Senate moves to save business from county taxes wave

The Senate Tuesday declared tax measures introduced by county governments illegal, opening a window of relief for businesses and ordinary citizens who have been feeling the weight of devolution in recent months.

The Senate Finance Committee said the levies are unconstitutional because they have been enacted without consultations with the Treasury and the Commission on Revenue Allocation (CRA) as required by the law.

Article 209(5) of the Constitution says that “taxation and other revenue-raising powers of a county shall not be exercised in a way that prejudices national economic policies, economic activities across county boundaries or national mobility of goods, services, capital or labour.”

“When we drafted the (Public Finance Management) PFM Act, we looked at how to enforce Article 209(5) of the Constitution and required county governments to consult the National Treasury and CRA while imposing taxation,” said Treasury principal secretary Kamau Thugge when he appeared before the Senate committee.

That was done in Section 161 of the Public Finance Management Act that the 10th Parliament passed a year after the new Constitution came into force.

Dr Thugge told the committee that none of the counties had consulted his office before passing the punitive tax laws.

“I have a lot of misgivings about what has happened in the counties especially with regard to imposition of taxes which, if not checked will impact negatively on the macro-economic stability of the country,” Dr Thugge said.

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In a move that is expected to intensify the supremacy wars between the legislators and the governors, the Senate on Tuesday directed the Treasury and the Attorney-General to move with speed and declare the said tax measures illegal.

The committee said nullification of the new tax measures was unlikely to stall revenue raising efforts at the county level because Parliament has approved extension of the defunct Local Authorities Levies Act until the end of June.

“We have allowed the counties to use local authority rates until June 30, 2014,” said Billow Kerrow, who chairs the Senate Finance Committee. “We expect the counties to have passed new Finance Bills in line with the Constitution at the end of this period.” 

Mr Kerrow said the Senate was not opposed to counties raising additional revenue but had serious reservations about the method of execution.

Besides the failure to consult the Treasury and CRA as required by the Constitution, the Senate committee further found that county governments had failed the test of public participation in passing the new tax laws.

The Senate hearing came in the wake of growing public protests against tax measures the Kiambu, Mombasa, Murang’a, Kakamega and Bomet counties have recently introduced, including levies on staple foods such as bananas, potatoes and livestock.

County governments’ powers to impose taxes without reference to the national government are limited to property rates and entertainment taxes, the Senate said.

Dr Thugge said the Treasury was concerned by the rising wave of taxation that is unfriendly to businesses at the county level.

“On the legal perspective of the new levies that were passed without regard to the law, I am not sure how non-consultation will impact the various Finance Bills,” the PS said. 

“After this meeting, I will consult the AG and issue the necessary directives,” he said.

The Senate committee expressed concern that many of taxes that the county governments are imposing could negatively affect the economy.

“To move goods from one county to another now has serious restrictions in terms of levies. This increases the cost of doing business and discourages investment,” Mr Kerrow said.

Kakamega Senator Boni Khalwale criticised the Treasury for failing to stop the implementation of the County Finance Bills that are prejudicing national economic policies contrary to the constitutional requirements.

New levies

“Now that you say the new levies were imposed without Treasury’s involvement, why can’t the national government suspend the taxes until they are in line with national economic policies?” Dr Khalawle asked.

Kisumu Senator Anyang’ Nyong’o said whereas suspension of the levies and taxes will present a challenge to county governments in terms of refunds, there was need for the Treasury to standardise them.

Prof Nyong’o said the fact that M-Pesa kiosks in Nairobi are being charged Sh5,000 levy per year while Busia charged the same outlets Sh15,000 bordered on the absurd.

“Certain counties have increased land rates by up to 400 per cent. Charges levied on architects for approving housing plans are up 800 times,” he said.

In Nairobi, the Architectural Association of Kenya has approached the county government with a proposal on land and property taxes whose fate is yet unknown.