Multiple constitutional petitions were filed to challenge the constitutionality of the legislative process leading to the enactment of the Finance Act. The petitioners also faulted certain provisions in the Finance Act as being in violation of the Constitution of Kenya, 2010 (Constitution). The High Court subsequently consolidated the petitions and rendered its decision on 28 November 2023 in Okiya Omtatah Okoiti and 51 Others (petitioners) vs The Cabinet Secretary for the National Treasury and Planning and 6 Others (respondents), Constitutional Petition No. E181 of 2023.

The High Court in summary found that the housing levy as framed in the Finance Act, 2023 as unconstitutional. The court particularly found that the levy was discriminatory because only employed people would bear the burden, among other reasons. The court, however, later stayed its decision until 10 January 2024, meaning employers and employees will continue to pay the levy until then or until such time as may be extended by the Court of Appeal.

The 107-page, 221-paragraph decision is not just about the housing levy, although for the petitions and the decision, the housing levy took centre stage.

The decision considers other important legal issues such as the role of the Senate in the Finance Bill process, public participation and whether members of the National Assembly can introduce provisions in the Finance Bill after public participation. Here is a detailed analysis of the decision.

Issues

The High Court outlined the following as the issues for consideration:

1. Were procedural requirements pertaining to the legislative process of the Finance Bill adhered to? Including:
   1. Whether the Finance Bill is a money bill.
   2. Whether the Finance Bill required concurrence of the Speaker of the Senate.
   3. Whether estimates of revenue and expenditure were included in the Appropriation Act in accordance with the Constitution and the Public Finance Management Act.
2. Whether the public participation conducted was sufficient.
3. Whether certain taxes cited in the petition and as enacted by the Finance Act were unconstitutional.
4. Whether section 84 of the Finance Act introducing the housing levy was unconstitutional.
5. What reliefs, if any, should the court grant in the circumstances?
6. Who should bear the costs of the consolidated petitions?

Analysis and determination

Were procedural requirements pertaining to the legislative process of the Finance Bill adhered to?

The petitioners argued that the Finance Bill concerned counties since it contained provisions affecting the functions and powers of county governments such as housing, making it imperative for the Senate to participate in the legislative process.

The respondents, on the other hand, averred that as the Finance Bill was a money bill and not a bill concerning county governments as contemplated in Article 110 of the Constitution, the concurrence of the Speaker of the Senate was not required, and the participation of the Senate was precluded by Article 114 of the Constitution.

A money bill is defined in Article 114 as one containing provisions on taxes; the imposition of charges on a public fund, or variation or repeal of such charges; the appropriation, receipt, custody, investment, or issue of public money; the raising or guaranteeing of any loan or its repayment or matters incidental to any of these matters. For purposes of the definition, “tax”, “public money”, and loan do not include those raised by a county.

The court agreed with the respondents and held that the Finance Act was a money bill, hence it held that the Speaker of the National Assembly was under no obligation to seek concurrence from the Speaker of the Senate prior to the introduction of Finance Bill. It held, however, that the Finance Act contains some matters that do not fall within the purview of or that are incidental to a money bill, although this fact did not change the basic character and substance of a money bill. The court therefore held that the extraneous amendments were unconstitutional, i.e. sections 76 and 78 of the Finance Act on appointment of board members of Kenya Roads Board; section 87 on allowing a beneficiary to appoint a proxy for unclaimed assets; and sections 88 and 89 of the Finance Act on removal of the expiry period for statutory instruments.

The High Court separately found that the estimates of revenue were approved through the Appropriation Bill and the Appropriation Act.

Whether the public participation conducted was sufficient

The petitioners also challenged the Finance Act on the basis that there was inadequate public participation.

The court considered that there was ample evidence that the National Assembly invited stakeholders to submit their comments on the Finance Bill though public meetings and submission of written memoranda. Some proposals were accepted while others were rejected.

The petitioners further complained that some of the submissions by members of the public were rejected without giving reasons. The court found that it was not mandatory for Parliament to provide reasons, but this would be a good practice.

The petitioners also challenged the provisions of the law that were introduced after public participation. The court found that the National Assembly is not precluded from effecting amendments to the Bill before it is passed as doing so would curtail the law-making powers of Parliament.

Whether certain taxes cited in the petition as enacted by the Finance Act were unconstitutional

The petitioners challenged tax raising measures introduced by the Finance Act. The court, while relying on Articles 94(1) and 210(1) of the Constitution, opined that the National Assembly has broad powers to levy tax provided the power is not exercised in a manner that infringes or violates provisions of the Constitution, more particularly the process prescribed and the Bill of Rights.

Consequently, the court proceeded to analyse each of the challenged taxes, such as taxes on entertainment, digital asset tax, tax on 'winnings' from betting, gaming and lotteries, the introduction of new tax bands, the introduction of 16% value-added tax (VAT) on insurance compensation and collection of excise duty within 24 hours from betting companies and alcohol manufacturers.  

None of the petitioners' challenges regarding the taxes were upheld mainly because the taxes were imposed by Parliament in compliance with the Constitution, hence there was no justification to intervene.

Whether section 84 of the Finance Act introducing the housing levy was unconstitutional

The petitioners challenged the introduction of the housing levy on the basis that the levy is an alien tax; that gross salaries of employees will be impacted; that salaries of judges, members of constitutional commissions, and holders of independent offices will be adversely affected; that the housing levy is discriminatory: that there is a lack of a legal framework to govern the imposition and administration of the levy; that the absence of a foundational statute results in uncertainty; that the Constitution places an obligation on the National Government to deposit all monies it raises in taxes in the Consolidated Fund; and that no fund as envisaged in Article 206 (1) of the Constitution has been put in place and that the Kenya Revenue Authority's (KRA) mandate does not include receipt of the funds arising from the levy.

Other grounds laid out by the petitioners included that the levy violates the Housing Act; that the deduction is unconscionable and impractical; that public participation in respect of the levy was cosmetic and a mockery of the sovereignty of the people; that the Employment Act, 2007 already obligates employers to provide housing for employees and that the imposition of the levy amounts to double taxation; and that the imposition of the tax under the Employment Act amounts to a limitation of labour rights among others.

The respondents argued that the amendment was aimed at taxation on income which the National Government is empowered to impose, and that the establishment of the housing fund was a policy decision aimed at enabling the Government to provide adequate housing for all citizens towards fulfilling the dictates of Article 43(1)(b) of the Constitution. They further argued that the introduction of the levy was not a novel issue as there are other levies, such as the sugar development levy, railway development levy and others imposed by the National Government that are geared towards collecting funds for various key priority areas.

The High Court, in its analysis, considered that the amendment in the Employment Act did not set out either on the face of it or by reference to other legislation how the stated purpose is to be achieved. The court further relied on Article 210 (1) of the Constitution, which provides that no tax or licensing fee may be imposed, waived, or varied except as provided by legislation, and on Article 10(2) (b) and (c) of the Constitution that outline national values and principles of governance, to hold that section 84 of the Finance Act had shortfalls that negate these principles.

The court also held that section 84 of the Finance Act did not set out how the levy will be administered once collected, and that the legislation did not state how it supports the housing policy function of the National Government. It further held that the framework for the housing levy legislated by section 84 of the Finance Act did not meet the requirements of Articles 201 on principles of public finance, 206(1) on the Consolidated Fund, 210 on imposition of tax, and Article 10 of the Constitution on national values and principle of governance.

Consequently, the court held that the introduction of the housing levy lacked a comprehensive legal framework in violation of Articles 10, 201, 206 and 210 of the Constitution, and that the imposition of the housing levy against persons in formal employment to the exclusion of other non-formal income earners to support the national housing policy was without justification, unfair, discriminatory, irrational, and arbitrary and in violation of Articles 27 (discrimination) and 201 (b)(i) of the Constitution.

The court separately found that the KRA had no power to collect the housing levy because the Employment Act was not listed as one of the acts which KRA had power to administer under the KRA Act.

The court proceeded to hold that section 84 of the Finance Act was unconstitutional, null, and void. It consequently issued prohibitory orders against the respondents from charging, levying or in any way collecting the affordable housing levy.

Conclusion

The court's decision is a relief not only to employees but also employers who had an obligation to each contribute 1,5% of an employee’s gross monthly salary as housing levy. The relief was, however, cut short when the court on the same day issued orders to stay implementation of this decision until 10 January 2024. We expect the respondents and the petitioners to file an appeal at the Court of Appeal to challenge the High Court's decision, and this means that the stay could be extended for a while. Employers and employees should be prepared to pay the housing levy until a final determination is made by the Court of Appeal (or the Supreme Court, as we see this going through to the apex court). In the meantime, the Government has gazetted the Affordable Housing Bill, 2023 which intends to cure most of the issues raised by the High Court. We will wait to see the impact of this on the ongoing case.

The court's emphasis on public participation is noteworthy. It confirmed that the same should not only be facilitative but also reasonable. It is, however, worrying that Parliament can introduce amendments to the bill even after public participation. While the court has indicated that it will be on standby to check against any excesses by Parliament, additional safeguards should be introduced to ensure that this is not abused.

The decision also reiterated the role of the Senate in the bill-making process by emphasising that there is no obligation for concurrence between the National Assembly and the Senate for money bills. However, it is important for the speakers of both houses to discuss and agree on whether a bill is a money bill or not.

It appears from the decision that there was not much focus on the electronic Tax Invoice Management System (eTIMS) and its implications. From January 2024, the KRA will disallow expenses that are not supported by eTIMS invoices. Low-income earners such as vendors and service providers will bear the brunt of this as corporates are likely to shun them in favour of more organised vendors such as supermarkets and professional outsourcing companies. Low-income earners can, however, engage the KRA to onboard them onto eTIMS.

Taxpayers should also be prepared to comply with other sections of the Finance Act, 2023 which come into force from 1 January 2024, such as taxation of employee shares in start-ups, taxation of branches, reduced monthly rental income tax of 7,5%, increased advance tax for commercial vehicles among others.