“Primary Society” vs. “Designated Society For Income Tax

Case Study: Invest & Grow Sacco v Commissioner of Domestic Taxes (Tax Appeal E024 of 2025) [2025] KETAT 316 (KLR) (27 November 2025) (Judgment

Background & Issues

• The KRA audited the SACCO (2018-2022) and reclassified it from a “designated primary cooperative society” (benefiting from friendlier specific tax computation under Sec. 19A(4) of the Income Tax Act – ITA) to a general “designated cooperative society” (taxed under Sec. 19A(2) ITA).
• The KRA found that the SACCO’s membership included not only individuals but also entities like community-based organizations (CBOs), churches, and schools (9 non-individual members out of ~28,111). Since the definition of a “primary society” under ITA is restricted to individual persons, the KRA argued the SACCO did not qualify for the preferential tax treatment.
• The KRA also disallowed certain business expenses claimed by the SACCO (e.g., fuel, board education, bad debts) for lack of sufficient documentation and imposed PAYE on staff allowances and withholding tax on dividends.

The SACCO appealed to the TAT after an unsuccessful objection.

SACCO’S Arguments:

• The SACCO claimed it provided all requested documents (audited accounts, ledgers, trial balances, invoices) to the KRA during the audit.
• Section 19A intent was to encourage savings and lending among individuals through SACCOs.
• Bad Debts: Argued they were deductible under Section 15(2)(a) ITA as debts proven uncollectible.
• Education & Training Expenses: Contended these were statutorily mandated for SACCOs under the Co-operative Societies Act and were integral to income production. Disallowing them was arbitrary.
• Fuel/Taxi Expenses: Maintained these were authorized, legitimate business expenses incurred wholly and exclusively for income generation.
• PAYE on Allowances: The SACCO argued that payments to staff and board were reimbursements for actual travel, training, and subsistence costs incurred on official duty, not taxable benefits.
• Withholding Tax on Dividends: As a proper primary society under Section 19A(4), the dividends it paid to members were “qualifying” and and therefore subject to 5% WHT.

KRA’s Arguments:

• Bad Debts: Claimed bad debts were disallowed because the Appellant failed to prove they had become irrecoverable as required by law.
• Education & Training Expenses: Expenses for member and board education during the COVID-19 lockdown period were questioned, as ledgers showed costs for physical meetings (hall hire, meals) when such gatherings were prohibited.
• Unreasonable/Excessive Expenses: Fuel and taxi expenses were disallowed because: They were supported by petty cash vouchers, not proper invoices., Vouchers lacked beneficiary and supplier names, The amounts were deemed excessive for the business travel described, The Appellant could not explain why it incurred both taxi and fuel expenses simultaneously.
• Capital vs. Revenue Expenditure: Costs classified as “repairs and maintenance” were deemed to be capital in nature (e.g., generator expenses) and thus not immediately deductible.
• Imposition of PAYE on Allowances:-payments to board members, top management, and staff were taxable allowances (e.g., responsibility allowance, commuter allowance) and not mere reimbursements, KRA’s review found variances between the PAYE returns (P10) and the staff costs in the Appellant’s books.

Tribunal’s Decision & Analysis:

On the Time-Barred Assessments

• The Tribunal held that assessments for 2018 (Corporation Tax) and January to May 2019 (PAYE & Withholding Tax) were statutorily time-barred.
• Reasoning: The Tax Procedures Act (TPA) generally limits the KRA’s power to amend assessments to five years from the date of the assessment (Sec. 31 TPA). The assessment was issued on 20th May 2024. Therefore, the KRA could only go back to 20th May 2019. Assessments for periods before this date were invalid, unless fraud or neglect was proven, which the KRA did not allege.

On the SACCO’s Reclassification

• The Tribunal rejected the KRA’s blanket reclassification but also rejected the SACCO’s claim of being purely a primary society.
• Key Finding: The SACCO had a mixed membership structure. Therefore, it should be treated as both a primary cooperative society AND a designated cooperative society for tax purposes

On Disallowance of Expenses

• The SACCO failed to discharge its burden of proof under Sec. 56(1) of the TPA. It did not provide adequate supporting documentation (like invoices, reconciliations) to the KRA during the audit or to the Tribunal to substantiate the claimed expenses.

On PAYE and Withholding Tax

• PAYE on Allowances: The Tribunal did not overturn the KRA’s finding on taxing allowances, implying that if allowances were benefits, they were correctly subjected to PAYE. However, the final computation was to be revisited as part of the overall precomputation.
• Withholding Tax on Dividends: The Tribunal’s ruling on mixed membership directly affects this. Dividends paid to individual members (from the primary society income) would likely remain qualifying dividends(5%). Dividends related to income from corporate members would be subject to withholding tax as “non-qualifying dividends(15%).

Final Orders of the Tribunal

• The KRA was ordered to recompute the SACCO’s tax liability by Separating income from individual members (tax under Sec. 19A(4) ITA) and corporate members (tax under Sec. 19A(2) ITA), Recomputing Corporation Tax, Withholding Tax on dividends, and PAYE accordingly.

78.Flowing from the Tribunal’s finding is that the Appellant’s income derived from primary members should be taxed at rates provided under Section 19 A (4) of the ITA whereas income derived from corporate membership should be brought to charge as provided under Section 19 A (2) of the ITA.