The Kenyan business landscape has been significantly impacted by the Court of Appeal’s recent ruling declaring the Finance Act 2023 unconstitutional. This landmark decision has substantial implications for taxpayers and businesses across Kenya.
The Finance Act 2023, assented to on June 26, 2023, prompted 11 consolidated constitutional petitions filed at the High Court’s Constitutional and Human Rights Division in Nairobi. The petitions challenged the constitutionality of the Act, arguing that its passage lacked the necessary Senate concurrence and public involvement. Central to these petitions was the debate over whether the Affordable Housing Levy (AHL) was lawfully introduced through the Finance Act 2023.
The High Court’s ruling, which was subsequently upheld by the Court of Appeal, found several fundamental flaws in the legislative process leading to the Finance Act 2023. The Court of Appeal identified the following key issues:
- Lack of Public Participation: Essential amendments were made without adequate public consultation, undermining principles of transparency and accountability.
- Bypassing the Senate:The Act included provisions requiring Senate involvement, which were overlooked.
- Disregarding Budgetary Procedures: The introduction and passage of the Act did not conform to the constitutional and procedural requirements outlined in the Public. In response to the ruling, the government has appealed to the Supreme Court. However, the Supreme Court has declined to overturn the Court of Appeal’s judgment while the appeal is pending. This means the Court of Appeal’s decision remains in effect until the Supreme Court resolves the appeal.
According to a tax advisory from PricewaterCoopers (PwC) Kenya, the court’s decision necessitates a return to the pre-Finance Act 2023 tax regime, which corresponds to the Finance Act 2022. PwC Kenya’s advisory, led by Job Kabochi, Partner in charge of Indirect Taxes, emphasizes that the ruling’s immediate impact
“In the intervening period, in absence of a stay of execution, the Judgment of the CoA has the full force of law and accordingly, the the government has to revert to the pre-FA 2023 for revenue collection,” says Job Kabochi.
Rulling’s immediate impacts:
- VAT Reversals: The VAT on petroleum products and LPG reverts to 8 percent from 16 percent. Exported taxable services are now subject to 16 percent VAT, except for Business Process Outsourcing (BPO) services.
- PAYE Adjustments: PAYE tax bands return to the 2022/2023 fiscal year rates, with the highest rate set at 30 percent.
- Withholding Tax Timelines: Payment deadlines for withholding tax and VAT revert to the 20th day of the following month.
- E-TIMS Regulations: The challenges related to the e-TIMS regulations introduced by the Finance Act 2023 are now irrelevant.
- Excise Duty Changes: The annual inflation adjustment for excise duty is reversed.
It is crucial to note that while the Finance Act 2023 is suspended, the Affordable Housing Levy (AHL) continues to be applicable and payable under the separate Affordable Housing Levy Act, 2024.
While the Court of Appeal’s decision provides clarity on the current tax landscape, the situation remains fluid. The government’s appeal to the Supreme Court will ultimately determine the fate of the Finance Act 2023, leaving businesses and taxpayers in a state of anticipation.