State forced to ignore of court orders on taxes to raise revenue

The government appears unwilling to let go of the billions of shillings that it has been raking from the tax measures that were introduced by the Finance Act, 2023.

This is despite the Court of Appeal’s judgement that the law is unconstitutional in the wake of the rejection of the Finance Bill, 2024 following public outcry. 

The Kenya Revenue Authority (KRA) has been slow to adjust its systems to reflect the reality without the tax measures introduced by the Act, whose implementation began on July 1 last year.

At the same, the Energy and Petroleum Regulatory Authority (Epra) continues to determine pump prices using the 16 per cent Value Added Tax rate introduced by the Act last year.

The Finance Act, 2023 introduced measures such as the doubling of value-added tax on fuel and higher Pay As You Earn (Paye) for high-income earners.

The government said if it stopped collecting taxes introduced through the Finance Act, 2023, it would lose tax revenues in the region of Sh164 billion annually.

It is against this backdrop that it sought stay orders from the Supreme Court, but the court declined, saying it would fast-track the hearing of the case. 

However, KRA has not adjusted its systems and done away with the tax measures introduced by the Finance Act, 2023 in the absence of a new Act this financial year.

The Federation of Kenya Employers (FKE) had queried why KRA had not adjusted its systems to reflect the Court of Appeal’s judgement.

FKE last week noted that KRA had not adjusted its tax systems to reflect the ruling by the Court of Appeal, adding that this had its members and other taxpayers unable to remit taxes.

“FKE regrets that our members and indeed all taxpayers in Kenya are unable to remit taxes in accordance with the judgement for the reason that the KRA has not yet configured its systems to comply with the Court of Appeal judgement,” said FKE Executive Director Jacqueline Mugo in a query to KRA on August 9.

“The purpose of this open letter is to ask KRA to urgently clarify to employers and all taxpayers in Kenya on how they should pay their taxes in view of the Court of Appeal judgement. We also note that today, August 9, 2024 is the last day for remittance of July 2024 taxes and our members may face penalties if KRA does not immediately address this concern.”

Last week, all eyes were on Epra to see the VAT rate it would use in determining pump prices for the August-September pricing cycle.

The Finance Act, 2023 had increased the VAT for petroleum products to 16 per cent from eight per cent, but even as it hiked costs, the regulator also zero-rated VAT for cooking gas, giving some relief to Kenyans.

It was expected that the pump prices would be computed using the eight per cent VAT rate given the Court of Appeal finding the Act that increased the rate unconstitutional.

This was expected to significantly bring down the cost of fuel. Epra, however, used the 16 per cent rate, seemingly going against the judgement.

The energy sector regulator has, however, indicated that it is waiting for advice from the Attorney General.

It is also the case with the Road Maintenance Levy, whose hike was suspended by the High Court in Mombasa, but Epra is yet to act on the suspension.

The Transport Ministry in early July increased the levy, which is used by the different road agencies to repair roads, by Sh7 to Sh25 per litre of super petrol and diesel. 

The increase was effected when Epra announced the prices for the July-August pricing cycle on July 14. On August 2, a Mombasa resident, George Odhiambo Juma, filed a petition against the levy, arguing that the government had not engaged Kenyans in its implementation.

The court last week suspended implementation of the levy until the case is heard and determined.

Epra has, however, not reviewed fuel prices, acting contrary to court orders, despite having the legal tools to review prices in case of such developments.

While the law requires Epra to announce fuel pump prices every 14 of the month, it can issue an addendum in case of developments such as a court order or the coming into effect of a new law.

It was the case on June 30 last year when it issued a revision of the maximum pump prices it had issued on June 14. In the addendum, Epra included the higher VAT rate that had been increased by the Finance Act, 2023, which came into effect on July 1.

It is, however, not the first time that the Kenya Kwanza regime has appeared to defy the courts. The administration has on several occasions been at odds with the Judiciary which has in the past stopped several tax-raising measures, including the Affordable Housing Levy last year, which was also part of the Finance Act, 2023.

VAT currently stands at Sh26 per litre of petrol and Sh23 per litre of diesel, and reducing it to eight per cent could mean knocking off Sh13 from the pump price of super petrol and Sh11 on diesel.

Add the Sh7 increase in the road levy that has been suspended by the High Court in Mombasa, and this could have meant Kenyans enjoying a reduction of as much Sh20 per litre, at least until the two cases are heard and determined.

The Petroleum Outlets Association of Kenya (Poak) had on Wednesday noted that the industry is “keen to see the revision of the VAT from 16 per cent to eight per cent.”

This, the lobby for small and mid-sized oil marketers in the country had noted, would “reduce the pump prices significantly.”

Government agencies staying put and continuing to collect taxes even after the courts have pronounced themselves could be a pointer to the difficult situation that the country finds itself in. 

In addition to the Finance Act, 2023 being found to be unconstitutional, which if upheld by the Supreme Court could result in a Sh164 billion financing gap,  the government is also grappling with the impact of the withdrawal of the Finance Bill, 2024 in the wake of countrywide Gen Z protests.

The government had expected that the tax measures proposed in the bill could help it grow tax revenues by Sh344.3 billion, which is now likely to be filled through more borrowing.

The government is now implementing a new budget that has considered the absence of a Finance Bill this year through cutting overall spending as well as increasing fiscal deficit.

In the Supplementary Budget, Treasury reduced the overall budget by 3.1 per cent to Sh3.87 trillion from Sh3.99 trillion.

The biggest change has been the reduction of development expenditure by Sh122 billion, which is expected to hurt new and ongoing development projects.

The fiscal deficit has also increased to Sh761 billion (4.2 per cent of GDP) from Sh597 billion (3.3 per cent of GDP).

This will largely affect domestic borrowing which Treasury expects to increase to Sh404.6 billion from an earlier Sh263.2 billion. The government expects to borrow the balance of Sh356.4 billion from foreign lenders.

Experts have in the recent past said the government might in the coming months look for other ways to increase tax revenues, including reviewing specific laws and hiking taxes and levies separately as opposed to the reintroduction of the Finance Bill. This was the case in the review of the Road Maintenance Levy.

Different government officials have made remarks to this effect, with John Mbadi, the new Treasury Cabinet Secretary, noting that there were progressive segments in the Finance Bill, 2024 that were good, which he might try to save them.

His boss President William Ruto during his ongoing tours of the counties, has noted how much the money collected through the Finance Bill, 2024 measures would have meant for infrastructure developments across the country. 

Ruto signalled that there are plans to re-introduce some of the proposals, counting on the dalliance with the opposition to face resistance in Parliament to pass the laws and possible protester fatigue among the "woke Gen Zs," whose protests forced the withdrawal of the Bill.

“We started the project of constructing roads, but along the way, we got stuck because of lack of money. We had planned well and allocated Sh130 billion in the budget, but as you all know, things went haywire, and I hope Kenyans understand that,” President Ruto told residents of Kakamega County Saturday.

“There are some people who made a lot of noise until the budget was withdrawn. I have now told our MPs we are going to plan afresh.”