The Finance Act 2023 was signed into law on June 26, 2023. This action led to 11 constitutional petitions being filed in the High Court, which were combined into Petition Number E181 of 2023: Okiya Omtatah and Others vs. the Cabinet Secretary for the National Treasury and Planning and Others.

The petitions mainly challenged the legislative process followed to enact the Finance Act 2023, and the constitutionality of some of its provisions. On September 13, 2023, a panel of three High Court judges (Justices Majanja, Meoli, and Mugambi) reviewed the case based on the submitted evidence and arguments. On November 28, 2023, the judges delivered their verdict, stating that:

• The introduction of the housing levy through an amendment to the Employment Act by Section 84 of the Finance Act, 2023, lacks a comprehensive legal framework and violates Articles 10, 201, 206, and 210 of the Constitution.
• Imposing the housing levy only on people in formal employment, while excluding those with informal income, to support the national housing policy is unjustified, unfair, discriminatory, irrational, and arbitrary, violating Articles 27 and 201(b) of the Constitution.

The Court of Appeal Petition

Following the High Court’s decision, 11 appeals were filed in the Court of Appeal. The Court summarised the key issues raised by the Petitioners as follows:

1. Constitutionality of the Affordable Housing Levy

The Court noted that the issue of the affordable housing levy’s constitutionality was rendered irrelevant (moot) by the enactment of the Affordable Housing Act, 2024, which was signed into law on March 19, 2024, and took effect on March 22, 2024. The Court explained that the doctrine of mootness applies when subsequent events resolve the controversy, making further adjudication unnecessary. The Court concluded that the new legislation addressed the concerns regarding the affordable housing levy, rendering the issue irrelevant (moot).

2. Inclusion of New Provisions Post-Public Participation

The Court found that adding 18 new provisions to the Finance Act 2023, after public participation, which were not part of the original Finance Bill 2023, violated constitutional requirements. The Court stated that these amendments bypassed the established legislative process and public participation requirements, violating Articles 118 and 10(2) of the Constitution. Consequently, the new provisions were declared unconstitutional, procedurally flawed, null, and void.

3. Sufficiency of Public Participation and Parliamentary Accountability

The Court emphasised that public participation is a fundamental aspect of democratic governance and not merely a formality. It stated that the Constitution mandates meaningful engagement in legislative processes, including providing reasons for adopting or rejecting public input. The Court stressed that transparency and accountability require Parliament to explain why certain views were accepted or rejected during the legislative process.

Determination

In light of the reasons provided above, On July 13, 2024, a panel of three Court of Appeal judges (Justices M’inoti, Murgor, and Mativo) delivered their judgment stating that:

1. The Finance Act 2023, which introduced provisions post-public participation, was unconstitutional, null, and void.
2. The Court refused the request for a refund of taxes collected on the grounds that:

• It was not included in the initial Petition before the High Court, making it improperly before the Court of Appeal.
• Legislative enactments are presumed constitutional until declared otherwise, as per Article 165(3) of the Constitution.

3. The Finance Act, 2023 violated Articles 220(1)(a) and 221 of the Constitution, as well as sections 37, 39A, and 40 of the Public Finance Management Act (PFMA) relating to the budget-making process. This rendered the Finance Act 2023 fundamentally flawed and void ab initio, and therefore unconstitutional.
4. The process leading to the enactment of the Finance Act 2023 was fundamentally flawed and in violation of the Constitution. Consequently, the entire Finance Act 2023 was declared unconstitutional, null, and void.

Key Implications Explained

The rejection of the Finance Act, 2023 by the Court of Appeal, has significant implications for individuals, businesses, and the Government. While this provides relief to individuals and businesses, it negatively impacts the Government’s ability to finance its budget due to the loss of revenue measures introduced by the Finance Act 2023.

Key Areas Affected by the Rejection of the Finance Act, 2023

1. Housing Levy

The High Court ruled that Section 84 of the Finance Act, which introduced the housing levy, was unconstitutional. The Court of Appeal did not address this issue because a new law, the Affordable Housing Act 2024, came into effect in March 2024, making the issue irrelevant (moot).

It is important to underscore that the housing levy remains valid under the new Affordable Housing Act. However, in April 2024, a petition was filed challenging this new law. There’s a good chance it will also be nullified because:

• The Affordable Housing Act was enacted following the High Court’s finding that the housing levy under the Finance Act 2023, lacked a comprehensive regulatory framework. Since the Court of Appeal rejected the Finance Act 2023, the new law is on shaky ground.
• The Affordable Housing Act might fail due to inadequate public participation, which is essential for legislative processes.
• The High Court found the housing levy unfair for leaving out informal workers. The new law tries to fix this but doesn’t clearly explain how informal workers should contribute, so this problem remains unsolved.

2. Pay As You Earn (PAYE)

The Finance Act 2023 increased tax rates from a maximum of 30% to 32.5% for employees earning between KES 500,000 and 800,000, and to 35% for salaries above KES 800,000. With the annulment of the Act, these tax rates will revert to the previous maximum of 30%, providing relief to affected employees.

3. Value Added Tax (VAT)

The Finance Act 2023 doubled the VAT on fuel, raising prices and the cost of living. Now, the VAT will go back to 8%, lowering fuel prices.

The Act also removed VAT on LPG gas, making it cheaper. The nullification will bring back the 8% VAT, increasing LPG prices.

4. Electronic Tax Invoice Management System (eTIMS)

The Finance Act 2023, introduced the eTIMS, requiring all businesses to onboard the platform and generate invoices through it. With the nullification of the Act, this requirement is no longer in effect. However, VAT-registered taxpayers are still required to use Electronic Tax Registers (ETRs) as per the Value Added Tax (Electronic Tax Invoice) Regulations, 2020, and the Value Added Tax Act, 2013.

5. Excise Duty on Imports

The Finance Act 2023 introduced new taxes on certain imports to support local industries:

• 10% on imported fish.
• KES 5/kg on imported sugar.
• 10% on imported cement.
• 30% on imported furniture.
• 10% on imported cell phones.
• 15% on imported paints and varnishes.

The Act also reduced the import declaration fee from 3.5% to 2.5% and the railway development levy from 2% to 1.5%. These changes were beneficial to the economy and consumers. However, with the nullification of the Act, the changes will revert to their original status.

Conclusion and What Lies Ahead

As of the time this Legal Alert was prepared, no appeal had been filed at the Supreme Court. The rejection of the Finance Act 2023, significantly impacts the Government’s budget. Thus, it is likely that the Government will file an appeal at the Supreme Court.

It is important to note that the implications described above will remain in effect if no appeal is filed or if the Supreme Court does not stay the implementations after an appeal is filed. We’ll keep an eye on the situation and update you with any new information.

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The information provided in this Legal Alert is for general informational purposes only and does not constitute legal advice. For guidance or inquiries regarding the Court of Appeal Judgment on The Finance Act 2023, contact us via email at info@dmklaws.co.ke and dmklaws@gmail.com or call +254 111 888 681.