Court Rules Finance Act 2023 Unconstitutional: Kenya’s Tax System in Limbo
In a landmark decision, the Court of Appeal in Kenya has ruled that the Finance Act, 2023, is entirely unconstitutional. This ruling leaves the nation without a valid Finance Act to govern taxation and other financial matters, as the Finance Bill 2024 was also rejected. Consequently, Kenya may have to revert to using the Finance Bill 2022, raising concerns about how the state will manage the significant deficit outlined in the Appropriation Act 2024.
The Finance Act, 2023, was struck down due to multiple violations of the Kenyan Constitution and the Public Finance Management Act (PFMA). The Court found that the enactment process breached Articles 220(1)(a) and 221 of the Constitution, along with sections 37, 39A, and 40 of the PFMA, which are critical to the budget-making process.
Originally published on 28th April 2023 and tabled in the National Assembly on 4th May 2023, the Finance Bill, 2023, underwent public participation and subsequent amendments before being passed by the National Assembly on 23rd June 2023. It received presidential assent on 26th June 2023, amending 12 key pieces of legislation, including the Income Tax Act and the Value Added Tax Act.
However, the Act’s journey was fraught with legal challenges. Eleven constitutional petitions were filed, contesting both the legislative process and specific provisions of the Act. These petitions were consolidated and heard by a three-judge bench, which declared several sections of the Act unconstitutional.
The Court of Appeal’s decision highlighted several critical issues. It declared sections 76, 77, 78, 84, 87, 88, and 89 of the Act unconstitutional. It found that amendments introduced post-public participation violated the Constitution. Furthermore, the introduction of the Housing Levy was deemed unfair, discriminatory, and lacking a comprehensive legal framework, violating multiple constitutional provisions.
This decision has significant implications. With the Finance Act, 2023, voided, and the Finance Bill 2024 rejected, Kenya is left without a current Finance Act to guide its taxation policies. The Finance Bill 2022 may serve as a stopgap measure, but the state faces a looming deficit, creating uncertainty about how the government will address this financial gap.
For corporations and individuals, this ruling underscores the importance of seeking legal counsel to navigate the current tax regime. The absence of a clear and current Finance Act means that stakeholders must stay informed and possibly adjust their financial strategies in light of these developments.
As Kenya grapples with this judicial ruling, the focus will likely shift to how the government plans to manage its finances and address the deficit without the guidance of a valid Finance Act. The legal and financial communities will be closely watching for the next steps in this evolving situation.