The judgment arose from a petition filed by Eliud Matindi who argued that tax waivers granted to Japanese employees, consultants, and companies on account of section 13(2) of the ITA violated the principles of equality and non-discrimination. Matindi also contended that Legal Notice No. 15 of 2021, which gave effect to the exemptions, had not been subjected to public participation contrary to Article 10(2) read with Article 118(1) of the Constitution.

Among the projects that benefitted from this tax exemption were the infrastructure developments at the Mombasa Special Economic Zone, power distribution systems in Nakuru and Mombasa, and the Olkaria 1 Unit 1, 2 and 3 plant rehabilitation projects, among others.

The appeal

Aggrieved by the decision of the High Court, the National Assembly together with its speaker (applicants) appealed to the Court of Appeal (CoA). They sought conservatory orders or a stay of execution of the entirety of the High Court’s judgment and decree pending the hearing and determination of their intended appeal.

The applicants argued that the High Court’s judgment would have the effect of treating every application for tax exemption to the Kenya Revenue Authority (KRA) as a money bill, to be submitted to the National Assembly for consideration and public participation. Such a situation would create a crisis at the KRA, considering the number of applications of this nature received by it each day.

The respondents’ case

Matindi, the first respondent, contended that the applicants’ memorandum of appeal did not disclose arguable points with a prospect of success. Further, the absence of an order staying the judgment would not render the appeal irrelevant were it to succeed.

Matindi also argued that the KRA had not recorded any difficulties in complying with the High Court’s judgment. In the event that the appeal succeeded, then the taxes collected from that date would be refundable to the affected named and known Japanese companies, consultants and individuals.

The Cabinet Secretary for Treasury and the Attorney General supported the position and submissions of the applicants, while there was no appearance from the KRA, the fourth respondent.

The Court of Appeal’s ruling

The CoA granted the orders of stay sought. It considered the following issues:

1. The applicants would face significant inconvenience against the public interest. This is because mechanisms would need to be put in place to effect the recovery of taxes that had been exempt for a period of over 10 years.
2. Declaring section 13(1) of the Income Tax Act unconstitutional would create challenges in obtaining tax waivers. It would necessitate the presentation of all applications for exemption before Parliament for consideration as money bills, with the associated constitutional obligations such as public participation. The CoA agreed with the applicants that Parliament was not adequately equipped to handle such a responsibility.
3. Finally, the CoA was of the view that the declarations and orders of the High Court were far-reaching and necessitated a stay.

The CoA also suspended the coming into force of the High Court’s declarations for a period of six months, pending hearing and determination of the main appeal.

Commentary and conclusion

The effect of the CoA’s ruling is that section 13(2) of the ITA continues to operate. Exemptions that were issued to Japanese companies through gazette notices pursuant to section 13(2) of the ITA remain valid for the next six months, pending the determination of the main appeal.

It is crucial to highlight that through the Finance Act 2023, the ITA was amended to exempt from tax non-resident contractors, subcontractors, consultants, or employees involved in the execution of a project entirely financed through a 100% grant under an agreement between the development partner and the Government of Kenya. The amendment in our view does not cure the issues at the CoA because some of the projects that benefitted from the impugned tax waivers were financed through concessionary loans, not grants. We await the CoA’s decision in this case.