The Court of Appeal Judges Kathurima M'Inoti, Agnes Kalekye Murgo and John Mativo yesterday ruled that the Finance Act 2023 was fundamentally flawed and therefore void and consequently unconstitutional.
This doesn’t mean that we will not pay taxes but rather we revert to the last amendment which was Finance Act 2022.
Independent tax expert, Clifford Otieno says that this essentially means that the new taxation measures introduced in the Finance Act 2023 are not applicable anymore.
For instance, the 2023 revenue-raising measures (Finance Act 2023) had raised the VAT on petroleum from 8 per cent to 16 per cent, since it’s now null and void the country should revert to eight per cent VAT.
This means consumers should see a reduction in the VAT applied to petroleum products, potentially lowering fuel prices.
"Further, the requirement for businesses to issue electronic Tax Invoice Management System (eTIMS) invoices and use them for claiming deductible expenses is eliminated," Otieno said.
"Therefore businesses will no longer need to issue eTIMS invoices or rely on them for tax deductions."
This, however, is likely to erode the gains made in digitising Kenya's tax administration.
Another tax measure introduced in the bill saw the government change the taxation rate for personal income.
The new top income tax rates of 32.5 per cent for monthly incomes between Sh500,000 and Sh800,000 and 35 per cent for incomes above Sh800,000 will now be removed.
This essentially means that the new tax bands for high-income earners would benefit from lower tax rates.
For businesses, the requirement to remit withholding tax within five working days is rescinded and the country moves back to remitting the same on the 20th of every month.
"The potential impact of this is that it gives businesses more time to remit withholding tax, potentially easing cash flow pressures but delaying tax revenue for the government," he added.
VAT on export services will now have to change from zero-rated back to exempt status, therefore, export services will no longer attract VAT.
This will see exporters won't unable to charge VAT on their services, which could simplify transactions but may also affect their ability to claim VAT refunds on inputs.
The withdrawal of the Finance Bill 2024 and the eventual nullification of the Finance Act 2023, have significant implications for Kenya's Supplementary Budget I for the current financial year 2024-25.
Total government expenditure that was initially projected to match the higher revenue expectations will now have to be downgraded further from the Sh3.87 trillion that occasioned the dropping of the 2024 finance bill.
The Implication of this is that the government will have to scale back its spending plans to align with the lower revenue projections.
"This means some projects and services might receive less funding, potentially impacting public services and infrastructure development."
The fiscal deficit was expected to be narrower, based on higher revenue projections, that were to be in the 2024 Bill. With its scrapping, the government was to borrow more widening the deficit to Sh769.99 billion.
The situation is expected to be further worsened by the latest ruling which means the government should revert to even lower revenues to finance increasing obligations.
Therefore, the gap between revenue and expenditure has increased, meaning the government will need to borrow more to finance its operations.
This could lead to higher public debt and interest payments, placing additional strain on future budgets.
However, with Kenya facing tight fiscal space in the international market borrowing will be hard and it will likely resort to the local market.
The effect of increased local borrowing by the government is that often leads to a crowding-out effect, where the government absorbs a significant portion of available credit, leaving less for private-sector borrowing.
This can stifle business investment and expansion, slowing economic growth.
Additionally, increased demand for local credit can drive up interest rates, making loans more expensive for consumers and businesses.