Motorists and high-income earners are among the biggest winners after the Court of Appeal declared the Finance Act 2023 unconstitutional.
The nullified law had introduced new taxes and raised others including doubling value-added tax (VAT) on petroleum products to 16 percent and additional raids on payslips of those earning from Sh500,000 per month. It introduced a new tax band of 32.5 percent for income of between Sh500,000 and Sh800,000. For income exceeding Sh800,000, a new top tax band of 35 percent was also introduced.
The court’s decision means that the top rate for pay-as-you-earn (PAYE) reverts to 30 percent and the VAT on fuel goes back to eight percent, marking the latest blow to President William Ruto’s revenue-raising measures.
The president had only recently bowed to pressure from youth-led protests and shelved the Finance Bill, 2024, which had sought to raise an additional Sh346 billion.
The Finance Act 2023 had also lowered some taxes—including dropping excise tax on telephone calls and data from 20 percent to 15 percent—and the net impact of its nullification is yet to be computed.
The court said the Constitution was regularly ignored in passing the law, such as the introduction of items not subjected to public participation.
“Accordingly, we hereby issue a declaration that the enactment of the Finance Act, 2023 violated Articles 220 (1) (a) and 221 of the Constitution as read with sections 37, 39A, and 40 of the PFMA which prescribe the budget-making process, thereby rendering the ensuing Finance Act 2023 fundamentally flawed and therefore void ab initio and consequently unconstitutional,” the judges declared.
The decision was issued yesterday by Justices Kathurima M’inoti, Agnes Murgor and John Mativo and came after tens of litigants, including Senator Okiya Omtatah appealed an earlier decision by the High Court that upheld parts of the Act.
It remains to be seen whether the executive will seek to salvage the Act by filing an appeal at the Supreme Court. For households and commercial transporters, the Court of Appeal’s decision looks set to lower their expenses as fuel prices drop.
The 16 percent VAT charged on fuel has accounted for more than Sh20 per litre in most pricing cycles. Resetting the tax to eight percent is expected to cut its impact by more than Sh10 per litre.
The relief would have been larger had the government not moved to raise the road maintenance levy (RML) by Sh7 to Sh25 per litre in the latest pricing review.
The RML is among the taxes and levies that account for more than a third of the price of fuel, whose cost is felt by households, power bills and manufactured goods.
The doubling of VAT on petroleum products excluded LPG or cooking gas. High-earners, on the other hand, save thousands of shillings that have been deducted since the expansion of the tax bands started in July 2023.
Their PAYE burden was exacerbated by the introduction of the Housing Levy at a rate of 1.5 percent on total income by the same Act.
The levy will however stay in place since the irregular process that led to its initial introduction was rectified by coding it earlier this year through the new Affordable Housing Act, 2024.
“Consequently, it is our considered view that the question of the declaration of unconstitutionality of Section 84 of the Act, which introduced the Affordable Housing Levy without a legal framework, Page 54 of 120, and whether the levy was discriminatory has been rendered moot by the enactment of the Affordable Housing Act, 2024,” the judges said.
Conflicting tasks
The court’s decision has piled new pressure on Dr Ruto’s administration, which is balancing conflicting tasks, including servicing a heavy debt burden and pacifying the public opposed to higher taxation.
Some of the additional debt that the current government has taken from the International Monetary Fund came with requirements to raise taxes.
Mr Omtatah said the country would now run on the provisions of the Finance Act 2022.
“All taxes that were introduced or removed by that Act (Finance Act 2023) are null and void,” he said following the judgement.
“And now that there is no Finance Act 2024, the law that now governs our taxes is the Finance Act 2022.”
