The decision by the Court of Appeal to void the Finance Act 2023 has left the government with a Sh510 billion hole in its budget for the current fiscal year while also exposing the true level of the Kenya Kwanza administration tax increments that sparked widespread protests.
The National Treasury yesterday filed a notice of appeal at the Supreme Court against Wednesday’s Appellate court decision, saying it stands to lose Sh164 billion in revenue if the provisions of the Finance Act 2023 are removed from the country’s tax laws.
This will be in addition to the Sh346 billion in new tax revenue that the government has lost after the Finance Bill 2024 was deleted due to pressure from protesters, forcing the Treasury to publish expenditure cuts and raise borrowing targets in a Supplementary Budget that is under debate in Parliament.
The National Assembly’s Majority Leader Kimani Ichung’wah, who is also Kikuyu MP, told the House on Wednesday that there would likely be further budget cuts on account of the court ruling, highlighting the Treasury’s limited fiscal wriggle room without the tax increases.
“With the court judgment today nullifying the Finance Act 2023…it is also likely that we will be here again for further cuts, because the Government of Kenya has no other way of generating revenue other than through taxation,” said the MP.
The Finance Act 2023 had increased a number of taxes, most notably doubling the VAT on fuel from eight percent to 16 percent and raided the payslips of top earners with two new tax bands of 32.5 percent and 35 percent applied on income above Sh500,000 per month.
The reversal of the fuel VAT is likely to have the biggest impact on consumer pockets due to the transport factor in the cost of goods, and also on energy bills. It will also ease the pain caused by the recent increase in road maintenance levy from Sh18 to Sh25 per litre of petrol and diesel.
The Finance Act 2023 also introduced a 1.5 percent Housing Levy, but this will stay in place as the irregular process that initially introduced it was remedied by the enactment of the Affordable Housing Act earlier this year.
All the other clauses in the 2023 Finance Act have been voided by the court ruling that the Constitution was regularly ignored in passing the law, particularly in the introduction of items that were not subjected to public participation.
The Finance Act 2023 helped the government raise its tax collection by 9.5 percent or Sh193 billion to Sh2.223 trillion in the just ended 2023-24 fiscal year, as per filings made by the Kenya Revenue Authority (KRA) last month.
The collected taxes, however, fell short of the target of Sh2.32 trillion by 4.2 percent, indicating that the economy had difficulties coping with the higher taxes amid tough macroeconomic conditions for businesses and households in the period.
“The year under review was characterised by multiple economic shocks that included depreciation of the shilling against the dollar, rising bank lending rates and international conflicts that disrupted supply chains, among others. These factors affected revenue mobilisation efforts,” the KRA said on July 8 in its revenue performance statement.
The KRA’s total revenue collection —which incorporates taxes, ministerial appropriations-in-aid (AiA) and other levies—stood at Sh2.407 trillion, falling short of the target of Sh2.52 trillion. The revenue was, however, 11.1 percent higher compared to the Sh2.166 trillion collected in 2022-2023.
The Court of Appeal ruling, therefore, raises the risk of revenue underperformance deepening in the current fiscal year.
There are, however, some taxes that will go up as a result of the reversal of the 2023 clauses, hitting taxpayers who enjoyed a reprieve over the 2023-24 period.
These include a return to a 20 percent excise rate on mobile data and airtime, and on bank cash transfer charges, which had been cut to 15 percent in the 2023 finance law.
Landlords will also see their monthly rental tax go back to a rate of 10 percent from 7.5 percent, while the VAT relief on cooking gas that was introduced via the Act will also be reversed.
Other items going back to a standard VAT rate from zero rated following the voiding of the 2023 Act include electric motorcycles, locally assembled mobile phones, electric buses, and animal feed manufacturing inputs.
The Finance Act 2023 had also removed the annual inflation adjustment on specific excise duties (those levied as a fixed amount on an item rather than a percentage of the value), meaning at its voiding gives the KRA a free hand to start making the adjustment afresh.
The Railway Development Levy (RDL), meanwhile, reverts to 2.5 percent from 1.5 percent, while the Import Declaration Fee (IDF) goes back to 3.5 percent from 2.5 percent. The rates had been cut by a percentage point each in the 2023 law.
The deleted Finance Bill 2024 had sought to reverse the 2023 cuts on the RDL and IDF, with the Treasury arguing that it needed the extra RDL funds to fund construction of an electric rail system in Nairobi.
