In Detail: Implications of the Court of Appeal Decision of the Finance Act, 2023 on the Country’s Fiscal Policy Approach.
The Court of Appeal this week pronounced itself on the constitutionality of the Finance Act, 2023, which was passed and assented to despite numerous concerns from various stakeholders, including the public. At the core of the resentment against the Act was the introduction of contentious revenue-raising measures, such as the Affordable Housing Levy.
These controversies would culminate into a protracted legal process that saw the High Court render specific sections of the Act unconstitutional while allowing others. Enjoying the benefits of stay orders issued by the High Court and affirmed by the Court of Appeal, the Act has been operational until the final nail on its coffin was hit by the three-judge bench at the Court of Appeal yesterday.
The pronouncement is a profound one considering the situation the country currently finds itself in. The uproar around the Finance Bill, 2024, subsequently leading to its withdrawal, meant the country solely relied on the provisions of the Finance Act, 2023 to support its budgetary needs. Suffice it to say that the recently approved Supplementary Budget for FY 24/25 was anchored on the now-defunct Finance Act, 2023.
Developing story: Supreme battle at the apex court
New developments are that the National Treasury has since moved to the Supreme Court to challenge the nullification of Finance Act, 2023. The National Treasury contends that the decision by the Court of Appeal is untenable and presents a challenge in running the affairs of the government if upheld.
It is further the contention of the National Treasury that the Court of Appeal judgement will result in budgetary deficits, particularly eroding the KSh. 164 billion worth of revenue already factored in the 2024/25 budgetary allocation. Considering that, outrightly, the matter is of public interest and importance, the Supreme Court will consider it a priority.
Implications of the Court of Appeal decision
What does the declaration by the Court of Appeal imply? As a precursor, the Court of Appeal made three salient declarations:
- The failure to adhere to or comply with the constitutional principles, including public participation, renders the entire Finance Act, 2023 unconstitutional.
- The procedures laid in law around the budget-making process, as outlined in the Constitution, were not followed, rendering the ensuing Finance Act, 2023 unconstitutional and invalid.
- This being a matter of public interest, no orders as to costs are issued.
It cannot be reiterated enough that the decision by the Court of Appeal presents a dicey constitutional situation. This is an unprecedented situation that both the Constitution, 2010, and the Public Finance Management Act, 2012, did not anticipate.
Ordinarily, the revenue-raising mechanism has been greatly impacted as the withdrawal of the Finance Bill, 2024, created a situation in which the Finance Act, 2023 was the anchoring revenue-raising mechanism. That being the case, it is important to highlight that there is no lacuna, as the taxman will revert to the principal acts, including the Excise Duty Act and Income Tax Act, among others, to raise revenue.
Recap: The Finance Act, 2023
The nullification of the Finance Act, 2023 does away with some of the core provisions as outlined in the table below. However, keen to note is that the Affordable Housing Levy will not be affected as there is already a stand-alone legislation, the Affordable Housing Act, 2024, which was assented to in March 2024.
| Finance Act, 2023 Provisions | Implication of Nullification |
| Introduced an increase in VAT on petroleum products (excluding LPG gas) from 8% to 16%. | This will now revert to the rate of 8%, as provided for in the VAT Act. |
| Introduced new PAYE tax bands, particularly the new tax band of 32.5% for income between KSh. 500,000 and KSh. 800,000, and 35% for income exceeding KSh. 800,000. | This reverts to the original position under the Income Tax Act. |
| Lowered the upper threshold for turnover tax to KSh. 25 million from the previous KSh. 50 million, and the rate increased to 3% from the previous 1%. | This reverts to the original position of having the upper threshold for turnover tax to KSh. 50 million, and rate to 1%. |
| Proposed amendments to Section 16 of the Income Tax Act – an electronic tax invoicing management system (eTIMS) requirement, which demanded that any expenditure should not be deductible if the invoices of the transactions are not generated from this system. This made eTIMS invoicing mandatory. | The decision implies that there will be no mandatory e-TIMS invoicing. |
Conclusion
There are indicators that the government will potentially work towards a new Finance Bill, 2024 to find a proper anchor for the country’s budgetary and fiscal needs for FY 24/25.
The appeal lodged by the National Treasury at the Supreme Court will, at the preliminary level, consider an application to stay the ruling of the Court of Appeal to maintain the status quo. This would be a reprieve, nonetheless, as parties canvass the constitutionality of the entire Finance Act, 2023.
Perhaps the question – from a policy perspective – is: can policymakers attempt to get things right, at the very least, to avoid the dicey situation the nation finds itself in? Time does speak loud enough, and it will tell.