AUGUST 2024 – KENYA
FINANCE ACT 2023 DECLARED UNCONSTITUTIONAL
It is important that employers note the following:

Court of Appeal declares the entire Finance Act, 2023 unconstitutional
The Kenyan Court of Appeal ruled on 31 July 2024 that the Finance Act, 2023 is unconstitutional due to fundamental flaws in the enactment process, which breached numerous important Articles of the Kenyan Constitution.

Two factors contributed to this decision. First, during the public participation process for the Finance Bill, 2023 the National Assembly neglected to explain its decisions about accepting or rejecting public proposals. Second, both the Appropriations Act of 2023 and the Finance Act were unlawful because they lacked revenue projections in both the Appropriations Bill and the Appropriations Act of 2023.

The Finance Act, 2023, which was ratified on 26 June 2023, amended a number of tax laws, including the Value Added Tax Act, Income Tax Act, Excise Duty Act and Tax Procedures Act. It also amended a number of non-tax laws, including the Unclaimed Financial Assets Act, the Employment Act of 2007 and the Kenya Roads Board Act. 

Implications of the declaration of unconstitutionality
The following significant tax modifications, which were included in the Finance Act, 2023 and are presently in effect, could be reversed by this ruling:

• Lower the branch companies’ corporate income tax from 37.5% to 30% and impose a
  15% repatriation tax on them.
• Employees making more than 500,000 Kenyan shillings (KES 500,000) per month are
  subject to higher employment tax bands (32.5% and 35%).
• Introduction of tax exemptions given to a range of taxpayers, such as businesses
  manufacturing vaccines for humans, enterprises operating in special economic zones
  (SEZs), developers of SEZs, and individuals carrying out projects that are entirely funded
  by grants under a contract between the government and the individual.
• Expenses that are not supported by electronic invoices are not deductible (under the
  Tax Invoice Management System, also referred to as e-TIMS or TIMS).
• Exclusion of local debt from interest limitations calculations used while computing earnings before interest, taxes, depreciation and amortisation (EBITDA).
• Imposing a capital gains tax on transactions made indirectly.
• Value-added tax (VAT) on petroleum goods raised from 8% to 16%.
• Zero-rating of the 8% VAT that was previously applied on liquefied petroleum gas.
• Zero-rating of VAT on services that are chargeable but were previously excluded from VAT when they are exported.
• Clauses prohibiting the commissioner from raising some excise tax rates yearly to account for inflation.
• Modifications to the rates of excise duty tax on different goods and services.
• Import Declaration Fee dropped to 2.5% from 3.5%.
• Elimination of the clauses relating to interest and penalty forgiveness.

Please note that the Affordable Housing Levy remains unaffected by the Court of Appeal’s judgment, as it was reintroduced under the newly enacted Affordable Housing Act of 2024. Contributions to the levy will continue as they currently are.

The Court of Appeal has confirmed that actions taken under the Finance Act, 2023 remain valid until the date of their judgment, as legislative enactments are presumed valid until declared unconstitutional.

The National Treasury plans to challenge this ruling in Kenya’s Supreme Court, the highest court of appeal. Taxpayers should await further guidance from the Supreme Court before taking any action.