The Court of Appeal has rendered the Finance Act 2023 unconstitutional, null and void for failing to consider the views of the public on various sections.
The three-judge bench of Justices Kathurima M’Inoti, Agnes Murgor and John Mutivo found that Parliament failed to follow the laid out procedure of legislation by introducing new sections without conducting public participation in them.
This now means that the government could face difficulty in raising nearly Ksh.300 billion to finance the national budget.
President William Ruto’s administration has had a season of setbacks over the last one year with most of the regime’s decisions being challenged and defeated in court.
In the Finance Act of 2023 enacted in June last year, the electronic tax invoice management system E-TIMS was introduced for business persons. The law made changes to the management of Value Added Tax while raising the VAT on fuel. The law also introduced new tax bands on Pay As You Earn (PAYE). All these have now been rendered unconstitutional.
The VAT on fuel was revised from 8 to 16 per cent raising fuel prices in the country.
On the PAYE, the government introduced higher taxation for persons earning over half a million shillings per month, attracting up to 32.5 per cent of tax. For those earning above Ksh.800,000 per month, the maximum tax was raised to 35 per cent. This too has been rendered unconstitutional.
The High Court last year had declined to find the PAYE revision unconstitutional saying it was a policy matter that the court did not have jurisdiction over. The court of appeal disagreed with the High Court.
The government intended to raise up to Ksh.311 billion from the Finance Act 2023. According to the Kenya Revenue Authority, revenues rose by Ksh.241 billion in the year between July 2023 and June 2024, partly due to the Finance Act 2023.
According to the three-judge bench, there are several sections in the Act that were introduced way after public participation in the original bill. The court says they are unconstitutional, null and void, for the reason that the new sections were never subjected to fresh public participation. The court found that the new sections were enacted in total violation of the constitutionally laid down legislative path.
The court’s decision reads in part, “Accordingly, we hereby issue a declaration that the enactment of the Finance Act, 2023 violated Articles 220 – 1a and 221 of the Constitution; as read with sections of the Public Finance Management Act which prescribes the budget making process, thereby rendering the ensuing Finance Act 2023 fundamentally flawed and therefore void ab initio and consequently unconstitutional.”
The decision on the Finance Act 2023 comes hot on the heels after President Ruto withdrew the Finance Bill 2024, which parliament subsequently deleted all the clauses. That decision cost the government a projected Ksh.344 billion in revenue. The Court of Appeal’s decision on the Finance Act 2023 could lead to a further loss of revenue of up to Ksh.300 billion.
The court however declined to issue orders for tax refunds, saying it was never a question for consideration at the High Court. The judges added, that once laws have been passed by parliament, they are presumed constitutional until the moment they are found not to be by the courts.
As to the housing levy tax, the judges found that since a new law, the Affordable Housing Act of 2024 has been enacted, the provisions of the housing tax in the Finance Act 2023 were no longer an issue.
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