Court of appeal in Kenya declares Finance Act 2023 unconstitutional

The Kenyan Court of Appeal (the Court) has declared the Finance Act 2023 (the Act) unconstitutional in a decision delivered on 31 July 2024 in Civil Appeal No. E003 of 2023 - National Assembly & another v Okiya Omtatah Okoiti & 55 others (Consolidated with Civil Appeal Nos. E016, E021, E049 AND E064, E080 OF 2024).

The Act was passed in June 2023 and introduced a raft of new taxes for businesses and individuals in Kenya including taxation of digital content monetization and digital assets, taxation of branches/permanent establishments (PE), taxation of capital gains realized on the sales of shares or comparable interests. The Act also increased the rate for personal tax for individuals and value added tax on petroleum products.

On 28 November 2023, a three-judge bench of the High Court held that various sections of the Act were unconstitutional and invalid for the following reasons:

• Sections 76, 78 87, 88 and 89 of the Act amended the Kenya Roads Board Act, the Unclaimed Assets Act and the Statutory Instruments Act and were unconstitutional as these amendments were extraneous to a money bill.
• Section 84 of the Act which introduced the housing levy was unconstitutional because it lacked a comprehensive legal framework and the amendment violated various articles of the Constitution including the freedom from discrimination under Article 27 as it was only against persons in formal employment to the exclusion of other non-formal income earners.

The Appeals 

Some of the respondents at the High Court were aggrieved by the decision of the High Court thereby filing seven appeals to the Court of Appeal. One of the appeals was withdrawn and the six remaining appeals were consolidated by the Court and heard together (the Appeals). The Court identified nine issues for determination some of which included (i) whether the appeals challenging the finding that Sections 84, 88 and 89 of the Act were unconstitutional were moot, (ii) whether the Act was a money Bill and whether it contained extraneous provisions contrary to Article 114 (3) (4) of the Constitution, (iii) whether the Act included provisions which were not in the Finance Bill 2023 which was subjected to public participation, (iv) whether the Senate ought to have been involved in the enactment of the Act and (v) whether there was sufficient public participation in the enactment of the Act and whether Parliament is obligated to give reasons for adopting and rejecting views given by members of the public during public participation.

Whether the appeals against the finding that Sections 84, 88 and 89 of the Act were unconstitutional are moot

The Appeals challenged the finding of the High Court that Sections 84 of the Act was unconstitutional because it introduced the housing levy as an amendment to the Employment Act without a comprehensive legal framework and was discriminatory to the extent that it only focused on persons in formal employment. They also challenged the declaration of unconstitutionality of sections 88 and 89 of the Act on the basis that they repealed Section 21 of the Statutory Instruments Act which amendement was extraneous to a money bill. 

The Court held that the Affordable Housing Bill, 2023 was enacted into law on 19 March 2024 to cure the defects identified by the High Court in its judgment and addressed both the comprehensive legal framework and the discrimination issues identified in the High Court’s judgment. Similarly, the Court held that the Statutory Instruments (Amendment) Bill, 2024 which was introduced in the National Assembly following the High Court judgment addressed the inadequacies identified by the High Court in declaring Sections 88 and 89 of the Act unconstitutional. Therefore, there was no controversy on the question of unconstitutionality of Section 84, 88 and 89 of the Act requiring the Court’s intervention.

Definition of a money bill and whether it can contain matters extraneous to Article 114 (3) and (4)

The appellants argued that the High Court should not have declared Sections 76, 78 and 87 of the Act unconstitutional after finding that it was a money bill because Article 114 (1) of the Constitution allowed provisions other than money matters to be dealt with in a money bill. They argued that the impugned sections were not extraneous to a money bill because the word “may” in Article 114 (1) of the Constitution meant that a money bill could deal with other matters other than money matters. The said provision reads as follows, “114 .(1) A money bill may not deal with any matter other than those listed in the definition of "a money bill" in clause (3).” Article 114 (3) defines a money bill as a type of legislation that primarily deals with financial matters. Specifically, it covers topics like: taxes, government spending, loans and management of public funds.

The Court held that the context in which the word “may” is used in Article 114 (1) of the Constitution does not denote discretion but a command. The Court emphasized that constitutional provisions must be interpreted contextually and not in isolation and that the definition of a money bill is rigid and exhaustive and not subject to wider interpretation. The use of the word “may” did not give Parliament discretion to include matters outside those listed therein in a money bill. The only time a matter other than those listed in Article 114 (1) of the Constitution could be added to a money bill is when the matter was incidental to the said matters as provided under Article 114 (4) of the Constitution which the Court rejected was the case in relation to remuneration of board members using public funds and payment of money from the Unclaimed Assets Trust Fund. The Court therefore upheld the High Court’s finding that the Act was a money bill and contained extraneous provisions which were unconstitutional.

Was it lawful to introduce new substantive provisions to the Act post public participation?

The High Court found that the National Assembly was not required to resubmit amendments introduced to a bill after public participation for further public participation and that the public participation conducted by the National Assembly was sufficient. The appellants also argued that it would be unreasonable to require the National Assembly to go back to the public for their views every time it was necessary to amend a bill during the legislative process and that the sections which were introduced post public participation were incidental to the other provisions in the Bill and were not new sections. Arguments in opposition to the High Court judgment were that to permit new provisions on the floor of the National Assembly post public participation was mischievous and defeated the purpose of public participation.

The Court noted that sections 21, 23, 32, 38, 44, 69, 72, 79, 80, 81, 82, 83, 85, 86, 100, 101 and 102 of the Act were totally new and not in the original Finance Bill 2023 which was submitted for public participation. The Court also noted that there were substantive amendments to sections 26, 38, 47 and 72 of the Act and which were introduced at the Committee stage by the National Assembly and which were not subjected to public participation. The question therefore was whether a Bill that had undergone public participation, First and Second Reading could be altered at the Committee stage or on the floor of the National Assembly beyond the original scope by introducing substantive new provisions.

The Court held that the new provisions did not undergo the entire legislative process as they were also not subjected to the First and Second Reading. Introduction of 18 new provisions to the Finance Bill 2023 post public participation was found to be a flawed legislative process which went against Articles 118 and 10 (2) of the Constitution. Consequently, the impugned sections of the Act which were introduced post public participation were found to be unconstitutional.

Should the Senate be involved in the enactment of a money Bill?

The Court agreed with the decision of the High Court that the Finance Bill 2023 was a money bill and as such, the concurrence of the Speakers of the National Assembly and the Senate was not a requirement under Article 114 of the Constitution save that it contained some matters that were not incidental to a money bill. The Court clarified that the Constitution does not require bills concerning county governments, including money bills to be subjected to the concurrence process under Article 110 (3) of the Constitution which provided that when any bill concerning county government has been passed by one House of Parliament, the Speaker of that House shall refer it to the Speaker of the other House. Therefore, lack of concurrence between the Speakers of the National Assembly and the Senate on the nature of the Finance Bill 2023 did not vitiate the Act. 

Was there sufficient public participation? Should the reasons for adopting and rejecting views be provided?

The Court stated that public participation is a crucial part of participatory democracy and the law-making process because it affords the public meaningful opportunity to participate in the legislative process and strengthens legitimacy of legislation in the eyes of the public. The Court noted that the evidence presented indicated that the National Assembly gave diverse stakeholders an opportunity to present their views on the Finance Bill 2023 and that the High Court was therefore right in finding that there was adequate public participation. The Court did not however agree with the finding of the High Court that Parliament did not have an obligation to provide reasons for adopting or rejecting any proposal received from members of the public. The Court held that Parliament had an obligation to conduct public participation in a transparent and accountable manner as a mandatory requirement in the Constitution by informing the general public and stakeholders why their views were not taken into account and why other views were preferred during the public participation. Such accountability in decision making by State organs the Court held, enhances public confidence and contributes to participatory democracy. The Court concluded that Parliament had an obligation to give reasons for rejecting or adopting proposal received during public participation. Failure to do so was contrary to Article 10 (1) and (2) (c) of the Constitution therefore rendering the process of enacting the Act flawed and the entire Act unconstitutional.

Were the estimates of revenue and expenditure included in the Appropriation Act?

On the question of whether estimates of revenue and expenditure were included in the Appropriation Act in accordance with the Constitution and the Public Finance Management Act, the Court found that the Appropriation Act 2023 did not contain the estimates of revenue presented to and approved by Parliament as required under Article 220 (1) (a) and 221 of the Constitution as read with the Public Finance Management Act. It was the Court’s conclusion that the approval of the Appropriation Act before the Finance Bill 2023 was presented to Cabinet violated Articles 220 (1) (a) and 221 of the Constitution as read with Sections 37, 39 and 40 of the Public Finance Management Act. Therefore, the Act had no legal foundation and was therefore unconstitutional.

Could the High Court intervene in policy decisions?

Some of the appeals faulted the finding by the High Court that it lacked jurisdiction to interfere with tax legislation based on the merger of policy and legislation of public finance matters. The High Court held that the question regarding the rate of tax to be charged under specific taxes was a policy decision that rests with the legislature. The Court of Appeal faulted this finding by the High Court and held that Article 165 (3) (d) (i) and (ii) of the Constitution confers vast jurisdiction on the High Court to determine any question on interpretation of the Constitution including whether any law is inconsistent with the Constitution. This wide jurisdiction of the High Court to question the consistency of laws with the Constitution also covers policy decisions made by a public body. Therefore, the High Court was found to have misinterpreted Articles 10 and 165 (3) of the Constitution and abdicated its jurisdiction to test the constitutionality of policy decisions which infringe the Constitution.

Whether the taxes paid on the unconstitutional provisions could be accounted for and refunded to taxpayers

The appellants argued in addressing the question of whether the taxes collected during the subsistence of the impugned provisions should be refunded to the taxpayers, that the said sections were valid and operated under a presumption of constitutionality until a finding to the contrary was made by the High Court. The Court declined to order a refund of taxes collected on the basis that the prayer for refund could not be granted since it was not pleaded in the Petition before the High Court and was improperly before the Court of Appeal and that legislative enactments enjoyed presumption of constitutionality up to the moment they are found to be unconstitutional in terms of Article 165 (3) of the Constitution.

Why is this decision important?

This decision contributes to the growing jurisprudence on taxation and the legislative process in Kenya. Importantly, it emphasizes that Parliament must not only conduct adequate public participation in the law-making process but also give reasons for adopting and rejecting public input and further that introducing substantive new provisions to a bill after public participation is unconstitutional. 

This decision strengthens the role of the judiciary in protecting constitutional right affirming the power of the courts to examine the constitutionality of policy decisions made by public bodies. While the court did not order a refund of taxes collected under the unconstitutional provisions, it raises questions about the legal consequences of such invalid laws.

With the declaration of the Finance Act 2023 as unconstitutional, the various taxes imposed under that legislation have been annulled by the judgment by the Court of Appeal. In view of the referral by the President of the Finance Bill 2024 back to Parliament following public pressure to reject the bill, it remains to be seen on what measures the Government will impose to bolster generation of revenue.