On 31 July 2024, the Court of Appeal, in the case of National Assembly & Another v Okiya Omtatah Okoiti & 55 Others (Judgment), declared the entire Finance Act, 2023 (Finance Act) unconstitutional. A brief summary of the matter and the implications of the judgment are as follows.
THE MATTER
The case originated from 11 constitutional petitions filed at the High Court challenging the constitutionality of the provisions of the Finance Act and enactment of the Finance Act.
Determination by the High Court
On 28 November 2023, the High Court issued its judgment finding that:
- the provisions of the Finance Act introducing the affordable housing levy were unconstitutional. This was on the basis that the affordable housing levy did not have a comprehensive legal framework and was discriminatory against persons in formal employment since it excluded non-formal income earners; and
- the Statutory Instruments Act, the Kenya Roads Board Act and Unclaimed Assets Act were unconstitutional since they contained matters that do not fall within the purview of a money bill.
However, the High Court dismissed the petitions challenging the legislative process leading to the passing of the Finance Act on the basis that (a) there was sufficient public participation on the Finance Bill 2023 (Finance Bill), (b) estimates of revenue were included in the Appropriations Bill, 2023 and Appropriations Act, 2024, and (c) that the concurrence of the Senate was not required in passing of the Finance Bill.
Issues for determination at the Court of Appeal
10 appeals (including cross-appeals) were filed by the petitioners and the government at the Court challenging the High Court decision. The Court condensed the appeals before it and determined the issues for determination were as follows:
Constitutionality of the entire Finance Act
The Court held that the entire Finance Act was unconstitutional since:
- the National Assembly did not give reasons for rejecting or adopting the proposals received from the public during the public participation process; and
- since estimates of revenue were not included in the Appropriation Bill, 2023 and the Appropriation Act, 2023, the process leading to the enactment of the Appropriation Act, 2023 and the Finance Act did not comply with the constitutional requirements. The Constitution of Kenya, 2010 (the Constitution) expressly provides that the estimates of revenue and expenditure should be submitted to the National Assembly two (2) months before the end of each financial year
Constitutionality of new provisions that had not been submitted for public participation
The Court held that 18 new provisions introduced by the National Assembly to the Finance Bill after public participation were unconstitutional since they did not go through the entire legislative stages of first reading, second reading, and public participation.
Constitutionality of introduction of the Affordable Housing Levy through the Finance Act
The Court held that the issue of the constitutionality of the provisions on the affordable housing levy contained in the Finance Act were moot. The Court noted that following the High Court judgment that the provisions of the Finance Act introducing the affordable housing levy were unconstitutional, the Affordable Housing Act, 2024 had been enacted repealing the provisions of the affordable housing levy in the Finance Act. Accordingly, the government had on its own motion complied with the High Court decision by establishing a legislative framework in accordance with the High Court judgment.
Constitutionality of amendments to the Statutory Instruments Act through the Finance Act
The Court similarly held that the constitutionality of provisions of the Finance Act amending the Statutory Instruments Act were moot. The government had introduced a Statutory Instruments (Amendments) Bill, 2024 that seeks to address all the issues raised in the High Court’s determination. Accordingly, the government had on its own motion addressed the issues identified in the High Court’s determination.
Other issues determined by the Court of Appeal
The Court of Appeal further determined the following issues:
- amendments to the Unclaimed Assets Act, 2011 and Kenya Roads Board Act, 1999 introduced vide the Finance Act were unconstitutional since the changes contained matters that did not relate to a money bill;
- a finance bill, is a money bill, whose dominant feature is taxes which falls within the exclusive competence of the National Assembly and concurrence of the Senate is not required;
- the High Court erred in making a blanket statement that courts out not to intervene in all policy matters. In this regard, the Court confirmed that the High Court has jurisdiction to intervene in policy matters to test their constitutionality; and
- the prayer seeking refund of taxes collected under the unconstitutional sections of the Finance Act was denied since it was not pleaded in the constitutional petition and legislative provisions enjoy a presumption of constitutionality unless held by a court to be unconstitutional.
IMPLICATIONS OF THE DECLARATION THAT THE ENTIRE FINANCE ACT 2023 IS UNCONSTITUTIONAL
Employees
Pay as you Earn: The old rates of pay as you earn as set out in the table below would be applicable since the 32.5% rate on income above KES 3 600 000 and 35% rate on all income over KES 9 600 000 had been introduced via the Finance Act;
| Annual Incomes | Rate on each KES |
| On the first KES 288 000 | 10% |
| On the next KES 100 000 | 25% |
| On all income above KES 388 000 | 30% |
Finance Act, 2023, Pay As You Earn Bands and Tax Rates
| Annual Incomes | Rate on each KES |
| On the first KES 288 000 | 10% |
| On the next KES 100 000 | 25% |
| On the next KES 5 612 000 | 30% |
| On the next KES 3 600 000 | 32.5% |
| On all income over KES 9 600 000 | 35% |
Employee Share Ownership Schemes (ESOPs): The employment benefit from an ESOP for the previously eligible start-ups would now be taxable at date the employee exercises the option. The Finance Act had provided that taxation of the benefit from the shares allocated or issued to an employee of an eligible startup was to be deferred to be taxed within 30 days of the earlier of: (a) the expiry of five (5) years from the year of the award of the shares; (b) the disposal of the shares by the employee; or (c) the date the employee ceases to be an employee of the eligible start-up.
Value Added Tax Act
- Fuel: The supply of fuel would be subject to 8% VAT and not 16%;
- LPG: the supply of liquefied petroleum gas (LPG) (which had been zero-rated) would be subject to VAT at 8%;
- Previously zero-rated products: the supply of the following which had been zero-rated would be subject to VAT at the standard rate, which is currently 16%;
- locally assembled and manufactured mobile phones;
- motorcycles with electric motors for propulsion, electric bicycles, electric buses, solar and lithium-ion batteries; and
- the supply of exported services. However, the supply of exported services in respect of business process outsourcing would be exempt from VAT.
- Input tax deduction: The deduction of input tax would be allowed if if a person holds either the requisite documents under the VAT Act or the registered supplier has not declared the sales invoice in a return. The Finance Act had provided that both requirements must be met before an input tax deduction could be claimed.
Corporate income tax
- Permanent Establishment Corporate Income Tax Rate: The corporate income tax rate applicable to permanent establishments (such as branches) would be 37.5%. Further, there would be no repatriation tax on the repatriated profit of a permanent establishment such as a branch. The Finance Act had: (a) changed the income tax rate which is applicable to permanent establishments (such as branches) from 37.5% to 30% from the year 2024 and each subsequent year of income; and (b) introduced a 15% tax on the repatriated profit of a permanent establishment (such as a branch).
- Allowability of expenses not supported by invoices from an electronic tax invoice system: Expenditure not supported by an invoice issued through an electronic tax invoice system would now be allowable when computing the taxable income of a person. The Finance Act had provided that expenditure claimed against the income of a person should be supported by invoices generated from an electronic tax invoice system save for where the transactions have been exempted in accordance with the Tax Procedures Act. Otherwise, such expenses will not be allowable for tax purposes.
- Electronic Tax Invoice Systems by the KRA: There is no legal basis for transition to the electronic invoicing system introduced by the KRA. The Finance Act had amended section 23 of the Tax Procedures Act by adding a provision that allows the Commissioner to establish an electronic system though which electronic invoices may be issued, and records of stocks kept.
Excise duty
- Alcoholic beverage manufacturers: Excise duty by licensed manufacturers of alcoholic beverages would be payable on or before the twentieth (20th) day of the succeeding month and not within twenty-four (24) hours upon removal of the goods from the stockroom.
- Rates of Excise Duty: Excise duty would be applicable at the old rates below since the new rates had been introduced vide the Finance Act;
|
Services |
Old rate |
Finance Act rate |
|
Telephone and internet data services |
20% |
15% |
|
Money transfer services by banks, money transfer agencies and other financial service providers |
20% |
15% |
|
Money transfer services by cellular phone service providers or payment service providers licensed under the National Payment System Act, 2011 |
12% |
15% |
|
Betting |
7.5% |
12.5% |
|
Gaming |
7.5% |
12.5% |
|
Prize competition |
7.5% |
12.5% |
New taxes that had been introduced, that are now unenforceable
- Digital Asset Tax: Digital asset tax, which had been introduced to tax (through a withholding tax mechanism) income from trading in cryptocurrencies, non-fungible tokens and other digital tokens, would no longer be applicable.
- Digital content monetization: Withholding tax would not be applicable on the income earned by residents and non-resident content creators from digital content monetisation.
- Sales, promotion, marketing and advertising: Withholding tax would not be applicable on payments to a resident person for sales, promotion, marketing, and advertising services.
- Indirect capital gains tax: The previous regime where capital gains tax (CGT) only applied on direct transfers of property in Kenya would be applicable. CGT on indirect transfers of property as had been introduced in the Finance Act would not be applicable.
- Export and investment promotion levy: The export and investment promotion levy introduced on various imported products would not be applicable.
Special Operating Framework Agreements
Only companies undertaking manufacture of human vaccines engaged in business under a special operating framework with the Government and whose capital investment is at least KES 10 billion would be subject to the tax rate specified in the special operating framework arrangement with the government. These would also be the only companies eligible for:
- exemption from the import declaration fee and the railway development levy; and
- exemption from value added tax for taxable goods, inputs and raw materials imported or locally purchased by the company.
The Finance Act had expanded the scope of special operating framework agreement (and the eligible tax incentives for income tax, import declaration fee, railway development levy, and value added tax) to include companies undertaking other manufacturing activities including refining.
Tax amnesty
The taxpayers that had received an amnesty on penalties and interests would not be subject to a demand for the penalties and interests waived as a result of the tax amnesty as introduced by the Finance Act. This is on the basis that the Court held that statutes enjoy a presumption of constitutionality and therefore acts done before a statute is held to be unconstitutional are deemed to be compliant with the constitution.
Miscellaneous Fees and Levies Act
The import declaration fee (IDF) rate would be 3.5%. The Finance Act had reduced the rate of IDF from 3.5% to 2.5% of the customs value of the goods imported into the country.
The railway development levy (RDL) rate would be 2%. The Finance Act had reduced the rate of RDL from 2% to 1.5% of the customs value of the goods imported into the country.
Our comments
We note that the Court held that taxes that had been paid based on the Finance Act should not be refunded based on the presumption of constitutionality of statutes which holds that statutes are considered constitutional unless a court judgment declares them otherwise. Relying on the presumption of constitutionality we would also assume that exemptions that were enjoyed would not be clawed back.
The Supreme Court has jurisdiction as of right to hear appeals from the Court of Appeal in any case involving the interpretation or application of the Constitution and therefore leave to appeal would not be required.
Therefore, the Supreme Court may issue a stay against the Judgment allowing for continued operationalisation of the Finance Act pending hearing and determination of the appeal. If a stay order against the Judgment is not obtained, the tax laws as amended before the Finance Act would take effect and the Finance Act provisions would not be applicable.
