President Ruto had to withdraw the controversial Finance Bill 2024 after deadly protests across Kenya. The bill had proposed significant tax hikes, including motor vehicle taxes and eco levy taxes. The protests, led by the Kenyan youth popularly known as Gen-Z, turned violent and resulted in at least several deaths. Protesters breached the parliament building, setting parts of it ablaze. Police used live ammunition and truncheons on demonstrators, drawing criticism from human rights groups and the attention of the international community. In a televised address, President Ruto acknowledged the strong opposition from Kenyans and said he would not sign the bill into law. He pledged to engage in dialogue with the youth and implement austerity measures, starting with cuts to the presidency’s budget. The government had sought to raise $2.7 billion in additional taxes through the bill to reduce the budget deficit and public debt, which stood at 68% of GDP. However, the tax measures were seen as exacerbating the country’s cost-of-living challenges. With the withdrawal of the Finance Bill 2024, Kenya continued operating under the Finance Act 2023.
Shortly after we had reverted to the Finance Act 2023, the Court of Appeal’s ruling declaring the Finance Act of 2023 unconstitutional marks a yet another significant setback for President Ruto’s administration. The judges found that the enactment process was fundamentally flawed, primarily due to the lack of public participation, which is a constitutional requirement for such legislation. The court specifically noted that 18 provisions of the Act were introduced without undergoing the necessary legislative stages, including the First and Second Readings, rendering the entire Act void ab initio (invalid from the outset). This ruling underscores the importance of adhering to constitutional procedures in the legislative process, emphasizing that such failures undermine the integrity of governance. The implications of this ruling are profound, as it not only affects the government’s fiscal policies but also reflects a growing public discontent with tax increases and economic management under Ruto’s leadership and in the overall putting the entire country in a very precarious situation.
Notably, the court addressed the controversial Housing Levy, which had previously been declared unconstitutional by the High Court, but opted not to revisit this issue, declaring it moot due to the enactment of the Affordable Housing Act, 2024. The government now faces the option of appealing this decision to the Supreme Court. Indeed, on 1st August 2024, The National Treasury filed an appeal at the Supreme Court against the Court of Appeal’s decision. The Court of Appeal decision declaring the Finance Act of 2023 unconstitutional has sent shockwaves through Kenya’s political and economic landscape. As the government, private sector, taxpayers, and citizens grapple to internalize the ruling, it’s time to reflect on the implications of this decision.
The implications to the Taxpayer
With the Affordable Housing Levy now in effect, it’s crucial to understand how the government is utilizing these funds. The government is currently investing the money collected from the levy into Treasury bills, indicating that it is collecting these funds faster than it can deploy them for housing construction. The levy consists of a mandatory monthly deduction of 1.5% from employees’ gross salaries, matched by their employers. From the time the Affordable Housing Fund was established on March 19, 2024, the funds are now managed by the Affordable Housing Fund Board. The housing initiative will focus on developing studios, as well as two- and three-bedroom apartments, aimed at providing more affordable housing options for Kenyans.
The nullification of the Finance Act 2023 has significant implications for Kenya, particularly in the context of rising living costs. Recent data from GSMA indicates that 51% of urban Kenyans and 52% of those in rural areas now cite the high cost of smart gadgets as a barrier to mobile internet access, a sharp increase from 48% and 35% respectively the previous year. This trend underscores the financial strain on citizens who struggle to afford what are often seen as luxury items, thereby challenging President Ruto’s vision of a digital superhighway as one of the cornerstones of his administration.
The Finance Act 2023 introduced various tax benefits aimed at easing the burden on taxpayers, including a reduction in the withholding tax on immovable property from 10% to 7.5% and a corporate income tax cut to 10% for companies manufacturing human vaccines. Additionally, it exempted several income types from taxation and allowed taxpayers to offset overpaid taxes against outstanding debts. However, with the Act now nullified, these benefits will no longer be available, potentially exacerbating the financial challenges faced by many.
Moreover, the reversal of certain tax cuts will further strain households. The return of a 20% tax on mobile data and airtime, an increase in monthly rental tax from 7.5% to 10%, and the reinstatement of VAT on previously zero-rated goods, such as locally assembled mobile phones and electric motorcycles, are expected to drive up costs. The railway development levy will revert to 2.5%, and the import declaration fee will rise to 3.5%.
In summary, the cancellation of the Finance Act 2023 is a double aged sword touching on both sides of the taxpayer and the tax collector.
The Implications to the Government
The declaration of the Finance Act 2023 as unconstitutional by the Court of Appeal poses significant challenges and potential setbacks for the Kenyan government. This ruling presents a complex situation that could have far-reaching consequences for the government’s finances, legislative processes, and public trust.
One of the primary concerns is the potential loss of revenue for the government. The Finance Act 2023 introduced various taxes and tax changes aimed at increasing government revenue. The decision by the Court of Appeal has left the government with a Sh 510 billion dent in its budget for the fiscal year. The National Treasury has indicated that it stands to lose Sh 164 billion in revenue if the provisions of the Finance Act 2023 are removed from the country’s tax provisions. This will be in addition to Sh 346 billion in new tax revenue the government has lost after the Finance Bill 2024 was withdrawn.
With the Act being declared unconstitutional, the government may face a significant shortfall in expected tax collections, which could have a substantial impact on its budget and the funding available for public services and development projects. For instance, on July 22, 2024, Business Daily reported that payroll taxes in Kenya grew by a modest single-digit percentage in the financial year 2023/2024, despite higher deductions from pay slips. The Kenya Revenue Authority (KRA) collected Sh 543.19 billion in payroll taxes, marking a 9.76% increase from Sh 494.90 billion the previous year. The introduction of a 32.5% tax on workers earning over Sh 500,000 monthly, and a 35% rate for those earning more than Sh 800,000, was expected to have a minimal impact on overall growth since over 90% of formal sector workers earn less than Sh 100,000 monthly. However, with the Finance Act 2023 declared unconstitutional, the government stands to lose significant revenue from these new tax bands, further constraining its ability to collect funds.
Moreover, the uncertainty surrounding the unconstitutionality of the Act could disrupt the government’s revenue streams and financial planning. The introduction of new taxes, like the digital asset tax, was intended to create additional revenue streams for the government. However, the court’s ruling casts doubt on the implementation and legality of these taxes, potentially delaying their enforcement and affecting the government’s ability to rely on these revenue sources as planned.
The court’s decision also has implications for public trust and the government’s credibility. It highlights deficiencies in the legislative process, particularly regarding public participation. This could lead to a loss of public confidence in the government and its institutions, undermining the legitimacy of future legislative efforts. The perception that the government is not committed to democratic principles, such as accountability and transparency, which are vital for effective governance, could foster public discontent and challenges in implementing government policies. The potential loss of revenue, legislative hurdles, and erosion of public trust are issues that the government must address to maintain financial stability, effective governance, and public confidence. Addressing these challenges will require a concerted effort to enhance transparency, accountability, and public engagement in the legislative process moving forward.
The Implications to the Legislature in particular
The declaration of the Finance Act 2023 as unconstitutional due to insufficient public participation highlights a pressing need for a robust discussion on the role of public engagement within the East African Community. As a nation, we must implement measures to ensure that citizens have a voice in legislative processes, or we risk facing legal challenges that could further impede the government’s revenue collection efforts. The social contract theory posits that while we acknowledge the necessity of government revenue, it must be collected in accordance with the rule of law. Without public input, critical decisions, like those outlined in the EAC Gazette notices, are made in isolation, leaving citizens uninformed and disenfranchised. This situation not only undermines democratic principles but also sets the stage for potential court challenges that could derail fiscal policies and deepen the existing governance crisis.
The East African Community (EAC) Gazette notice issued on June 30, 2024, introduced a series of new import duty rates on essential goods like rice, palm oil, and baby diapers. This notice closely mirrored the Finance Bill 2024, which was withdrawn by President Ruto just before the gazette’s release. The lack of public participation in the formulation of this notice is glaring; had it been subjected to public scrutiny, many of its contentious recommendations could have been identified and flagged out. Instead, Kenyans were left uninformed and excluded from decisions that significantly impact their daily lives, underscoring a troubling trend of transparency and accountability being overlooked in governance.
Public participation is a fundamental principle that permeates nearly every aspect of our constitution, its significance emphasized by its inclusion in the very first and last articles. This consistent emphasis underscores the critical role of citizen engagement in governance. Our constitution asserts its supremacy and grants authority to all its articles, clearly stating that any law conflicting with its provisions is null and void to the extent of such inconsistency. This constitutional mandate is unequivocal and serves as a bulwark against arbitrary legislation. Yet, the recent EAC Gazette notice and the nullification of the Finance Act 2023 due to inadequate public participation expose a troubling disregard for this foundational principle. As the supreme law of the land, the constitution must be upheld, and any attempt to circumvent its provisions, whether through domestic legislation or international agreements, is a violation of the social contract between the government and the people. Restoring public trust and ensuring effective, accountable governance requires a steadfast commitment to the constitutional values that define our nation.
Once the EAC gazette has been released, it is just as binding as any other law. How come then that the EAC Council of Ministers’ decisions are not presented for public participation in Kenya? These measures were approved as part of a council of ministers’ decision and mentioned in passing by the finance Cabinet secretary in the 2024/2025 budget speech before the national assembly. The Kenyan citizens did not get an opportunity to give their views, let alone their elected representatives.
The national values and principles, of which public participation is part, apply to all state officers including the Finance Cabinet Secretary. The Finance Cabinet Secretary has been in breach of his duty to put in place measures ensuring public participation in this area. The Courts have held over and over that the constitution is the supreme law in Kenya and all other laws including international law and indeed including the East African Community Management Act 2004 under which the EAC gazette notices are given bow to it. In a word, the constitution is the grundnorm. The constitution asserts that where there is a conflict between any law, The EAC gazette notice, the constitution takes precedence.
From the judgement of the Court of Appeal, it is only a matter of time before an aggrieved party approaches the court petitioning for nullification of the EAC gazette note of 30th June 2024 on account of lack of public participation. The petition is of course to be instituted in the High Court and Kenya being a jurisdiction where judicial precedents in higher courts are binding on lower courts, the EAC gazette notice is likely to be nullified as well.
It is not a happy state of affairs that each time a statute is enacted; it has to be challenged. This is costly and if possible, should be avoided because it costs a lot of time, money, and good relationships between the arms of government and the citizens. The point I am making is that life could be easier for everyone if our legislators were bound by the rule of law by following the provisions of the constitution especially article 10.
Implications to the Executive in Particular
President Ruto’s recent appointment of a task force to audit public debt has drawn considerable criticism, seen as a reactive measure amid political pressure surrounding the Finance Bill 2024. Critics argue that this move undermines constitutionally mandated offices like the Attorney General, Auditor General, and Public Debt Management Office, potentially leading to legal challenges and inefficiencies that could waste valuable time and resources. By bypassing these established institutions, the President risks compromising good governance and the rule of law, raising serious concerns about transparency and accountability in executive actions.
While the President faces challenges, particularly regarding the International Monetary Fund (IMF) and its funding conditions, the situation remains precarious. As of July 8, 2024, the IMF had yet to convene the Executive Board meeting necessary to finalize the seventh Extended Credit Facility for Kenya, which could significantly affect future disbursements. The withdrawal of the Finance Bill 2024 is expected to force a reevaluation of revenue targets, with tax revenues projected to drop to Sh 2.51 trillion; a loss of Sh 346 billion that the bill was expected to generate. This already difficult position for the executive will likely worsen with the Court’s declaration of the Finance Act 2023 as unconstitutional, further diminishing revenue collection and potentially destabilizing the country’s economic outlook.
Additionally, Kenya’s financial burden is underscored by the Sh 152.69 billion spent to repay debt to China in the last financial year, highlighting the strain on taxpayers due to loans for infrastructure projects like the railway. China’s lending practices, often characterized by minimal conditions, have led to accusations of debt diplomacy, where countries become ensnared in unmanageable debt, ultimately facing pressure to relinquish national assets or barter resources for debt relief. A notable example is Zambia, which has sought relief from Western creditors after defaulting on Chinese loans.
The National Treasury has estimated a total financing deficit of Sh 4.691 trillion from the 2018/2019 to the 2022/2023 fiscal years, against total government expenditures of Sh 14 trillion. With the recent Court of Appeal decision, the executive now finds itself in a challenging position, caught between the need for fiscal responsibility and the pressures of governance.
It’s time to FastTrack the enactment of the Public Participation Bill into law
The Public Participation Bill in Kenya aims to institutionalize and enhance the framework for involving citizens in the legislative process and governance. Its purpose is rooted in the constitutional mandate that emphasizes the importance of public engagement in decision-making, thereby promoting transparency, accountability, and participatory democracy. It seeks to create structured mechanisms for citizens to engage meaningfully in the legislative process. This includes providing opportunities for the public to contribute their views, opinions, and feedback on proposed laws and policies that affect their lives. By facilitating such engagement, the Bill aims to ensure that the voices of Kenyans are heard and considered in governance.
One of the core objectives of the Bill is to enhance transparency in the legislative process. It mandates that Parliament and other state organs provide clear communication regarding how public input is utilized in decision-making. This transparency is essential for building trust between the government and the public, as it allows citizens to understand how their contributions influence legislative outcomes. Moreover, the Bill emphasizes the need for accountability, requiring public officials to explain their decisions, especially when public input is disregarded. The Bill reinforces the principles of participatory democracy enshrined in the Kenyan Constitution, particularly in Article 10, which outlines national values and principles of governance. By institutionalizing public participation, the Bill aims to strengthen democratic governance, ensuring that citizens have a direct role in shaping laws and policies. This empowerment fosters a sense of ownership among the public regarding governance and decision-making processes. It emphasizes the importance of inclusivity in public engagement. It seeks to ensure that diverse groups, including marginalized communities, women, youth, and persons with disabilities, have equitable opportunities to participate in the legislative process. This inclusivity is crucial for addressing the needs and concerns of all segments of society, thereby promoting social justice and equity.
The Bill aims to establish clear guidelines and standards for public participation, outlining the processes that must be followed by state organs when engaging the public. This includes specifying the methods of engagement, timelines for public input, and the responsibilities of public officials in facilitating participation. By providing a framework for public engagement, the Bill seeks to eliminate ambiguity and ensure that participation is meaningful and effective. By fostering meaningful public participation, the Bill is expected to lead to better policy outcomes. When citizens are actively involved in the legislative process, they can provide valuable insights and perspectives that enhance the quality of laws and policies. This collaborative approach can result in more effective and responsive governance, addressing the actual needs and concerns of the populace. Also, the Bill should be subjected to public participation otherwise it risks being declared unconstitutional for lack of public participation.
Evidence Based research in introducing taxes
The rejection of the Finance Bill 2024 highlights significant shortcomings in the legislative process, particularly regarding the lack of evidence-based research that should inform tax policy decisions. Many provisions were dropped from the original draft, indicating that lawmakers struggled to justify certain measures, such as the Motor Vehicle tax, during public discussions. This raises concerns about the adequacy of research backing these proposals, especially in light of the Economic Survey 2024, which reveals that Kenyan wages have faced four consecutive years of negative growth. Specifically, a reported 2.8% pay increase last year translates to a negative 4.1% when adjusted for inflation, exacerbated by rising taxation that has driven up the cost of living, particularly for essential goods like petroleum products. Yet, instead of coming up with a better taxation policy, the country keeps increasing taxes which end up being counterproductive.
Evidence-based research is essential for developing tax policies in Kenya, as it enables informed decision-making and effective policy formulation. By leveraging data and empirical evidence, the government can evaluate the economic implications of proposed tax measures, ensuring they are both practical and advantageous for the public. This approach allows policymakers to gauge the revenue potential of new taxes while considering their impact on various economic sectors and the welfare of citizens. Moreover, integrating robust research into tax policy fosters transparency and accountability in the legislative process. When tax proposals are grounded in solid research, it builds public trust and confidence in governmental decisions. Engaging stakeholders through research findings encourages meaningful public participation, allowing citizens to comprehend the rationale behind tax policies and their potential effects. Such transparency is vital for maintaining legitimacy, as it demonstrates the government’s responsiveness to the needs and concerns of its constituents.
Lastly, aligning tax policy with national development goals is crucial. By analyzing social and economic data, the government can create tax systems that promote equity, growth, and sustainability. This strategic alignment not only enhances the effectiveness of tax policies but also ensures they contribute positively to broader developmental objectives, such as poverty alleviation and economic stability. In conclusion, evidence-based research is a cornerstone for establishing a robust tax framework in Kenya, driving informed decision-making, enhancing public trust, and supporting national development initiatives.
By:
Filden Oroni
Tax & Legal Associate, Andersen in Kenya