The conundrum that taxpayers are grappling with after the lifting of conservatory orders suspending implementation of the Finance Act 2023 by the Court of Appeal is whether the new tax changes will apply as from July 1 when most provisions of the Act came into force or as from July 28 when the orders were lifted.
For context, it is important to provide some background. First, the Finance Act 2023 was gazetted on June 26, introducing a myriad of far-reaching tax changes to be effected on various dates, as from July 1, September 1 and the last of the changes to come into play on January 1, 2024.
Of importance, the new Pay as You Earn (PAYE) rates for individuals were to come into force on July 1. Additionally, the controversial affordable housing levy, which would apply a rate of 1.5 percent on employee gross pay with a matched contribution by employers, was to take effect on the same date.
Other tax changes coming into force on July 1 included the increase of VAT on petroleum products from eight percent to 16 percent, mandatory remittance of withholding and withholding VAT taxes within five working days among others.
In normal circumstances, employers and other businesses would have implemented the new taxes with effect from July 1.
However, shortly after the Finance Act 2023 was gazetted, a petition was filed by Okiya Omtatah and others (the Omtatah petition), and a few days later, the High Court granted conservatory orders barring implementation of the Finance Act 2023.
These orders were confirmed by the High Court on July 10 to apply until the Omtatah petition was heard and determined in full.
The purpose of conservatory orders is to ensure that the matter, once heard and determined in full, does not result in the decision being rendered nugatory as the issue in dispute will already have been implemented.
An applicant is also required to demonstrate that there is a prima facie case with a likelihood of success, prior to a court granting the conservatory orders.
However, in an interesting twist of events, the government appealed against the orders to the Court of Appeal, and on July 28 the same lifted the conservatory orders, opening the door for effecting of the Finance Act 2023.
The dilemma that finds Kenyan employers and businesses is what to do now. Do taxpayers take the view that the conservatory orders issued by the High Court were to be of no effect, and therefore the new taxes should have been applied as from July 1 when the Finance Act came into effect, notwithstanding the fact that the conservatory orders were in place?
Or do the taxes take effect as from July 28 when the Court of Appeal lifted the conservatory orders?
This is a particularly problematic issue now noting the fact that the KRA has indicated that it expects employers to remit the affordable housing levy which most employers did not deduct from the July 2023 payroll.
The KRA has since then on August 3 issued a statement advising taxpayers that the new PAYE rates have been implemented on iTax with effect from July 1, 2023, and the PAYE (P10) return has been enhanced to enable the administration of the Affordable Housing Levy.
The Ministry of Lands, Public Works, Housing and Urban Development also released a statement on August 2 informing the public that the affordable housing levy took effect on July 1.
The issue of the effect of conservatory orders in Kenya has been the subject of deliberation by our courts in the past.
The High Court in September 2022, in the case of Stanbic Bank Limited versus Commissioner of Domestic Taxes (the Stanbic case), held that the moment collection of excise duty has been suspended by a lawful court order, that tax could not be levied and the commissioner could not lawfully claim from the taxpayer charges, which the commissioner had been restrained from collecting.
Such action would have violated the court order, demeaned the dignity and authority of the court and interfered with the administration of justice and the rule of law.
The Stanbic case emanated from a case filed by the Kenya Bankers Association (KBA) versus Attorney-General and KRA in 2013 in which conservatory orders were issued restraining KRA from levying certain excise duties introduced by Finance Act 2013, until the determination of that petition.
The orders remained in force until April 2017 when the matter was withdrawn by consent of the parties.
The KRA then sought to collect from various banks, including Stanbic Bank, the excise duties which had not been collected from customers of Stanbic Bank for the period from 2013 to 2017.
The High Court in the Stanbic case made a number of key points. Firstly, the High Court asserted that obedience to court orders is a cardinal principle in the administration of justice and maintenance of the rule of law.
Court orders must be obeyed, and the KRA could not have expected taxpayers to have disobeyed the court orders so as to collect the taxes during the pendency of the conservatory orders.
Secondly, the High Court observed that had Stanbic Bank on a precautionary basis gone ahead to collect the excise duty when the conservatory orders were in force, such action would have amounted to an illegality and, therefore, null and void.
In other words, Stanbic Bank would have been in breach of the law for collecting a tax which at the time of the operation of the conservatory orders, was not in force or effect.
Based on the High Court’s pronouncements in the Stanbic case, an argument can be made that the impact of the conservatory orders issued by the High Court on June 30 suspending the implementation of the Finance Act is that any new taxes or tax incentives introduced by the Finance Act could not apply until such orders are lifted.
Since the conservatory orders in the Omtatah petition were lifted on July 28, the provisions of the Finance Act could, therefore, only apply from July 28 onwards.
Where such an argument is adopted, any attempt by taxpayers to collect tax or take advantage of tax incentives or lower taxes under the Finance Act during the period when the conservatory orders were in force would be unlawful, null and void.
This would be so particularly in respect to consumption and agency taxes such as excise duty and value-added tax which are collected by agents at the point of sale or supply.
The challenge, however, that exists is that the courts have not always been as clear about the impact and effect of conservatory orders.
In the case of the Association of Kenya Insurers (AKI) versus Commissioner of Domestic Taxes, determined by the High Court in July 2020, conservatory orders were granted suspending implementation of some of the provisions in the Tax Laws (Amendment) Act, 2020 relating to value added tax on insurance services.
The High Court, while giving the conservatory orders, held that the KRA should not argue that they would be prejudiced by the conservatory orders regardless of the outcome of the petition, as KRA would be able to collect any taxes due, together with interest, from the taxpayers, should the court have found that the petition was not merited, for the entire period when the conservatory orders were in place.
The views of the High Court in the AKI case seem to be contrary to the views of the High Court in the Stanbic case, as the ruling by the High Court in the AKI case suggests that the KRA could retrospectively collect taxes relating to the period in which the conservatory orders were in force.
This is of course contrary to the position of the High Court in the Stanbic case, where the High Court held that court orders had to be obeyed and, therefore, taxes could not be collected when the conservatory orders were in place.
The Stanbic case and the AKI case, both being decisions of the High Court, carry the same weight and can be relied upon by either a taxpayer or the KRA to support contrasting arguments.
We would certainly hope that the three-judge bench appointed by Chief Justice Martha Koome to decide the Omtatah case will consider both decisions and provide their own finding on the effect of conservatory orders, for posterity purposes.
Such guidance would be vital in providing the much-needed clarity for taxpayers not just in the current circumstances, but also in the future whenever conservatory orders are granted.
Meanwhile, noting that the KRA has updated iTax, on the new PAYE rates and the Affordable Housing Levy, many employers may find themselves taking a conservatory approach where they will remit the taxes for the entire month of July 2023 based on the new rates.
The writers are from the law firm of Anjarwalla & Khanna LLP
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