The Court of Appeal has declared the Finance Act 2023 unconstitutional, invalidating the entire legislative package and reinstating the tax laws as last amended by the Finance Act 2022. The ruling, delivered in Nairobi, emphasized significant procedural flaws in the enactment process, particularly the lack of adequate public participation and failure to provide reasons for accepting or rejecting public input.
The Finance Act 2023, which had introduced sweeping changes including new tax rates and the controversial Affordable Housing Levy, was struck down by a panel of judges comprising Justices M’Inoti, Murgor, and Mativo. The court found that the legislative process failed to meet constitutional standards, specifically pointing out that the public participation conducted was inadequate as Parliament did not furnish reasons for adopting or rejecting the views collected from the public.
The case, initiated by multiple respondents including civil society groups and individuals, challenged the constitutionality of the Finance Act 2023 on several grounds. One of the pivotal arguments was the inclusion of 18 new sections to the Finance Bill on the floor of the House without sufficient public engagement. The Court of Appeal concurred with the High Court’s earlier determination that these additions did not meet the constitutional threshold for public participation, thereby rendering them unconstitutional.
Furthermore, the court addressed the contentious Affordable Housing Levy, a 1.5% deduction from gross salaries matched by employers, which was introduced through an amendment to the Employment Act by the Finance Act 2023. The court ruled that while the levy itself remains valid under the Affordable Housing Act 2024, its introduction through the Finance Act lacked a comprehensive legal framework, making it unconstitutional as initially implemented. This decision reflects the judiciary’s stance on the necessity of a detailed legal framework for new tax measures, ensuring they are not discriminatory or arbitrary.
The ruling has significant implications for Kenya’s fiscal policy, as it mandates a return to the tax laws as amended by the Finance Act 2022. This reversion means the cessation of several key provisions from the 2023 Act. The VAT on petroleum products, for example, will revert to 8% from the standard rate introduced in 2023. Similarly, the higher income tax brackets of 32.5% and 35% for higher income earners, introduced by the 2023 Act, are no longer applicable. The requirement for businesses to issue eTIMS invoices for claiming deductible expenses is also rescinded.
The Court of Appeal also overturned the High Court’s ruling on the inclusion of estimates of revenue and expenditure in the Appropriation Act, reinforcing the necessity for transparent and accountable legislative practices in budget formulation. The judgment emphasized the constitutional mandate for public participation in legislative processes, stressing that the failure to document reasons for accepting or rejecting public proposals undermines this fundamental democratic principle.
Moreover, the court upheld the High Court’s decision on several other sections of the Finance Act 2023. Sections amending the Roads Act 1997 and the Unclaimed Financial Assets Act were declared unconstitutional, reinforcing the judiciary’s role in scrutinizing legislative amendments for constitutional compliance.
While the Court of Appeal declined to rule on whether the increased taxes in the Finance Act 2023 violated economic, social, and consumer rights, citing the overall unconstitutionality of the Act as rendering such a determination moot, the implications of the judgment are profound. It sets a precedent for stringent adherence to constitutional provisions in legislative processes, particularly concerning public participation and transparency.
