sought the meaning of tax provisions by looking to the whole purpose of the section or the Act, rather than at the         actual words used. 


The foregoing shows that there has been a definite transition towards the adoption of the purposive approach in interpreting fiscal legislations. This does not mean that that literal interpretation of fiscal statutes should be ignored, it is only that they ought to be negated in only in cases where literal interpretation does not bring out the true intentions of the legislature in a tax statute.


It is clear that in the Yaya case, the court opted to interpret section 3 of the Act purposively by stating that income in the present context under the Act included income realised from unlawful activities. Could this mean that the Kenyan judiciary has abandoned the old system of literal interpretation of tax statutes in favour of current best practice? The available evidence on his matter shows that courts still insist on interpreting tax statutes literally as was shown in the cases of Republic v KRA Ex-parte Bata shoes Company (Kenya ) Limited[19]and Republic v Commissioner of Domestic Taxes Large Taxpayers Office Ex-parte Barclays Bank of Kenya Ltd[20] and Republic v KRA Ex-parte Fontana Ltd .[21] in all these cases the court relied on literal interpretation of a fiscal statue as a matter of course  and without giving a reason why they opted to rely on this mode of interpretation. Perhaps this is a typical case of the judiciary making one step forward and two steps backwards in embracing the world best practice in interpretation of tax statutes. What is even more worrying is the fact that the world has changed and adopted this purposive method of interpreting tax statues for the last thirty years and yet our judiciary is still partially stuck in the wheels of cold justice which was served in the previous century.


  • Deduction of Expenses

It is a settled principle of taxation that tax can only be levied on the net income of a taxpayer. The net income can only be realised after deducting all the allowable expenses from the gross income of a taxpayer. Section 15 of the Act has outlined the amounts that can be deducted from the gross income of a person for purposes of ascertaining his taxable income. These allowable deductions are not specific on whether the gross income that may have been raised thereof emanated from lawful or unlawful activities. Furthermore, section 16 of the Act has outlined the deductions that shall not be allowed in determining a person’s taxable income. Expenses incurred in carrying out or facilitating an illegal activity have not been specifically excluded therein. This could, therefore, mean that the expenses specifically incurred in carrying out a legal or illegal activities are wholly and exclusively allowed as deductions in ascertaining the total net income of a person for tax purposes. The big question is whether, for example, it was the intention of the taxpayer that a thief who bribed a bank manager to access the codes to bank safe could be allowed to deduct this expense from his stolen bank heist in the event that the taxman demands that he must pay tax on this stolen money. Even more poignantly, can a convicted fraudster or robber be allowed to deduct the fines and penalties imposed on him by the courts from the value of his stolen money which may have been taxed by the KRA?


In my view, the issuance of blank cheque for deduction of all expenditures that are incurred in the course of carrying out an illegal trade may lead to great embarrassment to the government because the public may form the view that the state is giving a thumb of approval to criminal activities. There are, however, no cases on which the Kenyan courts have interpreted whether all expenses incurred in obtaining an unlawful income form a business enterprise can deduct the expenses incurred thereon. South Africa has a few cases dealing with the deduction of expenditure relating to illegal receipts. Kenya could use the principles laid in this cases as a springboard to determine the limit to which deductions from illegal activities can be allowed.


In COT v Rendle,[22] the Commissioner allowed the deduction of costs and legal fees incurred when an embezzler. This was allowed as the expense was seen as closely related to the business operations of the taxpayer. In ITC 952 a partner in a partnership stole  funds from the partnership and the partners attempted to deduct the stolen funds for tax purposes the court ruled out the deductions because it was not an inherent risk of the business. In ITC 1383, the taxpayer, a commercial bank, attempted to deduct an amount that was stolen by one of its senior employees. In this case the court allowed the deduction because there was a close link between the theft and the normal business activities of the company.


The Australian position is a bit different from the South African position. The Australians are of the view that deductibility of career criminal expenses should never be allowed.[23] The basis upon which this is premised is that:  the illegality severs the conduct from the business; there are public policy reasons to prevent deductibility because illegal business expense like fines are meant to punish illegal behaviour and not limit exposure to tax; and that those costs or expenses are private in nature and were not intended to be deductible from the moment when the illegal businesses were commenced.


Furthermore, a person engaged in illegal trade would face the following challenges which would impede his ability to claim for deductible expenses from his income.


  1. The fear of exposing his partners who helped him facilitate or carry out the illegal activity.
  2. The difficulty of obtaining accepted proof of expenditure like an invoice or receipt to confirm that the expenses claimed were actually incurred.
  3. The difficulty in proofing that all the expenses incurred prior to the commission of the illegal activity was an expenses exclusively intended to facilitate the successful commission of an illegal activity.
  4. The fact that most people involved in illegal trade value secrecy and they therefore don’t keep proper and ascertainable records of their expenses and even income..


Which way should Kenya go, should it adopt the liberal position DOPTED BY South Africa, or the conservative position adopted by Australia. It is hoped that the Legislature, treasury or the courts will have the chance to give the country a guidance on this matter in the not too distant future.


  • Constitutionality of Taxing Illegal Income

Kenya is a constitutional democracy. This means that the constitution of the country is the supreme law, and that any law or regulation which contradicts it is null and void to the extent of its inconsistency.[24] There seems to be a general consensus that all the proceeds of crime should be subject to taxation.[25] If this was not done, then, tax experts would immediately opine that the Act is discriminative and unfair on the hard working Kenyans who are taxed on all their income earned, while the people who commit unlawful activities are allowed to retain their entire gross income untaxed. Besides, taxing all person on all their income would be an opportunistic way that could be used by the State to fill its coffers with the much needed revenue. Some scholars have even suggested that those involved in illegal activities should be allowed to continue with their activities provided that they pay their fair share of tax.[26]


The Latin maxim ‘nemo tenetur seipsum accusare,’ which means ‘no one is bound to accuse himself’ is the source of today’s right against self-incrimination. This right is premised on the belief that if someone is to be accused of some wrongdoing, then he should not be forced or induced to provide the evidence that is required to convict him of that wrong doing.[27] This Latin maxim is intended to protect taxpayers constitution al right to a fair trial[28] and preservation of privacy from unwarranted government snooping.[29]


Section 3 of the Act should therefore be interpreted in a manner that is consistent with the constitution and also respects the taxpayer’s right not to incriminate himself or gave his right to privacy violated. It is, therefore, unconstitutional for any tax authority to rely on the self-assessment income declaration form or return of any taxpayer in prosecuting him against any crime as this would amount to self-incrimination if the government that privileged information to criminally prosecute him for commission of an illegal activity.  The KRA is hence behooved to ensure that it strikes a balance between its right to collect tax and the rights that all taxpayers have not having an tax information filed with the KRA being used against them at criminal trial for alleged self-confessed crimes like theft, robbery, frau or racketeering


The courts have affirmed that the right to privacy can only be taken away from a taxpayer for very good reasons. Indeed in Keroche Industries Limited vs Kenya Revenue Authority and 5 others[30]  the court stressed that the right to privacy is an important pillar in Kenyan’s constitutional dispensation. And that any deprivation of this fundamental right in the constitution must accompanied by sufficient procedural safeguards that ensure certainty and regularity of law. It is clear that the Act and the Treasury or the KRA have not provided any regulations attendant to the Act or the Tax Procedures Act No 29 of 2015 on how to limit this fundamental right to help KRA realise the country’s taxation goals. In fact, contrary to this constitutional right, section 58 of the Tax Procedures Act No. 29 0f 2015 provides that an authorized officer of the KRA may inquire into the affairs of a person and in the process he shall have the unbridled right and access to all lands, buildings, equipment, devices and records of such a taxpayer from whichever place. In addition, such an officer can also extract and keep such records. This means that a revenue officer while in the course of his duty can access any person’s bank account, property records at the land registry, shares held in any company, employment records and whatever information that it may require from whatever source without any reference to the affected taxpayer. The retrogressive nature and invalidity of this provision in the Act which limits the constitutional right of privacy is apparent from the followings facts:


  1. The officer is not limited in what he can do with this information by the Act.
  2. The KRA does not have to notify the taxpayer of their actions.
  3. There is no laid down procedure or guidelines that such an officer is supposed to follow while accessing such private information.
  4. The consent and guidance of the court is not required when the taxpayer is carrying out this gross abuse of privacy.
  5. It has reduced a constitutional right into a mere footnote without even providing for limitations in an Act of Parliament.


It is not in doubt that the KRA should be allowed to access records and other information about the taxpayers to ensure that everyone pays his fair share of tax. The contention of this article is that such powers of access and enforcement should be exercised within the constitutional prism to ensure that there is a balance between the rights of taxpayer and the obligations of the revenue authority. And that the provision in the Act which seem to limit a taxpayer’s right to privacy are prima facie unconstitutional. This was affirmed AIDS Law Project –Vs- the Honourable Attorney General and 2 others[31]  where it was held that any Act of parliament which offends the constitution ought to be invalid.


Secondly, both the Act and the Tax Procedures Act No. 29 0f 2015 also lacks any relevant provision which endeavour to protect the privacy of the content of any documents submitted to the KRA. This provision which compels tax authorities to keep taxpayers tax information secret is a signature provision in a fair tax statute. It is believed that while it constitutionalize the Act, it may also help the KRA increase its tax base by encouraging people to make complete and honest income disclosures to KRA with the full knowledge that such information will not be passed over to third parties or the prosecutorial authorities.[32] The courts had a similar view in a celebrated South African case of Sackstein v SARS[33] where the court stated that protection of the tax information provided by taxpayers can help a tax authority to collect more revenue from taxpayers who are willing to make full disclosure of their affairs, including possible income earned from illegal activities on the understanding that the information they have provided will not be used against them.



This right ought to be clear and explicit in law. Just like the right to privacy, this right could also be limited in a manner that shall be clearly provided in law. For example the KRA could be allowed to disclose a taxpayer’s tax information only after obtaining the consent of the taxpayer or pursuant to a court order. As presently prescribed, the Act falls short of these constitutional protections to which every taxpayer is rightfully entitled. The country should remedy this situation by finding a better balance between the constitutional rights of each taxpayer to disclose all income, irrespective of the legality or otherwise of the manner in which it is derived, as required by the Yaya case, on one hand, and the taxpayers constitutional right to privacy which protects a taxpayer from disclosing information which could lead to breach of his privacy or exposing himself to the possibility of self-incriminating.


  • Fairness, Equity and Purposive Interpretation of the Act

In his famous work The Wealth of Nations Adam Smith stated that:


The subjects of every State ought to contribute towards the support of the

Government as nearly as possible to their respective abilities that is in

Proportion to the revenue which they respectively enjoy under the protection of the State in the observance or neglect of this maxim consists what is called equality or inequality of taxation[34]


It is submitted that the failure to tax income derived from illegal activities can have far reaching implications for any country in that those involved in criminal business activities will gain a competitive edge over those engaged in lawful business practices. The result is that the people running unlawful businesses will produce products at a reduced cost, and then sell them at a lower rate than those businesses that pay their taxes. This forms the thinking of criminals generate better gains and expect such gains not be subject to tax on the grounds that they originate from illegal activities.[35] If this is allowed to continue unabated it would kill the moral of other citizens to work hard and honestly declare their wealth to KRA.


It is for this reason that most states endevour to have a fair tax system which would tax income by all citizens irrespective of the source of such incomes. If this is done then the State would be said to be ‘keeping its revenue eye open and its eye of justice closed’.[36] This could partially explain why the court of appeal opted to tax income form illegal sources to ensure that all citizens who make income from within the country are taxed on all their income indiscriminately and irrespective of its source.




This work has identified the following there countries for comparative study. The Republic of South Africa (RSA), it has been chosen because it has well developed tax law and it’s one of the foremost democracies with a robust, dynamic and pretty effective tax system which has aligned itself to the best practices in the world. The United States of America (USA), because it is the leading democracy in the world with a very advanced and effective tax code. The United Kingdom (UK), because the country was a former British colony and adopted most of its tax laws from the country.


In the RSA a taxpayer who has obtained any income through unlawful means can be bound to pay tax on such income. There are no constitutional safeguards to protect him from invoking the defence of self-discriminating within the South African Income Tax Act of 1958 as amended. And an exparte order obtained by the Commissioner for the South Africa Revenue Service could allow him to share the taxpayers’ information with third parties. And any court can direct ta the evidence so obtained from the taxpayer could be admitted and used as evidence against the taxpayer in a case against the taxpayer.[37]


In the USA the Inland Revenue Code (IRC) compels taxpayers to disclose all information regarding their income, including information regarding income that derives from illegal activities. The IRC does this by inter alia making it a misdemeanor punishable by prescribed fines and imprisonment to fail to pay tax, file a return or keep records where these actions are required by law.[38] The fifth amendment of the USA constitution however protects the taxpayer from giving any self-incriminating evidence or disclosures to the IRC. USA case law has demonstrated that the courts in that jurisdiction have been prepared to give effect to the constitutional protection afforded the taxpayers by the Fifth Amendment, in striving to struck the required balance between the duty to disclose income derived from illegal activities and the constitutional right against self-incrimination.[39]


The UK legal system also propagates for the taxation of all income including the any income earned from possible illegal activities. The courts in the UK also recognize the constitutional right of taxpayers to be protected against use of the information in their tax returns that may amount to self-incrimination.[40] The UK has thus been able to strike the balance between the duty to disclose income derived from illegal activities and the constitutional right against self-incrimination.




It has been seen from the discussion above that taxation of income from illegal activities is taking root in Kenya, notwithstanding the fact that it is tainted with illegality This article makes it clear that a taxpayer who has income derived from unlawful activities, can elect one of three possible courses of action: Firstly he can disclose the income but not state the illegal means by which it is derived; secondly he can elect not to disclose the illegal income in his tax returns; finally he can fully comply by disclosing the illegal income as well as the manner in which it is derived.


If the taxpayer choses  the first possible course of action, he would have to state false means by which the income is derived, thereby exposing himself to a possible charge of refusing or neglecting without just cause to reply or answer truly and fully to the details of the tax returns.[41] To make things worse for the taxpayer, he would then be burdened with the onus of showing the existence of a just cause for such refusal or neglect or else he shall. Secondly, if he chooses the second option he could be prosecuted for failing or neglecting to furnish, file or submit a return and, in terms of section 110 of the Income Tax Act, face a fine one hundred thousand shillings or imprisonment for a period of up to six months, or to both.  If he opts for the third alternative he faces possible self-incrimination as the information in the tax returns can, if considered relevant to the director of public prosecution constituted a serious non-tax criminal offence.


Although the constitution protects a taxpayer against giving the taxpayer any information which is self-incriminating the Act has does not extend him similar protection. In the same manner, the Act also does not protect the privacy rights of a taxpayer in these same way that the constriction extends similar rights. It therefore becomes difficult for a taxpayer to obtain the desired constitutional protections. This is perhaps attributable to the fact that the Act has not been amended to align it to the constitution.


Overcoming the challenge of taxing illegal income is never easy because most criminal don’t employ accountants to keep their books of accounts, nor do they invite auditors to audit the books of accountants. Furthermore, these taxpayers don’t keep a paper trail of their illegal transactions. On the flipside there could be the dilemma that taxpayer may face if the court orders for the restitution of the stolen loot on which tax had already been paid. Would the KRA allow such a person to recover any tax that has already been paid from the stolen loot?



This study proposes the following recommendations to the legislature, the Government of Kenya and the national treasury as a way forward in dealing with the present challenge of levying income on unlawful activities:


  1. Adopt the Australian system of not allowing deductions in relation to any illegal activity from the taxable income from unlawful activities.
  2. Align the Act to the constitution by amending the relevant provisions within the Act which can allow for protection of privacy rights and protection of the employee rights against self-incrimination. This alignment shall include the provision of prosecutorial immunity to any taxpayer who discloses the sources of his criminal income in his income tax returns. This immunity should extend to content of the details of the taxpayers tax return to ensure that they are never used by the Director of Public Prosecution in any criminal trial.
  3. The treasury, KRA or the legislature could formulate regulations which could guide the KRA on the procedures to be followed in the event that it intends to access private records of any the very least, the KRA ought to be compelled to obtain an ex parte court order before it can access such records.
  4. Tax law is dynamic and complex. The judges who are stationed at the Commercial division of the High court should be exposed to continuous training on new developments in the field of tax law.
  5. Any ill-gotten wealth should be deemed to have accrued to the criminal taxpayer. If this proposition is adopted, then, tax that has been paid by a person from an unlawful transaction would not be refundable even if the court orders for a restitution of the ill-gotten wealth. At the same time the argument by some criminals that they lack legal claim to ill-gotten income or benefit shall be forestalled.
  6. To bring certainty, equity and fairness in the taxation of income, section 3 of the Act should be amended and aligned to the decision in Yaya case so as to make it clear that all income irrespective of their source is taxable.

[1]*** Section 3(2) of the Income Tax Act, Cap 70 of the Laws of Kenya (the Act)

[2] [2008] eKLR

[3] Nairobi, Misc. civil Application No 374 of 2006 (reported [2008] eKLR

[4] Section 13(2) of the Immigration Act, Cap 172 of the Laws of Kenya.

[5] Section 13(2) (f) of the Immigration Act, Cap 172 of the Laws of Kenya

[6]Nairobi Civil Appeal No. 59 of 1993

[7] Civil Appeal No. 55 of 2009 (reported [2016] eKLR

[8] J. Kobler, Capone: the Life and World of Al Capone (1971); K. Allsop The Bootleggers and their Era (1961).

[9] Section II of the Revenue Act of 1913.

[10] 15 F. 2d 809 ( 4th circuit 1926)

[11] 343 U.S 130 (1952)

[12][1932] 1 KB 752, 16 TC 523

[13] [2014] eKLR

[14] (1869) LR 4 E. & I. App. HL 100, 122.

[15] Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355,375.

[16] (2003) 51 ATR 654.

[17] Greenberg D  Craies on legislation (2004) 8th edition, London: sweet and Maxwell pages 562-564

[18] Steven R In law and politics- the House of Lords as a Judicial Body 1800 – 1976(1979) London Weidenfield and Nicolson pp 600

[19] Nairobi JR No 36 of 2011 [2014] eKLR

[20] [2012] eKLR

[21] [2014] eKLR

[22] 26 SATC 326 1965 (1) SA 59 (SR AD).

[23] Ranjana Gupta “ Taxing Income From Unlawful Activities” Taxation of Australasian Tax Teachers Association (2008) vol. 3 No. 2

[24] Article  2(4) of the Kenyan Constitution(2010)

[25] G Goldswain ‘Illegal Activities – Taxability of its Proceeds’ (2008) 22 Tax Planning 143

[26] H Donaldson ‘Hansie and the Taxman – Funds for the Fiscus’ (2000) 14 Tax Planning 81

[27] Article  49 (1) (d) of the Constitution of Kenya(2010)

[28] Article  50 of the Constitution of Kenya(2010)

[29] Article  31of the Constitution of Kenya(2010)

[30] Nairobi HCMA No. 743 of 2006 {2007} 2 KLR 20

[31] [2015] eKLR

[32] B Croome ‘Sounds of Silence – Secrecy Provisions’ (2009) 23 Tax Planning 2;

[33] 2000 (2) SA 250 (SE) 62 SATC 206.

[34]Smith A “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) Vol. 2 Oxford University Press at 350-351, edited by Campbell RH, Skinner AS and Todd WB.

[35] O Ogunnsanwo ‘A comparative study and analysis of the taxability of illegal income in South Africa and United States of America’ (Unpublished LLM thesis, University of Pretoria 2013)

[36] Mann v Nash (H M Inspector of Taxes) [1932] 1 KB 752, 16 TC 523 at 530

[37] Section 4(1B) the South African Income Tax Act No 58 of  1962 as amended.

[38] Sec 7203 the Inland Revenue Code

[39] E.g. Garner v United States and United States v Barnes

[40] The DPP v Michael Collins, Unreported Circuit Court judgment delivered on 27 September 2007.

[41] Section 110 of the Income Tax Act, No. 470 of the Laws of Kenya.