Executive summary

In Tumaini International Group of Schools v Kenya Revenue Authority (KRA) (No. TATC/E255/2023, decided 17 April 2025), the Tax Appeal Tribunal (TAT) held that donations a taxpayer received are not tax-exempt because the taxpayer failed to obtain the mandatory tax-exemption certificate required under Paragraph 10 of the First Schedule to the Income Tax Act (ITA). The TAT emphasized that engaging in charitable activities does not automatically entitle a taxpayer to an exemption.

The TAT found that the taxpayer did not follow the statutory exemption process and produced no exemption certificate or evidence of a KRA-approved exemption application. The taxpayer's reliance on the United States (US) donor organization's charitable status was held to have no bearing under Kenyan law. As a result, the TAT upheld the KRA's additional income tax assessments for 2018 to 2021, concluding that donor funds remain taxable unless the taxpayer holds a valid exemption certificate issued by the KRA.

Detailed discussion

Background

The taxpayer is a company limited by guarantee that operates a girls' secondary school in Masii, Machakos County and receives a significant portion of its operating funded through donations from the Tumaini International Trust, a US-based charitable organization. Following a compliance verification for 2018 to 2021, the KRA conducted a review and subsequently issued additional income tax assessments, asserting that the taxpayer had improperly declared its income as exempt without holding a valid tax-exemption certificate.

The taxpayer objected to the assessments, maintaining that it functions as a charitable educational institution, its income is primarily donor-funded and all funds were applied to educational and welfare programs for disadvantaged students. The KRA rejected the objection on the basis that the taxpayer had not produced a tax-exemption certificate as required under Paragraph 10 of the First Schedule to the ITA, prompting the taxpayer to lodge an appeal.

Issue for determination

The key issue for determination was whether the donations received from the taxpayer's donors were tax exempt.

Taxpayer's position

The taxpayer asserted that the assessments were unlawful because it operated as a charitable educational institution that funds its activities primarily through donor support and, therefore, its income qualifies for exemption under Paragraph 10 of the First Schedule to the ITA. The taxpayer further asserted that the KRA failed to consider the substantive nature of its work, including its status as a company limited by guarantee and the fact that donor funds were applied exclusively to educational and welfare programs for disadvantaged students, thereby rendering the assessments unjustified.

The taxpayer also maintained that it had submitted audited financial statements, bank records and donor schedules demonstrating that the school's operations could not run without external grants, and that the donations were not taxable income. In the taxpayer's view, the KRA disregarded this evidence and relied solely on the absence of a tax-exemption certificate, even though the taxpayer claimed that its efforts to apply for exemption were hindered by the KRA's refusal to issue a tax-compliance certificate.

KRA's position

The KRA maintained that the taxpayer was not entitled to treat donor funds as tax-exempt because tax exemption is not automatic and can only be granted upon issuance of a valid exemption certificate under Paragraph 10 of the First Schedule to the ITA. The KRA argued that the taxpayer filed self-assessment returns excluding donations from taxable income without ever obtaining an exemption certificate.

As such, the KRA explained that the taxpayer could not rely on the US donor's charitable status, as only an exemption approved by the Commissioner in Kenya is legally recognized. On this basis, the KRA asserted that the additional income tax assessments were justified and that the taxpayer had not discharged the burden of proving that the assessments were incorrect.

Court's analysis and determination

The TAT reiterated that entitlement to tax exemption under Paragraph 10 of the First Schedule to the ITA requires both substantive qualification as a charitable institution and strict compliance with the statutory process, including obtaining a formal exemption certificate from the KRA. The court held that the taxpayer failed to discharge the evidentiary burden of demonstrating compliance with this legal framework, as it did not provide proof of an approved exemption certificate or evidence that the KRA had granted an application.

Although the taxpayer provided audited accounts and documentation showing donor support, the TAT held that such materials could not override the statutory requirement for express approval by the Commissioner under paragraph 10 of the First Schedule of the ITA. Consequently, the TAT concluded that the taxpayer had not met the conditions for tax exemption and that the KRA's assessments were properly issued. The appeal was therefore dismissed and the objection decision upheld, with each party bearing its own costs.

Notable mentions

Despite the above, it is important to note that the High Court in Commissioner of Domestic Taxes v Thika Road Baptist Church Ministries (Tax Appeal E024 of 2021), now under appeal, held that tithes, freewill donations and offerings received are not taxable income, as they do not fall within the chargeable income categories listed in section 3(2) of the ITA.

In that case, the High Court first addressed the fundamental question of whether the disputed amounts constituted taxable income. Having determined that they did not fall within the statutory definition of income subject to tax, the Court found no basis to inquire into whether the Respondent required a tax-exemption certificate. Because the sums were not taxable in the first place, the question of exemption simply did not arise.

This position contrasts with the TAT's decision in Tumaini International, in which the TAT was not directed to, and therefore did not, examine whether the donor funds in question constituted taxable income under section 3(2) of the ITA. Instead, the arguments presented required the TAT to determine whether obtaining a tax-exemption certificate is a prerequisite for excluding donations from taxable income under Paragraph 10 of the First Schedule to the ITA.

Implications

This decision demonstrates that tax exemptions are not considered automatic, even if taxpayers are engaged in charitable activities. As a result, organizations with multiple sources of income should proactively secure a valid tax-exemption certificate from the KRA before classifying donor funds as nontaxable, as the taxpayer's charitable status alone does not confer exemption.