Kenya’s public spending plans were this month thrown into unchartered waters after a court suspended the implementation of the new Finance Act 2023.
Chief Justice Martha Koome on Tuesday set up a bench of judges to hear and determine the petition after High Court judge Mugure Thande on July 10 extended the freeze order on the Finance Act.
But what happens while the freeze order on the Finance Act remains in place? And what happens next if the Finance Act falls through the court process? The Business Daily spoke to constitutional lawyers about what all this would mean.
Why a Finance Act every year?
The Finance Act is an annual law that facilitates the collection of government revenues. Its significance is that it amends the existing tax laws.
“Every year the government wants to change some of the taxes that it is collecting. It may want to increase some taxes or even give some tax waivers. The government is always fiddling with the law so that it can either collect more revenue or give its people some savings on certain tax revenues,” Charles Kanjama, a constitutional lawyer, said.
"The Finance Act is just an act for taxation. It is not the one that gives the government power to tax. The government’s power to tax comes from the laws in place and the Finance Act only comes in to change some of the existing laws.”
What happens if the Finance Act is not passed?
Dr Muthomi Thiankolu, a scholar and constitutional lawyer, says that the only significance of the Finance Act is to amend the existing tax laws.
“It is more of a miscellaneous amendment Act, which means that if it is not passed the permanent tax laws remain in force. For example, we have the Income Tax Act, the VAT Act and the Excise Duty Act. All these laws remain in force notwithstanding the fate of the Finance Act,” says Dr Thiankolu. The government will continue collecting taxes as it did before.
Had the Finance Act been passed, various tax laws mentioned in the Act would have been amended. Parliament would have had to amend the existing laws to enable them to collect the extra revenue.
Therefore, the only setback that the government suffers with the current suspension of the Finance Act is that it will not be able to collect the extra revenue.
“The essence of the Finance Act is normally to set measures for the upcoming financial year. So it will only mean that the government may not be able to collect the extra Sh200 billion that it had hoped to collect in this financial year. The idea that government will now collapse is misplaced,” said Dr Thiankolu.
What should happen in the period the Finance Act is suspended?
It means that the process of the law coming into force has been interfered with. According to Article 116 of the Constitution of Kenya, once a Bill has been assented to by the President it should, within seven days after the assent, be published in the Kenya Gazette as an Act of Parliament.
Thereafter the Act will come into force on the 14th day after its publication unless the Act stipulates a different time.
President Ruto assented to the Finance Act on June 26, 2023. The Act was to come into force on July 1, 2023. However, the court suspended the Act on June 30, 2023.
What happens when the Chief Justice forms the Bench?
In deciding to extend the suspension of the Finance Act, Justice Thande observed that the petition raised substantial constitutional issues and that the Finance Act elicited great public interest.
She requested that the file be submitted to the Chief Justice to constitute a bench in line with her mandate under Article 165 (4) of the Constitution.
The article provides that any matter that has been certified as raising a substantial question of law be heard by an uneven number of judges appointed by the Chief Justice. It is a requirement that the number of judges should not be less than three.
“The bench will hear the dispute and render a decision that will resolve the issue one way or the other. If the bench rules that the Finance Act is unconstitutional the government will have to introduce a new Finance Bill and Appropriation Bill, of course, curing the defects that the court would have pointed out. This would take us back to the drawing board,” said Dr Thiankolu.
Mr Kanjama noted that the matter having been certified to be urgent “will be given an expedited hearing so that the decision can be made without too much delay.”
What happens with the extra taxes collected?
Despite the court suspending the Finance Act, the energy regulator, Epra, proceeded to increase fuel prices on July 1.
The Finance Act had proposed to double the VAT charged on fuel from 8.0 percent to 16 percent. In defiance of the existing freeze order, Epra proceeded to raise the price of fuel.
Currently, the price of fuel in Nairobi is as follows: petrol now costs Sh195.53 per litre, diesel goes for Sh179.67 a litre and Kerosene sells at Sh173.44 per litre.
“The legal answer is that those taxes will be refundable, the difficult part is the logistical nightmare of lodging those claims and getting the refunds,” said Dr Thiankolu.
While Mr Kanjama agrees that the extra taxes collected by Epra should be refunded, he acknowledges that it is difficult to refund consumption taxes as it is difficult to trace the consumers. The taxpayers are spread out across the country.
A source at the Parliamentary Budget Office concurred with the advocates on the effect of the existing tax laws even with the Finance Act being suspended.
“Nothing stops. Life goes on until the Finance Act comes into law. The original tax laws will still be used to collect revenue. The measures in the Finance Act were only likely to raise the country’s revenue. In the event that it gets suspended for a longer time, we will just have to either cut expenditure or increase borrowing.”
The source adds that it does not matter when the Finance Act, 2023 will come into force, next year March, the treasury will have to prepare another Finance Bill for the 2024/2025 financial year.