Supreme Court’s landmark ruling on Finance Act 2023, What it means for Kenyan taxpayers

Kenya’s Supreme Court has finally delivered a landmark decision on the Finance Act 2023, which comes off the back of a prolonged period of legal uncertainty and public dissent.

Although the court effectively overturned the Court of Appeal’s declaration of the entire Finance Act 2023 as unconstitutional, this ruling offers a clearer path forward for taxpayers, businesses, and policymakers by upholding most provisions of the Act. It does this while laying down crucial guidelines for legislative accountability and public participation in fiscal policy.

With this judgment, taxpayers now have amore stable framework to navigate, yet the decision also signals the government’s intention to enforce stricter tax obligations across sectors.

If we look back, the Finance Act 2023 had stirred nationwide debate since its passage, largely over concerns about the government’s approach to public participation and the economic impact of new tax provisions.

Public dissatisfaction had led to 11constitutional petitions challenging the Act’s legality, culminating in a Court of Appeal decision that deemed the entire Act as unconstitutional. The SupremeCourt has now overturned this, reaffirming Parliament’s authority to legislate on tax matters while mandating a more structured approach to public engagement.

Importantly, the Court held that further public participation is not required for amendments introduced following initial consultations, as long as those amendments reflect input already gathered. This decision shines a spotlight on the need for balance between legislative efficiency and public involvement, especially for financial bills with strict timelines.

For taxpayers, this ruling signifies are turn to compliance with a range of provisions that will shape Kenya’s tax environment in the coming years. Businesses face new obligations to use electronic tax invoicing (eTIMS) as a condition for allowable expenses, and corporate tax adjustments are set to increase the tax rate for permanent establishments and levy taxes on repatriated profits.

These changes, while intended to streamline tax administration, mean businesses have to strengthen their compliance infrastructure to meet the demands of real-time reporting and more rigorous record-keeping.

The Act also brings notable adjustments in value-added tax (VAT) that will affect both local and international trade. For example, exported services are now zero-rated, making it simpler for businesses to comply without the need to prove their services are ‘business process outsourcing’.

On the other hand, petroleum products will see a VAT increase to 16%, which may raise operational costs for transport and logistics-heavy businesses while offering consumers stability with LPG products remaining VAT-exempt. Meanwhile, Special Economic Zones retain tax exemptions on certain transactions, which is crucial for businesses reliant on these incentives for investment planning.

Beyond specific tax obligations, theCourt’s decision highlights a shift in how policy and law interact in Kenya’s evolving tax landscape. While the Court affirmed it can assess the constitutionality of legislative actions, it also emphasised restraint when it comes to intervening in policy decisions that fall within the government’s mandate.This approach acknowledges the executive’s role in setting tax policy while ensuring judicial oversight remains focused on constitutional integrity.

The judgment also provides a framework for evaluating future tax laws, outlining principles for assessing constitutionality. These include a rebuttable presumption that statutes are constitutional unless proven otherwise, and a detailed process for declaring any part of a law unconstitutional while managing the regulatory impact.

The Court has also introduced guidelines for issuing a ‘suspension of invalidity’, allowing laws to remain functional during any prescribed period of revision. This will hopefully prevent any legal and administrative disruptions.

For taxpayers, this ruling brings both clarity and a call to action. Businesses will need to update their compliance strategies to align with the Act’s provisions, ensuring electronic invoicing, timely excise duty remittance, and adherence to new VAT rules, among others.

The decision’s implications also stretch beyond mere compliance. What it does is set a tone for tax policy development in Kenya – one that prioritises revenue generation but respects constitutional requirements for public engagement.

In an environment where tax policies are increasingly scrutinised, this decision provides a foundation for a more stable and predictable tax system. Taxpayers can now move forward with greater confidence, understanding that tax obligations are growing, but there is an established framework that seeks to balance fiscal needs with fair governance.

There’s no doubt, Kenya’s tax landscape is shifting, and for businesses and individuals, adapting proactively to these clarified obligations and new compliance requirements will be essential in helping them navigate an ever-evolving regulatory terrain.

The writers are Partners at law firm, Cliffe Dekker Hofmeyr (CDH) Kenya.

The post Supreme Court’s landmark ruling on Finance Act 2023, What it means for Kenyan taxpayers first appeared on KBC.

The post Supreme Court’s landmark ruling on Finance Act 2023, What it means for Kenyan taxpayers appeared first on KBC.