What the Nullification of Finance Act 2023 Means for the Housing Levy & Other Tax Laws

The Court of Appeal on Wednesday, July 31, declared the Finance Act 2023 unconstitutional, null, and void. 

This decision reverses the country’s fiscal laws to the Finance Act of 2022, since the Finance Act of 2024 has already been dropped by an order from the Office of the President. 

Key provisions of the Finance Act 2023, which include amendments to various tax laws, have now been invalidated. This includes sections amending the Roads Act of 1997 and the Unclaimed Financial Assets Act.

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One of the most notable provisions of the Finance Act of 2023 was the introduction of a Housing Levy pegged at 1.5% of each employed person’s gross monthly salary. The employer matches the contribution with a similar amount. 

The Housing Levy, however, will remain in force since the government had earlier this year made a rushed effort to create an Act of Parliament to enforce the Housing Levy - outside of the Finance Act of 2023. 

The Housing Levy is now supported by the Housing Levy Act of 2024.

However, with the annulment of the Finance Act 2023, several tax changes will revert to the previous rates set by the Finance Act 2022. Notable impacts include:

- The standard VAT rate on petroleum products will revert from 16% back to 8%.

- Mandatory issuance of eTIMS invoices for businesses has been abolished, along with the requirement for these invoices to claim deductible expenses.

- New top income tax rates of 32.5% for monthly earnings between Kes 500,000 and Kes 800,000, and 35% for earnings exceeding Kes 800,000, have been annulled.

- VAT on export services will return to exempt status from its previous zero-rated status.

- The deadline for remitting withholding tax will revert to the 20th of each month, eliminating the previous requirement of five working days.

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The ruling comes after the Court overturned a previous High Court decision that had upheld the Act's legality.

The Court of Appeal emphasized that the failure of Parliament to meet the necessary threshold for public participation during the Act's formulation made it unlawful. 

Although the government asserted that the Finance Act 2023 underwent adequate public input, the Court found that the Parliament did not provide sufficient reasoning for its acceptance or rejection of public views. 

The Court declined to comment on whether the increased taxes imposed by the Finance Act 2023 violated economic, social, and consumer rights, stating that such considerations were irrelevant given the Act’s unconstitutional status. In addition to addressing public participation, the Court of Appeal criticized the High Court's conclusion that it lacked jurisdiction over policy matters. 

The decision leaves the government facing a substantial budget deficit of Kes 510 billion in the current fiscal year.

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